Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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A nervous wait for late June G20 meeting
John J. Hardy
Global Head of Macro Strategy
Summary: Both sides backed away from a fresh rhetorical escalation in the US-China trade negotiation showdown, and it now appears we could be in a nervous holding pattern until the late June G20 meeting if China confirms that Xi Jinping will meet with Trump on the sidelines of that meeting.
One of the worst days of the year for equity markets yesterday elicited hardly more than a nod of the head from the currency market, even as the USDCNY rate, the world’s most important exchange rate, rose the most it has all year – close to 1% at one point yesterday to 6.88.
Trump’s language late yesterday on Chinese retaliation sounded milder than yesterday’s earlier tweets: "There can be some retaliation but it can't be very substantial,". Trump also said he would meet with Xi Jinping at the June 28-29 G20 summit. This likely means that the setup now is that we have a tense stand-off until the meeting, which still looks better than yesterday’s sharp escalation in the two sides’ rhetoric. The lack of further escalation saw a modest bounce in risk appetite overnight, further encouraged by more diplomatic language from China’s side that both sides have “the wisdom” to come to terms.
The next step is a signal from China that it is amenable to a Trump-Xi summit on the sidelines of the G20 meeting (that could be a difficult ask if taking place under the shadow of fresh US tariffs on a further $300 billion of Chinese imports – might be more promising sign if the US holds back in actually implementing these, only threatening to do so in the event the sides can’t come to terms in late June).
If we do get that signal, market participants may feel emboldened to believe that China will hold the line on the USDCNY for now. Or could we see a tease just to the edge of 7.00 and at times beyond as a negotiating tactic? In any case, it is difficult to see why we should expect a significant further escalation until late June – leaving everyone hamstrung once again and likely with a directionless market.
Chart: USDJPY
USDJPY has rebounded after yesterday nodding its head to the ugly sell-off in equity markets. Yesterday’s experience reminds us how weak the transmission of traditional risk-off into JPY strength has proven, and it is an interesting sign of half-hearted JPY support that the modest bounce-back in sentiment has seen almost all of yesterday’s sell-off reversed.
Trump’s language late yesterday on Chinese retaliation sounded milder than yesterday’s earlier tweets: "There can be some retaliation but it can't be very substantial,". Trump also said he would meet with Xi Jinping at the June 28-29 G20 summit. This likely means that the setup now is that we have a tense stand-off until the meeting, which still looks better than yesterday’s sharp escalation in the two sides’ rhetoric. The lack of further escalation saw a modest bounce in risk appetite overnight, further encouraged by more diplomatic language from China’s side that both sides have “the wisdom” to come to terms.
The next step is a signal from China that it is amenable to a Trump-Xi summit on the sidelines of the G20 meeting (that could be a difficult ask if taking place under the shadow of fresh US tariffs on a further $300 billion of Chinese imports – might be more promising sign if the US holds back in actually implementing these, only threatening to do so in the event the sides can’t come to terms in late June).
If we do get that signal, market participants may feel emboldened to believe that China will hold the line on the USDCNY for now. Or could we see a tease just to the edge of 7.00 and at times beyond as a negotiating tactic? In any case, it is difficult to see why we should expect a significant further escalation until late June – leaving everyone hamstrung once again and likely with a directionless market.
Chart: USDJPY
USDJPY has rebounded after yesterday nodding its head to the ugly sell-off in equity markets. Yesterday’s experience reminds us how weak the transmission of traditional risk-off into JPY strength has proven, and it is an interesting sign of half-hearted JPY support that the modest bounce-back in sentiment has seen almost all of yesterday’s sell-off reversed.
The G10 rundown
USD – the dollar is standing relatively tall here after yesterday’s weakness within the G3. We should always ignore stories suggesting China will liquidate its treasuries like yesterday’s (note how the modest selling in UST’s on this story was immediately erased as soon as safe haven seeking was afoot.)
EUR – the single currency is stable and seems to remain firm on bouts of risk off, perhaps fed by unwinding of carry trades funded in euros.
JPY – the yen is playing its safe haven role, if somewhat half-heartedly. Likely dampening volatility potential is the lack of a more enthusiastic bid for US treasuries on the recent bouts of weak risk appetite. (the 30-year US yield benchmark has only shifted 15-16 bps top to bottom recently, versus the 55 basis point move lower from the peak that preceded the JPY flash crash at the beginning of this year.)
GBP – May’s position looks increasingly weak as she faces pressure to exit the scene. This throws in doubt the cross-party talks and raises the uncertainty level on hard Brexit risks.
CHF – a lingering CHF bid here even as risk appetite improves elsewhere- fed by Brexit woes or widening EU peripheral spreads ahead of Parliamentary Elections starting in under two weeks? EURCHF has dropped below the recent range and the 200-day moving average around 1.1340.
