Central Bank furore

​​​​​​Today's news headlines:

  • ‘Boris Johnson defensive, evasive, and favourite for No 10’ The televised debate between five remaining contenders for Number 10 yielded some interesting titbits but hasn’t fundamentally changed the probability that Boris Johnson is likely to win the contest and become PM before the end of July.  (Guardian)
  • ‘Donald Trump takes aim at Mario Draghi over interest rates’ Trumps criticism of the European Central Bank, which frames monetary policy as a trade weapon, shows that his protectionist roots go deep.  (Economist)

Trump blinks first

The trade dispute between the US and China has been a key catalyst in investors’ flight to safe assets this year. There have been continued hopes for a solution, but it has not materialised.  Yesterday, US President Trump took to Twitter to announce a G20 meeting calling Xi Jingping a “terrific president”. The reaction has been positive for riskier assets; equities across the board have ticked higher, US Treasury yields have bounced off recent lows, and the Yen reversed gains (partly due to a reported earthquake).

However, Trump’s Twitter account will not determine the success of the G20 meeting, only a firm agreement will ensure continuation of the risk rally. The track record for US China summits argues against raising hopes of trade deal, particularly as China Central Bank contemplates its policy tool box.

Bottom Line: Markets find relief from another glimpse of a trade deal between the US and China as risk assets climb. Short-term volatility is expected from headlines – especially when sourced from Trump’s Twitter. Pressure on Sterling and the Euro is likely to persist until developments on the trade dispute materialise.

Are currency wars returning?

In a speech yesterday, European Central Bank (ECB) President, Mario Draghi said that “additional stimulus” will be required if the economic outlook for Europe doesn’t improve. The dovish tone from Draghi implies the ECB are much closer to further asset purchases and a potential interest rate cut than previously thought. The Bloomberg Euro index fell sharply causing President Trump to accuse Draghi of deliberately trying to weaken the common currency to increase the Eurozone’s competitive advantage against the Dollar. The US may also be softening their stance on the ‘Strong Dollar Policy’ – Trump’s repeated calls for an interest rate cut have been ignored by the Federal Reserve to the point that the White House explored the legality of demoting Fed Chair Jerome Powell.

This issue is far from localised, throughout the US/China trade dispute, China has allowed the Yuan to weaken.  That too has drawn criticism from US administrations, but policy setting is far from straight forward.  You could make a very compelling argument that the Peoples Bank of China has used monetary policy to control their domestic economy, rather than a devaluation tool against the US.  Afterall, the Chinese are transforming their economy from low cost manufacturing to the high-end of the value chain, where a weak currency isn’t automatically a determinant of success.  The ECB too is juggling quite a few competing interests in their rate setting and currency devaluation isn’t automatically high on their list of priorities.

Bottom Line: The Fed’s likely to come under further criticism from Trump today, unless they send a strong rate cut signal. If protracted trade wars reduce global growth to a considerable extent, the resulting simulative central bank policies may extend to accusations of competitive devaluation.

GBPUSD

Following a frenetic start to the week, yesterday was flat day for this pair.  All eyes are on the Federal Reserve FOMC Meeting minutes this evening and as the inevitable administration draws.

GBPEUR

Given Trumps ECB salvo yesterday it is no surprise the EUR was sold yesterday.  The pair declined but focus has now shifted to the Fed.  This morning’s UK Inflation data may provide some preliminary diversion, if the readings come off as anticipated.

EURUSD

This pair traded below the 50-day support level and may have further to run given the various fresh protectionist sentiment emerging.  Mario Draghi is speaking this afternoon which always has the potential to move markets, especially after yesterday events.