Trump calls for rate cuts, softens stance on China

Trump wants lower interest rates, trade deal with China

The US dollar traded slightly lower against most of the other major currencies on Thursday and accelerated its slide during the Asian session today.

Once again, responsible for the volatility in financial markets was the new US President Donald Trump. While addressing the World Economic Forum in Davos, Trump urged global central banks to lower interest rates, while later in the day, in an interview with Fox News, he said that he would rather not have to impose tariffs on China and that he would prefer for the world’s two largest economies to find common ground on trade.

His call for lower interest rates and his unexpectedly soft stance on China pushed the dollar lower, with the dollar index (DXY) headed for its worst weekly performance since late November.

According to Fed funds futures, investors are now penciling in around 45bps worth of rate cuts by the Fed this year, nearly matching the Fed’s own projections of two quarter-point cuts. And all this ahead of next Wednesday’s FOMC decision, where the Committee is widely anticipated to hold off from acting.

With Trump not withdrawing his threats of imposing 25% tariffs on Canada and Mexico, as well as 10% levies on China on February 1, despite his softer rhetoric overnight, investors will be eager to find out what the Fed is planning to do in the shadow of all this uncertainty. Anything suggesting that policymakers remain cautious on future rate cuts due to the unpredictability of Trump’s actions could very well tempt traders to buy back the US dollar.

Aussie, kiwi rally on Trump’s stance, yen gains on BoJ

The Aussie and the kiwi are among the main gainers today, as Trump’s remarks on China, the main trading partner of both Australia and New Zealand, were reason for relief. If indeed Trump manages to strike a deal with China, both currencies are likely to extend their recoveries. However, with both the RBA and the RBNZ expected to proceed more aggressively with rate cuts compared to the Fed, arguing about a full-scale trend reversal may be premature.

The yen was also a big winner today, rising after the BoJ hiked interest rates by 25bps, as was broadly anticipated, and revised up its inflation projections. Combined with earlier data that showed Japan’s core consumer prices rose 3.0% y/y in December, the fastest annual pace in 16 months, the upwardly revised forecasts reinforced expectations of another quarter-point increase later this year.

Stocks and gold celebrate

Stock traders liked the idea of faster rate cuts, pushing the S&P 500 to a new record high, and the Dow Jones up nearly 1%. His comments on the trade relationship with China after the US close helped Asian bourses, with the Shanghai Composite adding 0.74%.

Europe is also in the green, perhaps due to optimism that if the US government is willing to find common ground with China, a deal with the European Union could also be likely. The better-than-expected preliminary PMIs from the Eurozone are also being cheered, with the euro extending its recovery and getting closer to the 1.0500 zone.

Expectations of lower interest rates benefited gold as well, which is getting even closer to its own record high. Today’s advance confirms that regardless of where the dollar goes, gold may be destined to continue drifting north. A strong dollar due to Trump’s previously aggressive tariff rhetoric helped the metal through safe haven inflows, while a declining greenback due to expectations of lower interest rates is positive due to the reduced opportunity cost for holding gold.