Market has short attention span on trade war fears

John Hardy

Head of FX Strategy

The US markets turned quickly yesterday after the meltdown inspired by President Trump’s fresh threats to place tariffs on Chinese imports. It this threat can’t sustain even 24 hours of risk aversion, it is hard to understand what can at this point. We haven’t entirely rejected yesterday’s sell-off, but we’re well on the way, and the simple inability to sustain the negative energy in major equities and the bid in Treasuries speaks volumes.

The most interesting of the two markets is perhaps the US Treasury market, where the bid in long Treasuries was rather weak given the energy level shown elsewhere. The US 10-year benchmark only managed a five basis point range on the day and has entirely erased yesterday’s brief dip in yields. 

This keeps the 3.00% pivot level in play in that US 10-year benchmark, a level that has been in play since February. A strong new rise above suggests that avoiding a DM equity meltdown may not mean any relief for emerging markets if this means that US yields can rise again in anticipation of further Fed hikes and on the blitz of US Treasury issuances this year. The Turkish lira is the weakest link among the more liquid EMs and this weekend sees a Turkish election, formerly believed to be a foregone conclusion in President Erdogan’s favour, but now doubt has crept in due to the economic disaster. In the meantime, Turkey’s insufficient reserves are declining and its credit spreads on USD-denominated debt continue to widen.

Tomorrow sees now fewer than four notable central bank meetings, with Norway perhaps set to maintain its schedule of a slow march to a very slow rate hike path. Elsewhere, the Swiss National Bank is not expected to do anything, while the Bank of England will be scrutinised for any clues on the potential for an August hike (we have our doubts) with a Brexit-related parliamentary vote possibly more pivotal in the near term (more below). Mexico’s central bank is set to hike 25 bps (consensus – sending a message to markets would require a 50 bps hike) ahead of the pivotal July 1 election.

Chart: USDCHF

The degree to which the US dollar can continue its broader rally if risk appetite stabilizes here is an open question. But in yield-sensitive pairings like USDJPY and USDCHF, a clearing of the trade war reaction and a fresh rise in US yields could see the USD outperforming even if the greenback heads sideways elsewhere. In USDCHF, the situation is rather interesting around the range highs just above 1.0050, with a break possibly leading to a look at the multi-year highs above 1.0300. At the same time, CHF presents idiosyncratic headline risks linked to the EU existential threats.

Enlarge
Source: Saxo Bank

The G-10 rundown

USD – as noted above, the USD rally could switch gears depending on whether US yields rebound and possibly rally more against the lower yielders rather than the G10 smalls, but regardless, it will take a considerable sell-off to turn the tide from here.

EUR – EURUSD still asking to probe the massive 1.1500 pivot zone, but see value beginning to mount rapidly below that level. EU existential risks linked to Italy have faded as the BTP 2-year is back down to 62 basis points at present. But the threat to Merkel’s leadership should receive more attention over the next couple of weeks.

JPY – the JPY cross sell-off was quick and brutal but hasn’t sustained, calling into question whether the trade war threat can derail markets for now. If US yields rise again, the yen could slip back to defensive mode – the next session or two is critical.

GBP – two months of nothing in EURGBP says it all. And how does one price a parliamentary victory today in the “meaningful vote” issue – as more likely to lead to an eventual Bremain or as simply increasing uncertainty, which is nearly total anyway? Tomorrow’s BoE seems unlikely to produce major developments, but given the 50/50 probability of an August hike, scrutiny clues will be intense.

CHF – Italy-linked existential worries have faded quickly, but German-linked uncertainty has suddenly spiked – with EURCHF anchored around the 1.1500 area for now. If EU-linked worries remain sidelined and global bond yields rise, the focus on USDCHF could pick up if parity comes into view again (massive resistance line just above 1.0050 extending back into 2017).

AUD – a modest bounce in the Aussie’s fortunes from yesterday’s low as Asian markets have tried to engineer a bounce. Still, key commodity prices aren’t supportive and Australia’s exports feed Asian export powers, so the country/currency is one of the weaker links in a trade war scenario.

CAD – the loonie has been in for a drubbing on the recent drop in oil prices and the worry that China could focus on US energy exports for future tariffs, as this could see North American crude grades trading at even steeper discounts. USDCAD has broken free and no real resistance until 1.3700-plus.

NZD – AUDNZD managing a bounce as Asian markets revived slightly. New Zealand reports Q1 GDP tonight – a miss would be very badly received, given the RBNZ’s insistence that policy could move in either direction.

SEK – EURSEK has rallied sufficiently to neutralise the downside threat, but further upside would likely require further signs of EU economic weakness or a new aggravation of EU existential risks/fresh ugly decline in risk appetite.

NOK – a Norges Bank meeting tomorrow with little strong signaling expected given the lack of any urgency from Norway’s data to tighten the timeline for eventual hikes. Risk appetite and oil the likely deciding factors.

Upcoming Economic Calendar Highlights (all times GMT)

   • 0800 – South Africa May CPI
   • 0800-0945 – ECB’ speakers at Sintra conference
   • 1330 – ECB’s Draghi, Fed’s Powell, BoJ’s Kuroda, RBA’s Lowe at Sintra conference
   • 1400 – US May Existing Home Sales
   • 1430 – US Weekly DoE Crude Oil/Product Inventories
   • 2245 – New Zealand Q1 GDP

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.