Arresting developments send USD and JPY higher

The arrest yesterday in Canada of Huawei’s CFO on charges of violating US sanctions against Iran set global markets on edge overnight, to say the least. Huawei has received considerable negative attention outside of China on national security concerns related to its mobile telephony and network technology and is banned from use by US government employees.

As well, its 5G mobile network equipment has already been banned in New Zealand, Australia and the UK. This echoes the risk I have mentioned in previous updates that targeted sanctions against Chinese companies could be as much of a risk for keeping the US-China relationship rocky as the risk of further tariff implementation. 

This story appears to be the proximate cause of the very ugly downdraft in risk appetite overnight, with the Asian session seeing its heaviest selling of equities in weeks. US equity futures opened after yesterday’s closure in such a frenzy of selling that the CME was forced to implement brief trading pauses to keep the market orderly. Suddenly, the US S&P 500 is staring down the lows for the cycle just a couple of days after trying significant resistance several percent higher (2,810 is the hurdle for a more risk-on stance).

In FX, volatility spiked higher, but the heavy hand of China over its exchange rate is likely muffling volatility potential at every turn as such a bloodletting in equity markets would normally see more cross-market contagion, particularly into EM. The heaviest selling was in AUD, showing the high sensitivity we expected to all things US-China related.

An interesting test of market sentiment arrived this morning as a Chinese Commerce Ministry spokesperson was out this morning putting a positive spin on hopes for a trade agreement with the US, ticking all the boxes that the market would probably have welcomed with far more enthusiasm were it not for the arrest news overnight. The spokesperson specifically mentioned the US’ 90-day negotiation window and listed most of the menu of negotiation areas (cyber was missing from the list) and stated that the US and China have a high level of consensus and that the ultimate joint goal is to remove all new tariffs.

Yesterday, the Bank of Canada waxed cautious in its outlook in its latest monetary policy statement. The market was already a heavy seller of CAD in recent sessions, but the dovishness in the outlook cleared the bar of expectations and USDCAD reached new highs for the year above 1.3400, opening the range to the next major chart level just shy of 1.3800. In the statement, the BoC noted that the large downward revisions to past GDP levels could mean more space for Canada’s economy to grow without aggravating inflation. It also upped the profile of trade conflicts as a risk to the Canadian economy. The January hike that the market had priced at 75% odds is now priced at mere 25%. 

Chart: AUDUSD

The AUD sell-off took on new urgency in overnight trading as fresh longs were send running for cover by market developments and the risk that the US-China relationship may be taking a turn for the worse. The rejection of the entire recent rally sequence suggests a top is in place until proven otherwise, potentially setting us up for a try at the lows and then some to the downside, though the gravity of China defending the CNY floor could make life difficult for AUD bears looking for a more notable trend to develop here.