Donald Trump’s inauguration speech proved thin on any mention of infrastructure spending - the least ‘Republican’ of Trump’s policies, but arguably - the most pro-growth.
And markets took note.
Whilst traders initially put this down to a change in strategy, Trump's agenda on his first day in office, in which he decided to meet business leaders in the morning and then worker's representatives in the afternoon seemed to demolish that theory.
This could mean that Trump was deliberately underplaying infrastructure spend and fiscal stimulus on Friday to weaken the Dollar, then that in itself speaks volumes.
The Trump reflationary story has been a major driver behind the Dollar’s appreciation yet as Market Pulse’s Stephen Innes says, a strong Dollar lies at odds with Trump’s protectionist trade policy.
“If you think about it, the strong USD runs counter-intuitive to President Trump’s trade policy; adding another level of uncertainty.
“So, instead of investors piling back into the dollar, the market is more likely to pile into the volatility trade, given the muddled economic and political landscape,” said Innes.
Indeed, Trump himself recently said the Dollar was too strong in comments aimed at China.
Market Pulse’s Innes sees a period of volatility ahead for the currency as a conflict between the Dollar-positive reflationary, fiscal stimulus story plays out against the need to keep US exports competitive by keeping the Dollar down.
The buck's recent correction reflects this incompatibility and could be the next major theme for the currency.
“While the reflationary trade makes for a credible, strong dollar storyline, I suggest bracing for an extended period of dollar volatility to the extent that we have not experienced in years.”
Trump's penchant for verbal intervention on a score of subjects may spill-over into currency manipulation and could mean further weakness for the Dollar ahead.
“The markets have priced in huge expectations, so Trump’s fiscal policy will remain in the limelight. However, there could be more disappointment for dollar bulls this week, especially from those who were banking on the president charging out for the gates on Fiscal and Tax Reform,” said Innes.
“Indeed, there is growing discomfort from Investors who continue to seek confirmation to buttress their long USD and higher global rates bias,” he added.
History Suggests 'Inauguration Effect' on Dollar
The notion that Trump's inauguration speech could be a watershed moment for the Dollar is backed up by research conducted by Scandi lender Nordea Bank, which makes a strong case for the Dollar be influenced negatively by the presidential inauguration.
“On all presidential inaugurations since 1973, both first and second terms, EUR/USD has risen by an average of 3.6% between the yearly open and by the end of February,” said Nordea's head of FX strategy, Martin Enlund.
"It (EUR/USD) has only dropped once out of 12 times (in 1973), and that was in conjunction with the then-ongoing collapse of the Bretton-Woods system,” adds the Nordea strategist.
This is strong empirical evidence which points to a soft period for the Dollar in the wake of Donald Trump's swearing in.