Talking Points:
- "Trump trade" goes into reverse as AHCA healthcare reform fails
- Yen may extend gains as US Dollar falls on Fed view, risk aversion
- Quiet economic calendar likely to keep focus on Washington, DC
Global financial markets may be at the brink of a major change in the thematic narrative driving prices as the "Trade trade" suffers a painful blow.
The central idea defining the trend in benchmark asset classes since November 2016 has been the expectation that Donald Trump will successfully implement a pro-growth, pro-inflation fiscal policy. This will include corporate tax cuts, deregulation and generous infrastructure spending. That will boost earnings and push the Fed into a steep interest rate hike cycle.
After the failure of AHCA, a healthcare reform bill championed by the White House, doubts about the US administration's ability to turn rhetoric into policy have proliferated. Not surprisingly, that has favored anti-fiat gold and the anti-risk Japanese Yen at the expense of the US Dollar, shares and - on a relative basis - higher yielding commodity currencies. If momentum holds, these moves may evolve into a lasting shift away from themes that have defined markets for the better part of five months.
The economic calendar offers few distractions from this narrative. A slight upside revision in fourth-quarter US GDP and steady core PCE inflation are enough to sustain the status quo but probably insufficient to advance a hawkish Fed narrative, even if they are accompanied by cautiously optimistic comments from central bank officials. A smattering of Eurozone data may pass without fanfare given its limited implications for ECB policy trends. The UK is due to formally trigger "Brexit", but that probably means little in terms of standalone event risk.
--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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