Money trumps everything: Foreign investments in the U.S.

Isn't it interesting how pithy comments by Donald Trump set so many wheels in motion so quickly? Apparently, this is even true for countries that are potential targets for criticism by the U.S. administration for being alleged currency manipulators or unfair trading partners. Unbalanced trade is a major issue for Team Trump. China is the prime foe, but countries such as Canada, Mexico, Germany and South Korea, who feature trade surpluses with the United States and some of whose currencies are undervalued relative to the USD as measured by PPP, are in Trump's crosshairs, too.

Perhaps the jawboning is a tactic by Donald Trump, the dealmaker, his opening move in lengthy negotiations that will ultimately lead to more jobs in the U.S. and an increase in exports by American companies. The president's tough stance on trade has borne fruit already: Several American corporations have committed to building factories in the United States instead of Mexico. Now even foreign entities seem to be succumbing freely to Trump's demands: Japan's Government Pension Investment Fund (GPIF), which controls more than $1.1 trillion in assets, is reportedly planning to make substantial U.S. infrastructure investments, and technology giant Samsung Electronics may build a new U.S. factory for home appliances. Trump is selling these headlines as early success stories on his way to fulfilling his "Make America Great Again" campaign pledges. Looking at it more objectively, one must ascertain that these "successes" have been achieved without any resistance whatsoever. Let's see how his tactics hold up once he actually has to negotiate with another country. Trump hasn't really been tested so far, but we already know how badly he reacts under pressure.

DXY Dollar Index 03/02/2017Finally, a quick afterthought relating to Peter Navarro's criticism of Germany: While it is true that German exporters benefit from a weak euro, it has been the ECB that weakened the common currency (indirectly, mind you, because it's not really within its mandate to do so). German politicians as well as Jens Weidmann, president of the Bundesbank, have openly opposed the ECB's lax monetary policy. Hence Navarro's statement that Germany manipulated "its currency" to gain an unfair competitive advantage is hardly justified - you might even go as far as saying it's utter nonsense. My original commentary here.

Open positions as of 03/02/2017 12:38pm CET:
EURTRY short from 4.0524, unrealized return: +1.27%
EURUSD short from 1.0795, unrealized return: +0.55%

Realized YTD return: +0.7% from 2 trades
Total YTD return: +2.52% from 4 trades

BoJ holds stimulus, JPY little changed

The Bank of Japan kept its stimulus package unchanged and only marginally adjusted its inflation forecast. BoJ governor Haruhiko Kuroda (still enjoying himself in Davos) said it was "too early to discuss an exit strategy". Although inflation is still well below the central bank's 2% target, the recent bout of JPY weakness has taken pressure off Kuroda & Co. to do more. Uncertainty of the effects from Trump's policies may also have played a role in the BoJ's decision to take it slowly. The JPY is little changed. I expect more JPY weakness going forward, NZDJPY long being my favoured trade idea. Looking for breakout above 83.75.

NZDJPY Daily 31/01/2017Open positions as of 31/01/2017 8:52am CET:
EURTRY short from 4.0524, unrealized return: +0.36%

Realized YTD return: +0.7% from 2 trades
Total YTD return: +1.06% from 3 trades

Watching NZDJPY for breakout

Let's be honest: It's been a rather boring week in FX and I'm happy it's drawing to a close. Yellen's comments didn't really provide any new information, yesterday's Draghi presser was a snoozer, volatility in G10 FX was subdued. Only Theresa May's Brexit speech moved markets by giving a short-lived boost to the GBP, but that's unlikely to persist with actual Brexit negotiations on the horizon.

Looking forward, Trump might stir things up from early next week. I still favour USD long trades but, as I've said before, I'm waiting for a catalyst before entering into a new position.

I also like NZDJPY long with a potential breakout above 83.29-.75 that might extend to 88 or even 93. In addition, the pair offers a bit of a carry pickup. On the sidelines as of now, but standing ready to open that trade if momentum doesn't fade.

NZDJPY 20/01/2017G10 Interest Rates 20/01/2017Open positions as of 20/01/2017 9:00am CET: Flat

Realized YTD return: +0.7% from 2 trades

USDJPY resistance around 103.00/.50

USDJPY exchange rate volatility decreased in February with the currency pair trading in the 100.75 to 102.75 range since the beginning of the month, following a slump of five big figures in January. We remain bullish on the USD versus the JPY though, given the monetary policy divergence of the two countries' central banks. The BoJ hinted at further stimulus while the Fed is widely seen to continue its tapering efforts moderately but steadily. The chart tells us that USDJPY will hit some resistance in the Y103 to 103.5 range. Should the rate manage to break above that level, we see the USD moving towards Y105 again.

Bigger picture: The depreciation of the JPY can hardly be of benefit to China, which recently intervened in an attempt to signal market participants that it won't accept the CNY to go in one direction only. You should expect more two-way volatility for CNY exchange rates from now on. If Japan will continue to devalue the JPY in one way or the other, China and other Asian countries will be tempted to do the same with their currencies so as not to put their exporting businesses at a disadvantage. This may well culminate in a currency war in Asia and a deepening of the conflict between China and Japan. If you have exposure to Chinese or Japanese assets and currencies, do not lose sight of this particular risk. We see plenty of potential for disputes that may ultimately bring a new round of war rhetoric in the second quarter of 2014.

Abe adviser Koichi Hamada: Fair yen value at 100 per dollar

In an interview with Reuters, Koichi Hamada, a retired Yale University professor and since December 2012 one of Japan PM Shinzo Abe's advisers, said the Japanese yen was appropriately valued against the US dollar at levels around ¥100. Mr Hamada had already voiced this opinion in March, despite the Japanese government having asked him at the time to stay clear of such public announcements. He further told Reuters that the Bank of Japan had a lot of room for further easing, if necessary. It is hard to imagine that Mr Hamada made these remarks on behalf of the BoJ's Mr Kuroda or prime minister Mr Abe, both of whom would certainly want to avoid further exchange rate targeting for the time being, as official hints at more future interventions could draw Japan deeper into "beggar thy neighbour" arguments with its Asian trade partners. Be that as it may, currency traders took notice of Mr Hamada's comments and interpreted the USD/JPY rate of ¥100 as a temporary ceiling. As of this writing, USD/JPY is trading at ¥99.2, roughly 0.2 percent below yesterday's level after profit-taking.

Moving to Europe and the United States, both EUR/USD and GBP/USD advanced further. EUR/USD is currently at $1.3091 (+0.65%) and cable trades at $1.5332 (+0.5%), after stronger than expected UK industrial and manufacturing production numbers and Federal Reserve chairman Ben Bernanke's signals from last night that the Fed was unlikely to quit its asset purchases anytime soon.