Head of FX Strategy
Summary: The market is already reacting to news headlines citing unnamed officials close to the US-China trade talks. If the story is correct that a deal could focus in particular on currency issues (Chinese promises to not devalue in exchange for US concessions on tariffs or other measures), then there could be important implications for the USD outside of USDCNH, most immediately for EURUSD.
US stock futures and USDCNH were all over the map overnight, first on stories citing two sources close to the US-China trade talks that there was no real progress and that the Chinese delegation could already be set to leave Washington a day earlier than scheduled (at the end of today rather than Friday). But later, stories cited a possible focus on a “currency pact” between the two sides, apparently a recirculation of something that had been agreed in a previous round of talks. And if an agreement on currency is a part of the deal (likely some promise from the Chinese side not to devalue in exchange for US concessions on tariffs) this could have important implications for the level of the US dollar elsewhere, especially versus the Euro. After all, while the Trump administration has agreed to a minor trade deal with Japan, if one that still leaves the auto tariff issue dangling, the trade confrontation with the EU is ongoing and a new schedule of tariffs is set to go into effect next week against the EU. Trump could easily pick up the currency angle with the EU as well.
As well, we get the FT out overnight (paywall) with a story saying that Draghi went against the “in-house advice” on restarting QE – we could see some interesting details emerge related to this in today’s ECB minutes. We already know that representatives of the core EU countries were against restarting QE anyway and assess that ECB policy is at the end of the road, but the minutes might give a better sense of the internal debate. We’re constructive on this move above 1.1000 in EURUSD, though we’ll need to see the move survive the end of the week and the US-China trade talk outcome, as we discuss below in the chart.
EURGBP has slipped above 0.9000, as UK Prime Minister Boris Johnson is set to meet with his Irish counterpart for last ditch negotiations ahead off the EU summit in a week’s time and Parliament’s Oct 19 deadline for requiring an extension to avoid a No Deal. The UK September RICS House Price data was actually far less depressing, at -2% than expected (-7%) and two points higher from the previous reading, but we are registering the most contracted negative credit impulse readings for the UK since the early 1990’s. This morning the UK reports Aug. Manufacturing and Trade Balance data.
The Swedish krona is clawing back some of the ground it has lost recently after it crossed to new lows for the cycle in recent days versus the Euro. Today’s September CPI release was stronger than expected, with headline inflation rising to 1.5% YoY from 1.4% in Aug and vs. 1.3% expected. Core inflation stayed at 1.3% vs. 1.2% expected. Norway’s CPI release was elevated, with a 2.2% core YoY CPI reading versus 2.1% expected.
Chart: EURUSD
EURUSD has crossed above 1.1000 for the first time in more than a couple of weeks as we await the ECB minutes up later and a possible further sense that the outgoing Draghi was going rogue in restarting QE – a policy that could be reversed down the road, and even if not, the ECB is at the end of its policy rope and future EU-US trade policy discussions could see currency entering the discussion. Let’s see if the EURUSD move holds here, but we are constructive on this proving the beginning of something, with further confirmation that the pair has at least neutralized the downtrend on a close into the 1.1075-1.1100 area.
The G-10 rundown
USD – the Powell Fed is going to bring liquidity and Trump wants to focus on currency – we may finally be reaching critical mass to turn the tide against the US dollar
EUR – the EURUSD move higher today looks important, but needs to find further sustenance from the US-China trade talk outcome. But regardless, the issue of the EURUSD being at the end of its policy rope remains as a broad supporting factor for the euro, that could be supercharged by a clear fiscal focus in EU policy somewhere down the road.
JPY – the yen a bit more insulated than the euro from any US-China “currency pact” talk because of the US-Japan limited trade deal, and the market is fearing a BoJ move at its meeting later this month, but the JPY looks too weak here relative to the bond market unless risk appetite goes into full upswing mode.
GBP – market may need firmer indications on No Deal Brexit risks to weaken further now that it has made a major reassessment after the August-September sterling rally.
CHF – the factors discussed above could also drag EURCHF significantly higher.
AUD – trading awfully quietly, even through all of the headlines overnight. Certainly, almost any form of deal, limited or otherwise, could support an AUD rally – supported technically by momentum having long ago left the scene in the AUDUSD sell-off.
CAD – the loonie could prove vulnerable in the crosses (think AUDCAD in particular) if the US-China trade talks prove more productive than anticipated
NZD – the kiwi having a hard time gaining momentum here versus the AUD, but we have to await outcomes of the US-China trade talks. A limited deal would likely favour AUD more than NZD, so hard for traders to decide whether to jump in here for fresh AUDNZD longs or wait for a deeper consolidation.
SEK – a minor beat on inflation may not be enough to turn the tide back higher for SEK, though a narrative shift here on the euro as per our discussion above could be something that changes the market’s assessment for SEK as well. A lot of wood to chop to reverse the EURSEK chart, in any case.
NOK – EURNOK toying with the highs, having not yet taken out the high for the cycle yet – as we note above for SEK, the most supportive thing for NOK would be a stronger EUR
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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.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
