The market’s reaction to the trade cease-fire began fading already late yesterday as journalists were unable to corroborate some of Trump’s claims on what was agreed with other administration officials, where the garbled response made it clear that the president may be playing loose with the truth or have over-interpreted something that was said.
As well, neither Chinese state media nor Chinese officials have corroborated the entire discussion of a 90-day time frame, China’s promises to buy more US products, nor a reduction of tariffs on US cars that was trumpeted only in a Trump tweet. The only evidence from the Chinese side, indeed, are vague statements about a commitment to slowly reduce the trade imbalance and an obvious immediate commitment to strengthen CNY over the last couple of sessions, as USDCNY has pushed down to new two-month lows since the weekend summit.
The CNY strength overnight looks the chief driver of the weakening USD since yesterday’s bounce. And we’ll continue to second guess the importance of this deal for markets as long as the long end of the US yield curve remains subdued – a real sign of safe haven seeking and concern about the economic growth outlook.
Portions of the belly of the US yield curve are beginning to invert as the market suggests that the Fed is already getting too tight. The US 10-year yield benchmark yesterday closed south of the pivotal 3.00% level as well. With weaker risk appetite, questions on the trade deal and lower long US yields, it appears USDJPY may finally be waking up.
Below we discuss the risk of a profound reversal in AUDJPY if the market decides the US-China relationship is as shaky as ever and on the risks to Australia’s economy as China’s growth model changes, commodity prices remain subdued, and Australia’s credit cycle takes a turn for the worse. Overnight, the Reserve Bank of Australia’s Philip Lowe continues to put a positive spin on the state of the economy, but concerns look a bit more prominent as he stated that “one continuing source of uncertainty is the outlook for household consumption.
Growth in household income remains low, debt levels are high and some asset prices have declined.” Those assets are real estate assets and data points to Australia’s housing bubble in full reverse, with construction activity likewise beginning to crater. We are looking for ways to express AUD weakness – AUDCAD for now and potentially both AUDJPY and AUDUSD if the recent rally extension in those two pairs reverses.
Australian short rates headed another couple of basis points lower overnight in the wake of the RBA meeting and AUD a bit more on the defensive in broad terms. The recent upside break in AUDJPY could prove a red herring here if risk appetite continues to sour on US-China relationship concerns and if long yields in the US continue to head lower, which tends to support the yen. The 83.00 area was the key level on the way up.