An exciting development is ahead for tonight - the President will be addressing Congress. If his prior speeches have been anything to go by, there will be fireworks. Trump is after all, a stump speaker who has shown little reticence to ad-lib. Dribs and drabs of the speech have been coming out , but it's fair to say that we won't know enough about it to draw conclusions until it happens. As we've increasingly seen with Trump, how he delivers will matter just as much as what he says in his upcoming speech.
The key part of his speech for markets will be any details on specific fiscal stimulus plans Trump plans to implement. The level of specificity we can expect is probably slim to none, but we can perhaps glean a general sense of direction from this one before Gary Cohn and Steve Mnuchin take the baton, providing the granular particulars. If yesterday's market reaction was any indication, markets will have a knee jerk reaction to any mention of infrastructure spending at every point on the yield curve. US rates and USD bulls were inspired but it was small reaction to Trump's mention of "big" infrastructure spending along with the 10% boost to defense expenditure. The dollar gains were in anticipation of Trump's address to the joint session of the Congress tonight where more details on his 'big' infrastructure spending, 'phenomenal' tax overhaul and 'protectionist trade policies' are anticipated.
Trump will want to deliver something credible and believably big tonight, but there was little in traders' reactions to suggest they think it would be DOA in Congress. And people obviously think the Fed will be paying more than careful attention given the repricing of futures contracts. We might also get some clarification on contradicting comments (between Trump and Mnuchin) over labeling China as currency manipulator.
Bear in mind though, that the world will be watching. It won't be just Americans watching, subject to its content, nor trading on its message. In my view, Trump's speech to Congress will probably dampen inflationary expectations from the new administration and thus, the reflation trade. If one were to look at the rally since the election, there was little in the way of fundamentals backing things up. If anything, it was driven by hopes of Trump stimulus, rather than a clear trend of improving economic data.
Overall, DXY should stay within recent range of 100 - 102 ahead of Trump's address. Although, expect dollar to strengthen meaningfully if Trump delivers on his fiscal promises. The last move up in yields - with UST 10yr higher around 2.35%, could see more juice following tonight's speech. I see buying in prior to tonight's speech as a good entry point into the next leg of the dollar rally.
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