FX Update: Risk rally reversing on trade deal uncertainty

The Friday close rather spooked me as it was already glaringly clear Friday that the US and China were much farther from coming to terms on a trade deal than the market seemed to believe all last week. And yet we sailed into the close with an extremely modest correction in the major equity markets and almost no correction in US treasuries, perhaps one of the more stunning non-reactions in recent memory. And yet, with the Asian session, it appears a bit more reality has settled in, with the US-China trade deal as uncertain as ever, the Hong Kong situation crescendoing once again, and Spanish elections reopening the populist-centrist fault lines as the Vox party jumps 50% from the recent election to grab 15% of the vote.

In short, the world makes a little more sense this morning as equity futures, treasuries and the yen all point to a reversal in last week’s extreme complacency, a development we have been covering extensively in our recent Market Call podcasts. Looking ahead to the rest of the week, we will have the ongoing grind of headline risks on the fate of the US-China trade deal, but a fairly interesting economic calendar as well this week, especially for the UK and Australia. Today’s calendar highlights area at the bottom of this post. Also this week we have:

Tuesday – The latest UK earnings and employment data and the latest German ZEW survey, helping to understand if the Germany economy is beginning to stabilize.

Wednesday – New Zealand RBNZ – looking for another cut. Australia’s latest Consumer Confidence survey, interesting because it has suffered a long and ugly slide. Traditionally, confidence most coincides with the labour market, see Thursday! Also Sweden, the UK and the US all reporting CPI ahead of a US Fed Chair Powell before a congressional committee.

Thursday – Australia’s jobs report and AUD looking very vulnerable if US-China trade deal news sours further and this proves a negative report. Germany to report Q3 GDP and prove or disprove that it has  avoided a technical recession.

Friday – US Retail Sales offers evidence on Fed’s hoped for resilient US consumer, and the Bank of Canada’s Poloz out speaking in the US with Q&A afterward, could let slip with thoughts that influence market’s perception of policy outlook.

Note that today is a banking holiday in the US while the equity exchanges are open, so we won’t be fully back down to business in global markets this week until tomorrow.

Chart: AUDJPY
AUDUSD and perhaps with higher beta, AUDJPY, are interesting to watch this week over the possible US-China trade deal headlines, but also the flurry of important data out of Australia, especially the confidence and employment data tonight and Wednesday. For the JPY,  it is all about safe haven sovereign bonds and whether yields  have topped out here now that we have reached pivotal levels like the 2.00% area in the US 10-year benchmark. If risk appetite sours further here and treasury yields drop, we could be in for a significant reversal in AUDJPY after a very sell organized, three-wave correction sequence.