Talking Points:
- DXY Index back at the October highs as EUR/USD steadies just above $1.0850, the October low.
- Asian currencies, EM FX hit hard as reality sets in that the period of cheap, export-led growth - unbounded globalization - is coming to an end between Brexit and President-elect Trump.
- It's Veteran's Day in the US (Armistice Day everywhere else), so take a moment to remember those who served.
Market activity may quiet down during the European and North American trading hours today as many market participants will be taking holiday for Veteran's Day/Armistice Day. While bond markets have a recommended close by SIFMA, US equity markets will remain open. The economic calendar is fairly light overall, and incoming US economic data reporting before the election may carry less significance going forward, given the dramatic shift in US fiscal policy that's currently being priced into markets.
In spite of the holiday today, however, there has not been a cessation of hostilities among the Asian and emerging market currencies. The reactions we're seeing are very much tied to President-elect Trump. One of his core campaign pledges was to take on a more protectionist view: labeling China as a currency manipulator; slapping a tariff on Chinese goods; withdrawing from the TPP deal; and renegotiating NAFTA.
In sum, these prospective policy shifts point to only one possible conclusion: the Asian and emerging market growth miracle - fuelled by weak FX rates, cheap credit, and overwhelming demand from Western economies - is coming to an end. Of course, there is a potential to kick off a trade war - long-end US yields have been rising rapidly, perhaps a sign of a foreign sovereign dumping Treasuries? - but it's far too soon to travel down that counterfactual path.
Certainly, EM currencies have had it worse than DM currencies. While EUR/USD has reversed sharply this week, it still finds itself hovering over the mid-October swing lows near $1.0850. Concurrently, the DXY Index, constituted by nearly 60% Euro, continues to hold below its October swing highs around 99.10. Somewhat obviously, we'd be hard pressed to believe that DXY can breakout without EUR/USD breaking down, or vice-versa.
See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CAD, USD/MXN, and Crude Oil.
Read more: Trump Reflation Trade Fueling US Yields, US Dollar Rally
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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