AUD – the Aussie hasn’t recovered in line with the general US-China trade sentiment bump overnight as the employment component of an NAB business conditions survey dropped to -1.2, the lowest reading since early 2016, an ugly decline indeed from the record (since series began in early 1997) highs for the survey over 15 in early 2018.
CAD – USDCAD still lingering in the higher part of the range despite the improvement in sentiment. Oil prices look heavy again despite the latest geopolitical risks on the US’ confrontation with Iran and a possibly related flap over damage to Saudi tankers, etc.
NZD – the kiwi thriving on the AUD weakness, but it is our thesis that this can only be taken so far, as AUDNZD entering the buying zone toward 1.0500. The RBNZ will likely match the RBA cut-for-cut.
SEK – enjoying the bounceback in risk sentiment and short Swedish rates are pegged near the highs for the cycle after the April CPI today came in matching expectations (2.0% year-on-year for the core and 2.1% for the headline.) First support / pivotal area in EURSEK is the 10.70-60 zone after its recent break higher.
NOK – oil weaker and the NOKSEK pair has mostly reversed its recent break higher – an opportunity for shorts if sentiment remains stable or better and oil prices decline further.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Apr. Jobless Claims Change
0830 – UK Mar. Average Weekly Earnings
0830 – UK Mar. ILO Unemployment Rate and Employment Change
0900 – Euro Zone Mar. Industrial Production
0900 – Germany May ZEW Survey
1000 – US Apr. NFIB Small Business Optimism survey
1230 – Canada Apr. Teranet / National Bank Home Price Index
1645 – US Fed’s George (FOMC Voter) to speak
0200 – China Apr. Industrial Production
0200 – China Apr. Retail Sales
USD – the dollar is standing relatively tall here after yesterday’s weakness within the G3. We should always ignore stories suggesting China will liquidate its treasuries like yesterday’s (note how the modest selling in UST’s on this story was immediately erased as soon as safe haven seeking was afoot.)
EUR – the single currency is stable and seems to remain firm on bouts of risk off, perhaps fed by unwinding of carry trades funded in euros.
JPY – the yen is playing its safe haven role, if somewhat half-heartedly. Likely dampening volatility potential is the lack of a more enthusiastic bid for US treasuries on the recent bouts of weak risk appetite. (the 30-year US yield benchmark has only shifted 15-16 bps top to bottom recently, versus the 55 basis point move lower from the peak that preceded the JPY flash crash at the beginning of this year.)
GBP – May’s position looks increasingly weak as she faces pressure to exit the scene. This throws in doubt the cross-party talks and raises the uncertainty level on hard Brexit risks.
CHF – a lingering CHF bid here even as risk appetite improves elsewhere- fed by Brexit woes or widening EU peripheral spreads ahead of Parliamentary Elections starting in under two weeks? EURCHF has dropped below the recent range and the 200-day moving average around 1.1340.
AUD – the Aussie hasn’t recovered in line with the general US-China trade sentiment bump overnight as the employment component of an NAB business conditions survey dropped to -1.2, the lowest reading since early 2016, an ugly decline indeed from the record (since series began in early 1997) highs for the survey over 15 in early 2018.
CAD – USDCAD still lingering in the higher part of the range despite the improvement in sentiment. Oil prices look heavy again despite the latest geopolitical risks on the US’ confrontation with Iran and a possibly related flap over damage to Saudi tankers, etc.
NZD – the kiwi thriving on the AUD weakness, but it is our thesis that this can only be taken so far, as AUDNZD entering the buying zone toward 1.0500. The RBNZ will likely match the RBA cut-for-cut.
SEK – enjoying the bounceback in risk sentiment and short Swedish rates are pegged near the highs for the cycle after the April CPI today came in matching expectations (2.0% year-on-year for the core and 2.1% for the headline.) First support / pivotal area in EURSEK is the 10.70-60 zone after its recent break higher.
NOK – oil weaker and the NOKSEK pair has mostly reversed its recent break higher – an opportunity for shorts if sentiment remains stable or better and oil prices decline further.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Apr. Jobless Claims Change
0830 – UK Mar. Average Weekly Earnings
0830 – UK Mar. ILO Unemployment Rate and Employment Change
0900 – Euro Zone Mar. Industrial Production
0900 – Germany May ZEW Survey
1000 – US Apr. NFIB Small Business Optimism survey
1230 – Canada Apr. Teranet / National Bank Home Price Index
1645 – US Fed’s George (FOMC Voter) to speak
0200 – China Apr. Industrial Production
0200 – China Apr. Retail Sales
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