By Michael O’Neill

Students of history know that the original Wailing Wall is the retaining wall of the Temple of Mount Complex, built by Herod the Great, circa 19 BC.  Less studious types think it is the name of President Trump’s passion project that he wants constructed across one thousand miles of the US/Mexico border.

Many financial market participants fall into the “less studious” camp, which is understandable.  Markets started reacting to his every tweet and comment when his infatuation with his marquee campaign promise led to a partial closure of the US government, from December 22, 2018, to January 25, 2019.  It reopened after a stop-gap bill was approved by the President giving Democrats and Republicans three more weeks to pass an appropriations bill.   That bill expires on Friday, February 15.  

The odds for another shutdown faded dramatically February 11, when Congressional negotiators said they had reached a tentative deal which included $1.375 billion for barrier funding.  The bill includes restrictions on the barrier itself, restrictions that Mr Trump had rejected earlier. President Trump was less than thrilled. “Am I happy? The answer is no, I’m not. I’m not happy.” Nevertheless, he admitted he did not want another shutdown which sparked somewhat of a global rally for so-called riskier, higher-yielding assets.

At least that was the case for global stock markets.  Major equity indices in Asia, Europe and on Wall Street rose sharply.  FX markets reacted less enthusiastically. In fact, they dismissed the news outright. 

The FX reaction (or lack of one) may be cautionary because the deal is not signed, and President Trump is known to be rather petulant when he doesn’t get his way. However, he may not want to be portrayed as placing further undue hardships on government workers, and there may be enough in the new agreement for him to declare victory.

The building of walls is a core theme in 2019.  Great Britain is counting down the days until it builds a wall between itself and the European Union, (EU) figuratively of course.  It has been over 966 days since the public voted to leave the EU. In March 2017, the UK government triggered article 50 which gave them two years to negotiate an exit deal.  Time runs out on March 29.  Prime Minister Theresa May managed to cobble a deal together which was soundly rejected by Parliament on January 15. Her new strategy was to rewrite her original deal which the EU said they had no interest in doing.  Nevertheless, she takes her new amended Brexit plans to Parliament on February 14, hoping for some Valentine’s Day love. 

Whatever happens, will be followed by another vote near the end of the month.  UK politicians appear to have woken up to the fact that a “no-deal” Brexit would be a calamity and something they need to avoid.  It’s in the EU’s best interest to prevent a no-deal Brexit as well, and arguably they are in far better shape to absorb the disruption and will negotiate accordingly.

With so many walls around, it is understandable that the Loonie has flown into one. Fortunately, it is still flying, but it is a tad woozy and flying in circles.  Canada added 66,800 new jobs in January, and the unemployment rate is at historically low levels.  Oil prices have remained resilient even as US crude inventories rise thanks to promises of additional production cuts by Saudi Arabia.  All of the above have underpinned the Canadian dollar, but not enough to prevent its 1.10% slide since the beginning of the month.

The Canadian dollar is not alone.  The major G-10 currencies have lost ground to the greenback, and a lot of the reason is due to their central banks taking a dovish turn. The Fed adopted a dovish bias at their January 30 meeting, the Reserve Bank of Australia followed on February 5, the Bank of England was next on February 6, and the Reserve Bank of New Zealand confirmed their dovish stance on February 13.  The Bank of Canada led the parade.

The Fed said they would be patient when it came to future rate increases.  That patience may be tried.  The US added another 304,000 new jobs in January which eased fears that economic growth was slowing. Inflation was a tad higher than expected as well. January Core CPI rose 0.2% (as expected). If major data releases continue to surprise to the upside, the Fed will turn hawkish far quicker than the rest of the G-10 central bankers which helps underpin the US dollar.

There has been another wall in play as well.  That’s the one that has FX traders wailing after banging their heads against it, anticipating a “risk-seeking” fueled US dollar sell-off that has yet to occur.