Macro FX trading – Q3 2019 commentary

Market overview

Q3 came in on a breeze and whipped up into a tornado of events, news flow and aggressive moves in rate markets: reaching a zenith of volatility during a stormy August. 

After a steady 25 basis-point (bp) US Fed rate cut at the July meeting, President Trump announced an escalation of tariffs against China on August 1.  CNH breached 7.00, stocks fell hard but rates moved more so with 2021 fed funds futures falling some 65bp to 0.85bp and both 2-year and 10-year US bond yields falling to 1.45 percent before basing. Bunds, meanwhile, fell to around –75bp as 15bp of rate cuts were priced into the September ECB meeting. 

Into mid-September, Trump, with an eye on stock markets, rowed back by postponing some tariffs. In combination with improving US data, the move sent global bonds lower and rates higher.  

JPY, CHF, USD saw haven flows matching the risk and rate moves, whilst AUD, NZD, SEK the opposite. EUR experienced more of a bumpy grind lower thanks to some very weak manufacturing flash PMIs in late September.  

In the UK, Prime Minster Boris Johnson prorogued parliament to keep the No Deal option on the table. This was returned with interest by way of the Benn Bill, which seeks to block such an outcome, and finally with the closing of parliament being deemed illegal and reversed by the Supreme Court. This meant GBP/USD hit multi-decade lows as uncertainty increased. 

Risk, Oil, CAD and NOK alike were buffeted by tensions in the gulf amid discussions of Iran sanctions and an attack on Saudi’s refineries, but reactions were short lived as global growth expectations lowered.  USD marched upwards, buoyed by the highest short and long dated rates in the western world.  The warning offered by US Repo rates spiking gave the Fed work in progress to fix the money market plumbing before year end. 

Then, to cap it all off and keep a stiff wind blowing into Q4, the Democrats commenced an impeachment enquiry into President Trump.

Portfolio performance

(Performance figures are net of transaction costs but before service and performance fees.)

Outlook

Heading into Q4 both geopolitics and data are taking a turn for the worse, complicated and potentially exacerbated by the ongoing Trump impeachment proceedings. 

Trade talks commence on October 10, so haven currencies could expect further inflows on an adverse outcome (Bonds, Gold, JPY, CHF, USD) or even just a truce that fails to row back tariffs. Conversely, risk assets could benefit from positive surprises, although that outcome seems unlikely as the discussions commence. 

Markets expect a Fed package designed to alleviate funding pressures in US money markets, with a substantial and successful package relieving some of the pressure on the USD, alongside any rate cut that is partially priced at the October 31 Fed meeting. 

As the October 31 Brexit deadline approaches, GBP activity could ramp up. Especially if Johnson at least appears to push for a no deal.