USD consolidation as Trump cabinet nears completion

USD: Trump continues to deliberate over Treasury Secretary

The US dollar remains close to recent lows at a little above the 106.00 level for DXY with no clear drivers for the markets with most focus remaining on Trump’s final cabinet selections. Howard Lutnick will be President-elect Trump’s Commerce Secretary with Treasury Secretary and US Trade Representative still to be announced. However, Trump in his statement on Lutnick announced that the Commerce Secretary would have “direct responsibility” over the Office of the US Trade Representative – an office that currently is separate from Commerce. The change elevates the role of Lutnick in Trump’s administration.

Kevin Warsh, Marc Rowan and Bill Hagerty are the names widely now cited as being considered for the key Treasury role. The Chair of the Council of Economic Advisors is another key economic role that has yet to be filled. The good news in these positions still being under consideration and the appointment of Howard Lutnick is that Trump at least appears to be taking a different approach with the economic / financial markets related roles and is giving more emphasis to experience over the focus of loyalty alone as has been evident in some of his other key cabinet picks. Given the statement from Trump on Lutnick’s role, Robert Lighthizer may now end up in an advisory role rather than US Trade Representative. Kevin Warsh remains the pick that the markets would like most and could see the dollar soften modestly although Treasury Secretary would not be the person specifically driving trade tariff policies.

The biggest mover in G10 FX this morning is the yen although the 0.5% depreciation does not appear to have been driven by any specific macro factor. We did get an announcement of a deal between the LDP and New Komeito with the opposition DPP on a fiscal stimulus package that will incorporate DPP tax proposals. The details are scheduled to be released this week but a supplementary budget will be passed by the end of December. The agreement also incorporates a plan to increase the tax-free threshold from JPY 1.03mn, as proposed by the DPP, possibly next fiscal year .

The yen has likely weakened back today merely reflecting the retracement yesterday when the yen strengthened on increased geopolitical risks after Ukraine fired long-range missiles (ATACMS) further into Russia for the first time since US permission was granted. Reuters is today reporting Putin is open to talks on a ceasefire deal. The fact that the yen strengthened on a risk-off development yesterday does suggest that the risk-on / risk-off dynamic has changed which makes sense to us given the Fed have now begun to cut rates and the markets are priced for more cuts over the coming twelve months. We will have to see the details of this fiscal stimulus package that has been agreed but if it is sizeable it raises the prospect of the BoJ being in a stronger position to hike at the January BoJ meeting.

YEN NEGATIVE CORRELATION WITH VIX HAS BECOME PERSISTENT

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Bailey signals still open to gradual cuts

Yesterday, the Treasury Select Committee hearing with four members of the BoE’s MPC added to market conviction that the MPC is unlikely to cut the key policy rate in December but that a cut in February was still very much on the cards. Given the OIS pricing, this key takeaway left the rates markets little changed and the pound being dictated by ongoing political developments in the US and some increased concerns over geopolitical risks in Ukraine. The hearing also included new MPC member Alan Taylor, Deputy Governor Clare Lombardelli and MPC member Catherine Mann.

The primary message from Governor Bailey was that the budget impact on the economy – in particular the increase in National Insurance Contributions for employers – was unclear and could play out in different ways. The change could mean the added cost is passed on via inflation to the consumer or it could be through reduced employment or hours worked. Hence, the BoE would stick to a gradual pace of rate cuts in order to assess the behaviour of companies to the NICs change. So this in reality is just another uncertainty for the BoE to assess adding to Trump’s trade policies, and geopolitics. Predictably, Trump’s trade policies were addressed with Bailey stating that the BoE would not make any quick conclusions and would want to see the extent of tariffs, the scale of retaliation and the FX response.

There has not been much opportunity to assess the views of Alan Taylor and based on yesterday’s testimony we can reasonably conclude that he leans to the dovish side of the MPC. He stated clearly that if conditions were weaker “and my own views skew to the downside risk” offer the best indications we have to date that if/when a time comes when a decision might be finely balanced, he seems more inclined to vote to ease the policy stance. Clare Lombardelli was more balanced in her views and seems closely aligned to Governor Bailey while Catherine Mann offered nothing surprising given her much more hawkish stance. Indeed, in Mann’s view the policy stance is not restrictive which points to het continuing to resist cuts to the policy rate possibly well into 2025.

Given the very low level of expectations of a cut in December there was nothing in yesterday’s testimony to surprise the market and shift those expectations. No doubt caution within the MPC will have been reinforced by the wage data from Germany that revealed third quarter negotiated pay surged by 8.8% on an annual basis, the biggest increase since 1993. Excluding one-off special payments, wages still grew by 5.6%. The UK CPI data just released here in the UK also highlights the stronger message of caution conveyed by Catherine Mann with the headline CPI YoY rate in October rebounding from 1.7% to 2.3%, 0.1ppt higher than expected. Core was 0.2ppt higher than expected at 3.3%, up from 3.2%. Services CPI was also stronger, up from 4.9% to 5.0%. With the Resolution Foundation estimating that the UK jobs data is has undercounted employment by almost 1 million people, the need for BoE caution is even greater. In today’s markets EUR/GBP moving lower makes more sense that GBP/USD moving higher.

UK SERVICES CPI STILL STICKY ALTHOUGH 3 & 6MTH ANNUALISED RATES CONTINUE TO EASE

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	09:30	House Price Index (YoY)	--	2.9%	2.8%	!
EC	10:00	Construction Output (MoM)	Sep	--	0.10%	!
EC	10:00	ECB's Negotiated Wages	Q3			!!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	0.5%	!
EC	13:00	ECB President Lagarde Speaks	--	--	--	!!!
UK	16:00	MPC Member Ramsden Speaks	--	--	--	!!
US	16:00	Fed Governor Cook Speaks	--	--	--	!
US	17:15	FOMC Member Bowman Speaks	--	--	--	!!
US	18:00	20-Year Bond Auction	--	--	4.590%	!!
EC	18:00	ECB's De Guindos Speaks	--	--	--	!!

Source: Bloomberg