US Dollar Supply As Risk Appetite Fully Re-Ignited

Quick Take

The narrative continues to be dominated by optimism around the US-China trade talks. At the same time, the divergence in US stocks (soaring) and long-dated global yields (depressed) is hard to be justified on the basis of ‘rainbows’ in the US-China trade discussions alone. One must also assume that the market is pricing quite aggressively the chances that Central Banks — the ECB, the Fed, and the PBOC — , will keep base money (QE) at very ample levels. The market is essentially giving the benefit of the doubt to the favorable resolution of two critical macro issues. Firstly, the US-China trade talks will ultimately yield a breakthrough that enhances the outlook for global growth into Q2 ’19. Secondly, the brief period of QT (Quantitative Tightening) is coming to an abrupt end. Central Banks are literally trapped in a QE vicious cycle. Pull this liquidity out of the system, and the ramification for financial conditions are more disastrous than the US, EU, China can bear. The current backdrop of rising equities and a falling US Dollar (microflows related for now) has allowed the likes of the beta currencies (NZD, CAD, AUD) to fare way better, with the outlook favorable as the intermarket flows stand. The outlook for the EUR, GBP has also improved, but unlike beta FX, these two currencies face a harder road ahead to sustain and/or extend much further its gains.

Narrative In Financial Markets

  • It’s set to be a low key affair in markets during the North American session this Monday, as the US and Canada are both off to celebrate President’s Day and Family Day respectively.
  • A new wave of ‘risk-on’ sentiment emboldens beta currencies and equities while the US Dollar starts to show a weakening macro bullish trend as optimism around US-China trade talks maintained.
  • ECB members Villeroy and Coeure mull the possibility of a new LTRO (long-term refinancing operation) program for European banks should the weakening trend in European indicators continue. If confirmed down the road, it will invalidate any case for the ECB to consider any prospects of rate hikes during this year, which at this point, looks extremely unlikely.
  • San Francisco’s Fed member Daily sees no case for further rate hikes this year while Atlanta’s Fed member Bostic says rates are a bit short of neutral but in no rush to move policy.
  • The rhetoric surrounding the Sino-US trade talks keeps improving. US President Trump said there is a possibility to extend the March 1st tariff increase deadline if talks move in the right direction. Trump also boasted that “trade talks are going extremely well”, obviously doing its part to keep stocks pumped. Meanwhile, Xinhua news agency revealed that US and China reached a consensus on core unresolved trade issues. Trade negotiations are set to continue in Washington this week.
  • The US has averted another government shutdown after US President declared a national emergency situation on the contentious issue of the border. Trump will now be able to release over $8b from various ministerial budgets for the wall funding.
  • Bittersweet US data. On the positive side, the US Feb prelim Univ Michigan consumer sentiment rose by over 2bp to 95.5, even if inflation expectations in 5–10y drop markedly. It was encouraging to see to US empire index for Feb at 8.8 vs 7.00. The bad news was the sharpest decline in over 1y in US Jan industrial production to -0.6%, with the US an import price index of -0.5% adding to the negative mix (no inflation to be found).
  • China’s data dump over the weekend (money supply, new yuan loans, aggregate financing volumes) shows a strong start of the new Chinese year as one would expect.

Potential Drivers — Economic Calendar Week Ahead

Source: Forexfactory

The calendar is absent of any relevant economic news releases on Monday.

On Tuesday, the focus will shift towards the RBA minutes of its Jan meeting, UK employment numbers and the German ZEW economic sentiment, the latter being a critical piece of information to take the pulse of the EU economic state. On Wednesday, all the attention will transition towards the Fed’s Jan meeting minutes. Earlier on the day, Australian will release wage growth numbers which are not a market mover for the AUD.

On Thursday, traders will be faced with the Australian jobs, plenty of EU PMIs alongside the ECB Jan meeting minutes will be released. The same day, the US will publish its core durable goods orders series as well as the Philly Fed manuf index. Later on Thursday, BOC Governor Poloz is scheduled to speak about monetary policy at the Chamber of Commerce in Montreal.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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