Morning Commentary: The State of the Union

Foreign Exchange - Morning Commentary

The State of the Union

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After a one week delay due to the government shutdown, President Trump is scheduled to deliver his State of the Union address tomorrow, February 5, 2019. 
But what exactly is the state of the Union? 
From an economic point of view, the signals have been mixed.  Partly this has to do with the delay in publishing economic data due to the partial government shutdown.  Even with the government opening temporarily, the data flow still remains delayed.  To this last point, the deal brokered to open the government only does so through February 15 and that day is rapidly approaching.  House Speaker Pelosi has indicated that a plan needs to be finalized by this Friday in order for the Congress to vote on it in time.  So far the Democrats have offered no new money for border barriers and the continued discord from Democrats and Republicans does not bode well for the impeding debt ceiling debate and USMCA ratification.  
With regards to the US economic data that has come out, the US economy appears to be on solid footing, especially relative to China, Japan and the Eurozone with Europe expected to publish another set of economic data points this week showing further contraction.  This compares to the US which just posted a strong January jobs report, building off December's strong number.  However, this conflicts with the Fed narrative out of its January meeting where the central bank took a dovish turn and signaled patience and flexibility around its policy path due to economic uncertainty.  While the Fed has pretty much checked all the boxes needed for a weaker USD, relatively strong economic performance from the US and continued soft data worldwide has added up to USD resiliency. 
All of this sets the stage for President Trump and his State of the Union address.  It would be reasonable to expect the president to talk about the strong jobs number, as well as US-China relations.  Moreover, it has been reported that the president could begin to lay the groundwork for declaring a state of emergency in order to use funds from other parts of the government to build the border wall.     
  • Australia posted another poor series of data points.  This time it was the Melbourne Inflation Index that dropped, implying a soft official CPI print. 
  • U.K. economic data was also negative with survey data showing businesses taking a "wait and see" approach before making further investments in the country.  Case in point, Nissan announced that it would no longer produce its X-Trail model at its British plant, citing uncertainty around the UK's relationship with the EU. 
  • Meetings between Liu He and US officials progressed well last week, but no confirmation on a trade deal is expected until presidential-level talks are held, potentially in late February.
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