Head of FX Strategy
Summary: The Xi-Trump agreement to press the pause button on their mutual showdown over trade has triggered a global risk-on celebration. In reaction, the US dollar is weaker across the board, particularly versus the commodity dollars and emerging market currencies.
The chief question from here is how much the US and China can accomplish over the 90-day delay on the laundry list of issues from forced technology transfer and intellectual property protection to cyber-crime and non-tariff trade barriers that must be addressed to the US’ satisfaction to avoid a resumption of hostilities.
In any case, the cease-fire was still a positive breakthrough of sorts and this, on top of the recent downshift in Fed guidance is about as potent a risk-on signal as investors can expect for the near term. I suspect the market is overplaying the Fed signal, where any dovish move from here will be due to a material worsening in the economic outlook. The next key event risk on that front will be the December 19 Federal Open Market Committee meeting.
The US dollar traded weaker across the board, most notably against emerging market currencies. The most heavily traded of these, the Mexican peso, is having a look at the 20.00 level after Obrador was finally sworn in as president over the weekend. He promised in a fiery inauguration speech to bring a “fourth transformation” to Mexico with an anti-corruption drive and shift way from “neo-liberalism”.
The market has been unsure whether to look at Obrador as a pragmatist or someone whose left populist leanings will risk fiscal excess and a closing off of further foreign investment in Mexico’s energy sector. Outside of EM, I suspect that within the G10, further USD weakness potential will prove rather limited until or unless we see a sustained improvement in the US-China relationship and a bigger shift in relative policy outlooks.
The G20 statement itself was Exhibit A for the massive ongoing shift in the geopolitical environment, as the US was able to eliminate prior references to avoiding protectionism and China likewise deleted past language on “unfair trading practices” it felt were pointed its way. The removal of general language saying that global institutions are necessary and useful also speaks volumes, as was the commitment to reforming the WTO. The gears of history are certainly grinding as the de-globalisation theme picks up speed.
USDCAD shorts are one way to capture a rally in crude oil and a further weakening of the US dollar if these developments deepen – watch out for a Bank of Canada meeting mid-week this week, where the market is looking for a pause ahead of a hike at the January meeting, a hike that is not fully priced. Still, potential beyond 1.3000 looks like a stretch without some more profound breakthrough on trade or something that sparks a strong divergence in the relative rate outlook – which has largely flattened for the last three months.
USD – the weekend’s developments and trade ceasefire are USD negative as long as the risk-on celebration lasts and Fed policy expectations are sidelined. An exceptionally high November Average Hourly Earnings print would be an interesting test of the market’s assumptions on the Fed’s stance. Then it is on to the December 19 FOMC meeting and the dribble of trade policy headlines and Trump tweets.
EUR – hard to get excited about the outlook for the euro as activity surveys weaken and German bunds are scraping bottom and Brexit risks drag on. EURAUD is not far now from the early 2018 lows.
JPY – the yen is sitting out the G20 reaction, trading like a funding currency for global risk-on and likely to continue to trade in negative correlation with emerging markets.
GBP – of the list of possible outcomes for Brexit, parliament signing on for May’s deal with the EU seems the least likely. Elections, second referendum, a “crash out”, a delay to allow a transition toward one or more of these options…safe to say sterling will remain a mess to trade until we get visibility.
CHF – global risk on and recent weak Swiss GDP data not supportive and EURCHF has avoided a downside break.
AUD – an Reserve Bank of Australia meeting tonight, and beneath the surface of the reaction to G20, it speaks volumes that the Australian yield curve couldn’t muster more than about one single basis point of enthusiasm - we are increasingly contrarian on AUD strength from these levels as the 200-day moving average in AUDUSD swings into view above 0.7400.
CAD – CAD rallying smartly on the combination of firmer oil prices and risk-on, and AUDCAD an alternative way to fade the enthusiasm for the AUD.
NZD – NZDUSD jumps above the 200-day moving average to start the week – but momentum is divergent if the move doesn’t stick and extend. Stay tuned.
SEK – the SEK bulls barely hanging in there as the 10.34 and 200-day moving average area in EURSEK provided resistance late last week. Market still favouring a December Riksbank rate hike despite recent weak data.
NOK – the solid bounce in oil prices on Putin and Saudi Arabia's MBS making friendly and boosting the OPEC+ framework throws the NOK a lifeline for now. The EURNOK sell-off needs to deepen further, however, to suggest the upside risk has faded.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Nov. Manufacturing PMI
1130 – US Fed’s Clarida (Voter) TV Interview
1300 – US Fed’s Quarles (Voter) to speak
1430 – Canada Nov. Manufacturing PMI
1500 – US Nov. ISM Manufacturing
1530 – US Fed’s Brainard (Voter) to speak
0330 – Australia RBA Cash Target