The dollar cheers Trump but it hasn't gone anywhere
The buck (and other assets) have popped the champagne corks and toasted Trump's tax pledge. One meeting with some airline bods has given the market new hope that Trump's going to pull out some more economy boosting measures. They may be right, they may be wrong but everything is relative.
The dollar ran around 160 pips higher, whoopee! What's has it actually done though? Not a lot in a short-term perspective.
USDJPY H4 chart
All we've done is move from one area of support back to one area of resistance at the 113.80/114.00 area. Before you think I'm being dismissive of the move, I'm not. After getting over the scepticism from the when the tax comments hit the wires initially, I said that they put Trump expectations right back to the forefront after they had been waning. What's happened now is that USDJPY should take on a bid tone whereas it's had an offered tone more recently. It's still a rally sell overall but the intraday dynamics may have changed.
Context is also needed. 160 pips is not a signal that the market is betting the farm on Trump. If we're 500+ pips higher by the time he tells us these "phenomenal" plans then we'll know the market is buying the expectation but we'll know that anyway because we'll be seeing the levels break on the way up. For trading, that's the only thing we need. Shorts can still lean on topside levels still but they need to take greater care if sentiment has, or is, turning bullish. Longs can have a bit more faith in support levels and go with any breaks. There will be plenty of opportunity for both sides but it helps if you have an idea of which way the market is leaning so you can know where the greater risk to your trade lies.
The second thing that needs some context is the market chatter about whether Trump will come out and take a shot at the strong dollar. It's always possible but what exactly does that mean in dollars and cents.
What is a strong dollar?
Is this a strong dollar?
USDJPY weekly chart
How about the same period in a broader USD indicator?
Dollar index weekly chart
Both those show some significant dollar strength but let's use that term "context" again.
Let's look at both the above charts on a longer-term basis.
USDJPY/Dollar index monthly
Do either of those indicate that the dollar is strong? When and where exactly can we call the dollar strong?
If Trump messes with buck what exactly will happen? Sub-80 USDJPY in a few months? It's very unlikely for one reason and one reason only, everything Trump is trying to do for the economy is USD positive. Better economy brings greater investment from abroad. Higher interest rates bring higher yields for investors. All roads lead to foreign money saying "I want to make money out of a growing America". Isn't that what Trump is trying to do, "Make America Great Again"? Trump can target the dollar but it will face headwinds all the way.
America isn't Japan. It's doesn't need to run it's currency down thousands of pips to spark some life into it. It already has growth, it already has inflation. It threw the kitchen sink at the economy and (as the Fed would say) it worked. Yes, a weaker dollar would help the US immensely but at what cost? Sinking Japan back into its deflationary hole, Europe too? What currency will folks run to for safety in that scenario?
Financially the world is a now very small place and the links between economies become ever tighter and tighter, and that's why Trump can't afford to trash the dollar. If he does, he might get some short-term gain but the long-term cost will be immeasurable. Maybe he doesn't care and has a FU attitude to the world in general, and wants the US to be a closed shop living off its own means. That's a pipe dream if so.
So boil it all down in to trading terms and what does it all mean? There's no real way to trade the super long-term view of any of this. You're not going to sell USDJPY here with a 100 pip stop hoping for 50.00 in 10 years. All we can do is align ourselves with the market sentiment and roll with the punches and kicks that come as part of watching markets day by day. The best we can do is plan for a year or two ahead at most. We did it through Japan and the USD rally in 2011 and we'll do it on anything that Trump says or does.
