FX Update: USD awaits trade talks, Scandies limping at the brink

Somehow, markets cobbled together a rally overnight that was entirely erased as of this writing, as we await the outcome of US-China trade talks later this week. The market seems hopeful that the talks will move toward a détente or better, with China perhaps promising to purchase large amounts of US goods (agricultural goods are the hot button issue for Trump) while the US side may adjust its tariff schedule. But we see it as highly unlikely that a more comprehensive deal is in the works, as China will never agree to the oversight the US side as proposed in the past and the difficult issue of technology transfer. Just yesterday, the US announced the blacklisting of eight companies accused of participating in human rights abuses in Xinjiang with surveillance technologies. This kind of news is hardly a promising prelude to talks and China has vowed to respond to the blacklisting.

On a more popular level, there is also the story of a US NBA (professional basketball) team’s general manager tweeting something in support of Hong Kong protesters, which has unleashed a robust Chinese response and could risks escalating the US-China showdown further down on the level of populist politics. As well, we have to consider that Trump is under explosive pressure on all fronts politically and could prove far less willing to agree to a deal than the markets or the Chinese negotiators believe, if he feels he can win on the populist front by scuttling talks and successfully transfer the blame for collateral damage in markets on the Powell Fed and the impeachment efforts.

Sterling has been creeping lower and lower in recent sessions as the market fears that Boris Johnson is willing to see a constitutional showdown with Parliament over a no-Deal Brexit if he can’t get enough from the EU side to agree to a deal, while the EU side may be hoping that Parliament can win that confrontation, that it can get another delay via Parliament or with a caving Boris Johnson and that it eventually perhaps has a different negotiation partner after UK elections later this year (or even a reversal of Brexit in the event of a second referendum). It is clear from the detailed rejection that the EU gave to Boris Johnson’s latest proposal that the two sides remain far apart. All the while, the UK recession is here and now and likely set to worsen.

The Turkish lira dropped sharply yesterday as the market was concerned that Turkish incursions into Syria and against Kurdish forces there could unleash a President Trump response, as the US president has been sending conflicting signals on US policy in the region. Trump tweeted, in a way it seems only he can: "As I have stated strongly before, and just to reiterate, if Turkey does anything that I, in my great and unmatched wisdom, consider to be off limits, I will totally destroy and obliterate the Economy of Turkey (I’ve done before!)." 

Chart: EURNOK
EURNOK has pulled above 10.00 again despite a fairly supportive backdrop of buoyant risk appetite in recent sessions. Weak oil prices are weighing here, but so too is the general concern on the global economic outlook, perhaps concerns that Norway’s fossil fuels output are not a 30- or 50-year cash cow for the country, but perhaps half of that or less if climate policy across Europe sees a radical shift. A further squeeze higher is the overweening risk if global risk sentiment takes another dive similar in scale to the recent one – perhaps on disappointing or indifferent US-China talks or a weak beginning to earnings season. There may be the complacent assumption out there that 10.00 is a ceiling after every approach (this is the third major foray near the level since late 2017), such that if  significant separation with that level is achieved, an ugly squeeze could be as those short volatility – or unhedged – are forced to pile on to the move.