E Markets: Two-Sided

Tails I win, heads you lose? Hopes for an easy Monday for risk in perhaps the quietest week for economic news this summer have been dashed with the two-sided coin of FX. Is this USD strength or foreign weakness? The drivers of USD support are the FOMC rate hike path – 4 in 2018, 2-3 more in 2019 – driving the rate spreads above much of the world (including EM). The US stock market earnings in 2Q and its ability to shrug off trade drama also stands out. Trade war themes have been USD supportive and global risk negative.  Over the weekend, Trump tweeted” “Tariffs are working big time,” and in a rally Saturday, said China was “doing poorly against us” and tariffs “are really hurting their economy.” The bigger stories overnight are about rates, growth and politics driving the USD:

  • CNY drops to May 2017 lows – despite PBOC Friday action to raise cost of forwards, options and swaps – CNY fell 0.2% on the day to 6.8425 reversing from early gains of 0.45%. The 1-year swap rate drops to 2.62% below the US rate for the first time since 2009. 
  • GBP at 11-month lows after UK. International Trade Secretary Liam Fox told the Sunday Times that a no-deal Brexit is now more likely than not at 60% chance. Brexit hopes remain in play, however, as the FT reports, The EU may soften Irish backstop powers to avoid a no-deal Brexit including potential revisions like giving the European Court of Justice only indirect authority over Northern Ireland.
  • EUR on worst losing streak since May – back to 1.1510 June 21 and May 29 lows – after German factory orders fall 4% m/m. The good news about Italy FM Tria with soothing comments post a budget meeting were lost but BTPs did have some relief. 
  • CAD back lower over 1.30 after Saudi Arabia halted new trade and investment dealings with Canada in an escalation of a dispute over the kingdom’s arrest of a women’s rights activist

The risk connection of USD to stocks remains in flux with the CNY not working outside of Asia but the EUR and GBP seem to also be losing their correlations.The breakdown of GBP looks important today and worth watching for larger moves and more knock-on effects like FTSE up, EUR lower. Watching 1.30 as the pivot with 1.3090 for upside against 1.2750 bear target.

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James Goldstein 7 months ago Member's comment

Good stuff.