All eyes on G20 for fate of CNY

The Federal Open Market Committee meeting minutes elicited a collective yawn, as they were generated weeks before Powell’s latest speech and as the market’s attention is now squarely on the Buenos Aires G20 meeting and the direction of the US-China trade relationship.

It is clear from these minutes and a parade of recent Fed appearances that the Fed is downshifting and wants a more data dependent stance from here after a very likely hike at the December FOMC meeting. The Fed’s guidance deceleration is likely down to the massive slide in crude prices, clearly tighter financial conditions, signs of a slowdown in the most interest rate sensitive sectors and the pronounced risks from Trump’s trade policies.

Our key barometer for the dollar on the developments in US yields is not just whether they are rising or falling, but the reasons behind the moves as well as, very importantly, the direction of risk appetite. Lower US yields on safe haven seeking and weak risk appetite (for example if the G20 entirely fails to generate anything constructive on trade) would likely prove rather USD positive. Flat to lower (and even very gently rising) yields together with a trade ceasefire emerging from Buenos Aires, meanwhile, could prove a powerful signal for USD weakening for a time.

We see low odds of the G20 driving any lasting improvement in the US-China relationship. The chief question in the event nothing emerges in the wake of this meeting is how quickly China signals its intentions for its currency. A guess would be no immediate volatility and some delay of weeks or longer before that signal is sent.

On a side note, the noise level from the Mueller investigation is escalating dramatically and will occupy increasing bandwidth in the political headlines as well as acting as a significant distraction in the Trump administration, possibly eventually impinging on financial markets as well.

The latest confession from Trump’s lawyer Cohen about Russian contacts ahead of the election related to a real estate deal look serious. Key congressional committees in the new congress that gets underway in January will have Democratic leaders and will exercise “subpoena power” to do everything in their power to take Trump down from any angle it can – with the business side of his past and related conflicts of interest a more likely source of dirt than the collusion angle that obsessed Democrats in the wake of the election and actually prompted the Mueller investigation in the first place. 

Chart: AUDCAD

Trading ranges have mostly been nervously respected in the run-up to the G20 meeting, but one G10 pair in particular has seen a significant move – AUDCAD, which captures both the slide in oil prices and the hopes that G20 will provide some sort of breakthrough that will improve the outlook for China-linked assets and currencies like AUD. The move looks overdone here based on longer-term valuation and relative interest rate developments, but could overextend further if G20 headlines bring a positive spin. Still, we’ll be on the lookout for technical reversals indicating it is time to get short again for a retest of the lows.