Head of FX Strategy, Saxo Bank Group
Summary: The two bogeyman that have long dogged market sentiment, Brexit and the US-China trade deal, could be set to entirely fade away as event risks of consequence very soon. The question will then be whether this eventuality is already priced in and there is anything left in the tank to drive a further strong risk sentiment.
Bloomberg reports that the US may give China until 2025 – conveniently the year that a second term for Trump would end – to make good on its commitments to purchases of US goods and allow 100% foreign ownership of Chinese companies. This is most likely an effort by the US side to extract something that looks good on paper to maximize political gain ahead of the November 2020 election and likewise to avoid any damage to economic and market confidence ahead of that date.
There are apparently outstanding issues on enforcement of the deal and the hot button issue of technology transfer, but where this process is headed is neatly encapsulates in this line from the Bloomberg article: “The White House is particularly focused on purchases commitments through the second quarter of 2020, in an effort to narrow the trade balance ahead of Trump’s re-election bid.”
So – now it looks like we will be getting the softest of Brexits and the maximum market-friendly outcome of the for the US-China trade deal via a near six-year delay. This means that global markets will have to get back down to the humdrum business of assessing the global economic outlook and how far it has taken its celebration of accommodative policymakers. To my eyes, the exit of these two bogeymen for markets was long ago priced in.
And now, given a steep backup in US interest rates all along the yield curve over the last week, we are at a near term pivot point as well: the point at which circular logic becomes unbearable if my diagnosis of the situation is correct. In other words, can market sentiment and global yields continue to back up when it was precisely the reintroduction off the policy punch bowl earlier this year that goosed confidence in the first place? Either markets pivot back lower very soon, or we are building all of our confidence for a further melt-up on a single round of a PMI bump in China providing stimulus for the world economy and boosting it enough to overcome rising yields and energy prices.
GBPUSD has rebounded, but shouldn’t this latest round of news have boosted the currency even more? Supposedly, we’re just waiting for the EU to grant the requested delay (don’t see any reason for the EU to play chicken now that May has folded on her red lines) and for the actual agreement to take shape, but we’re sceptical that sterling can put much more together here even if a clear path to a soft Brexit emerges. Stay tuned.
USD – the big dollar is easing a bit lower again ahead of the jobs report tomorrow – remember last month’s negative payrolls growth surprise.
EUR – the bounce from the sub-1.1200 lows looks half-hearted so far. Very ugly German factory orders this morning and the ceiling may be low for any euro revival, especially in the crosses if risk sentiment remains strong.
JPY – the yen looks the high beta currency to any possible pivot in sentiment as outlined above – i.e., US treasuries taking a dive lower, for example, on an ugly US jobs report tomorrow and/or weakening confidence in the state of the global economy.
GBP – sterling is bid and there is not a lot more range to work with in EURGBP on further supportive headlines, but we question the potential magnitude of a positive reaction even if we get a roadmap to a softer Brexit scenario in coming weeks.
CHF – Brexit hopes and strong risk sentiment pushing back against ECB dovishness to keep 1.1200 pivot area intact in EURCHF for now.
AUD – the Aussie getting a boost from the raging optimism that China will stimulate the global economy into lift-off and that US-China trade negotiations prove a non-event or even better.
CAD – strong oil prices have kept USDCAD in the range as the price action coils in a tight range – the pair looks a low beta play on the direction of risk sentiment and oil prices.
NZD – the AUDNZD gunning for the next significant level – overcoming 1.0500 which at least starts to suggest a turning process.
SEK – EURSEK has probed the 200-day moving average – currently around 9.38, but so far reluctant to break. Given maximum support (for SEK relative to EUR) from global risk sentiment, this is a weak performance.
NOK – given the backdrop of strong oil prices, what is taking NOK so long to break higher versus the EUR (EURNOK lower). Watching the 9.60 area in EURNOK.
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