One is still flying over the cuckoo’s nest

Michael O’Neill

FX Trader,

Readers of a certain vintage will be familiar with the 1975 Oscar-winning movie, 'One Flew Over the Cuckoo’s Nest'. It is the fictitious story of Randall McMurphy, a slacker who transfers from a prison work farm to a psychiatric hospital to avoid hard labour. If there were a 2018 remake of that movie, the premise would be that a billionaire reality TV host moves into the White House and makes policy at 240 characters per tweet.

In 2018, we no longer use the term “cuckoo’s nest” to describe a building filled with people suffering from paranoia, hallucinations, and delusions. We call it “The White House.” President Donald Trump calls it “home.”

Global markets are dancing like marionettes on steroids, and Trump’s Twitter account is pulling the strings. Asset prices have soared, sank, sizzled, and been sautéed with every tweet.

President Trump initiated a trade dialogue between China and the US that started out hostile and morphed into what appeared to be a professional diplomatic discourse; the kind that mends fences builds trust and makes the world a better place. On May 21, he tweeted “China has agreed to buy massive amounts of additional Farm/Agricultural Products - would be one of the best things to happen to our farmers in many years!” The so-called risk-assets rallied which includes the commodity currency bloc and oil. Once again, risk assets were in demand on an improved outlook for global growth.

Trump got reclusive, paranoid North Korea to agree to a summit in Singapore on June 12. NK leader Kim Jong-un, as a sign of good faith, released three American prisoners and agreed to talks about denuclearising his country in return for sanction relief and investment. No other US President in the past 60 years had even come close to resolving the “NK issue.”

The President campaigned on tearing up the North American Trade Agreement (Nafta) and talks to renegotiate the deal have been going on for a year. In April he was tweeting about a deal being close.

This week, he changed his tone and tune. He may have stubbed his toe. Maybe his carpal tunnel syndrome flared up, or his hair-dye ran into his eyes. Or maybe he just got mad because the other signatories to the Iran Nuclear deal, (China, France, Russia, the United Kingdom, and the European Union) didn’t join him in walking away from the treaty.

On May 22, Trump told reporters that he is “not satisfied” with the China trade talks. “We have a long way to go.”

On May 24, he tweeted that he was cancelling the Singapore summit saying “I have decided to terminate the planned Summit in Singapore on June 12. While many things can happen and a great opportunity lies ahead potentially, I believe that this is a tremendous setback for North Korea and indeed a setback for the world..."

On May 23, Mr Trump turned his sights on Nafta. He said “Nafta is very difficult. Mexico has been very difficult to deal with. Canada has been very difficult to deal with … but I will tell you that in the end we win. We will win, and we'll win big.” He upped the ante on May 24 and threatened to slap 25% tariffs on all cars imported into the US.

The President’s mercurial mood swings caught financial markets off-guard again. Risk-averse trades were in demand. The Japanese yen and Swiss franc soared, and equity prices slipped.

USDCAD bounced between 1.2720 and 1.2920 this week, dancing to the tune of Trump’s Twitter tweets. That range could widen next week with the risk of lower oil prices and month-end portfolio rebalancing flow.

Mark Twain wrote, circa 1897. “Truth is stranger than fiction, but it is because fiction is obliged to stick to possibilities; truth isn't.”  It is as accurate today as it was 121 years ago.

Chart: USDCAD one week

The week ahead 

It is going to be a short week for the US and UK... and it is going to be volatile everywhere. All the excitement will be crammed into the last three days capped off by the US nonfarm payrolls on Friday. If that is not enough, month-end portfolio flows and President Trump may add another element to the trading mix.

Major Event: The Bank of Canada policy meeting statement. There was a faint risk of a rate hike, but that risk disappeared with Trump’s automobile tariff threat. There isn’t a press conference scheduled which reduces the odds of a hike even further.

Major data

Monday and Tuesday have very little actionable economic releases

Wednesday: There is a lot of second tier data from New Zealand, Japan, Germany and the Eurozone, which will only have minor, if any, impacts on FX trading. Instead, traders look ahead to US Q1 GDP and PCE reports.

Thursday: China NBS Manufacturing PMI may get more scrutiny than usual because of the trade dispute. Switzerland Q1 and Eurozone inflation data will be the highlights in Europe. The US data, which includes PCE and Chicago PM Index may have limited impact ahead of Fridays NFP report. Canada releases March GDP.

Friday: Caixin Manufacturing PMI reports will be the highlight in Asia. UK and Eurozone Manufacturing PMI will keep European traders on their toes. US NFP is expected at 185,000, handily beating April ’s disappointing gain of 164,000 jobs. The ISM Manufacturing report rounds out the day.

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