Head of FX Strategy
Summary: Traders are getting taken for a rough ride in this headline-driven market as the dark clouds yesterday from Trump comments and a Chinese riposte this morning were suddenly parted by a Bloomberg article suggesting that a phase one trade deal remains on track despite heated exchanges between the two sides.
Reader’s note: most of the below was composed before the late breaking news from Bloomberg citing officials saying that a phase one US-China trade deal remains on track despite all of the aggressive exchanges between the US and China.
We noted the head-scratching combination on Monday of weak equities and weak safe haven bonds after US Commerce Secretary Ross said the US plans to implement the December 15 round of tariffs on the remainder of Chinese imports if no trade deal is struck. Cue yesterday’s comments from US President Trump on possibly delaying any trade deal until after the election, which makes the first threat even more serious for global markets. In reaction, equities were once again weak, while safe haven bonds swung around from weakness to pronounced strength – a more traditional state of affairs.
As for FX, we have seen more of the JPY and CHF strength we would normally expect in these circumstances, but the transmission into FX has been unusual in other ways, most notably in the fairly weak US dollar here and the lack of more weakness in currencies traditionally more sensitive to risk aversion (and China worries) like AUD and NZD. Hard to tell whether this latter behavior can persist. We did note on today’s Market Call that not all warning bells are ringing equally in our measures of risk aversion. One barometer of trade hopes – the USDCNY – is pointing in the wrong direction as the rate edged above 7.07 at one point during this morning.
Headline risk is extreme over coming sessions as we all know that Trump can do anything at any time. Would a slight deepening of this equity sell-off see him delaying or vastly reducing the December 15 round of tariffs, for example – leaving the market hopeful that the situation will simply be on hold for a year or more? We shall see, in the meantime, let’s have a look at the incoming data, especially today’s US November ISM Non-manufacturing survey and tomorrow’s US November jobs report. Market expectations for the Fed have been oddly inert over the last couple of days, with expectations only about 5 bps lower through early next year after yesterday’s developments, for example. Expect a larger jolt to the outlook on bad data misses out of the US. (And as if to make the point – just before wrapping up today’s commentary we see the headline from Bloomberg that “US and China move closer to trade deal despite heated rhetoric”)
Chart: USDJPY
We note the recent triple divergence in USDJPY (three new highs in price, each at a lower high in the MACD) and the vigor of the recent sell-off that suggest the risk of a major turn lower here. Of course, if we turn right back around and see the US and China able to reach a basic phase-one deal as indicated in a late breaking article just before pixel-time, we could yet get caught in another “pump and dump” cycle typical of headline driven markets. Weak US data is a different risk, however, for USDJPY than trade-deal news.
The G-10 rundown
USD – most notable development here is that weak trade deal sentiment is not supporting the US dollar – and if data is weak through tomorrow we may have to add pressure from a more dovish Fed.
EUR – the EURUSD holding up well here after the recent rally of the key 1.1000 area, but needs more – especially a punch above 1.1180 to merit hopes that the long period of moribund action is ending.
JPY – the yen getting more traditional support here as safe haven bonds were bid yesterday on top of the weak risk sentiment, relieving some of the confusion from Monday’s session. JPY
GBP – sterling oddly aggressive this morning, given a clear tightening in the polls, but the weak USD and GBPUSD pulling above 1.3000 has likely inspired considerable order flows.
CHF – the franc doing its safe haven thing as EURCHF presses down into the lower half of the late range.
AUD – the Aussie is hanging in there rather well, given the news flow. The GDP print wasn’t weak enough to merit much comment – October Retail Sales up tonight.
CAD – the latest apparent decline in trade deal hopes and correction in oil prices could underline the Bank of Canada’s recent tilt back to a more cautious stance today. US data also important for CAD in the crosses. USDCAD poised near important 1.3300-50 pivot zone.
NZD – NZDUSD has broken free of the former range and what arguably looks like a head and shoulders formation, but now confronts and 200-day moving average below 0.6550. Tough to enthuse on the kiwi’s prospects in this environment but its resilience remarkable.
SEK – weak risk sentiment and now a weak November Services PMI (47.9) out of Sweden this morning to add to the terrible Manufacturing PMI from earlier this week and SEK is backpedaling further. Still, the SEK rally not showing signs of breaking unless EURSEK jolts back above perhaps 10.70.
NOK – EURNOK pulling to a new local high on a very hostile backdrop for NOK, including concerns for the global growth outlook on the latest US-China trade woes and seasonality. Last resistance is toward the 10.30 top
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
