A great deal, or no deal
Today's news headlines:
- ‘Brexit Britain contemplates another foreign central bank boss’. One of the contenders for Mark Carney’s role is former Chief Economist at the International Monetary Fund (IMF), Raghuram Rajan. This may prove to be an interesting choice for Britain, given the candidate has a previous track record of delivering ‘uncomfortable economic truths’ at the IMF and Reserve Bank of India (RBI). (Bloomberg)
- ‘Bond market “almost taunting the Fed” amid rate-cut bets’. Bond markets around the world are nearly certain about a rate cut as sovereign yields sink to pre-Trump levels. However, the Fed is yet to commit to any action having only expressed a dovish sentiment. (Bloomberg)
The world according to Trump
'We're either going to do a great deal with China or we're not going to do a deal at all,' proclaimed the US President yesterday, adding that he won't complete the agreement unless Beijing returns to the terms negotiated earlier in the year. Trump expects to meet with Chinese President Xi at the G-20 summit later this month and has threatened China with additional tariffs of 25% on $300bn of goods if the meeting doesn't occur. Risk-off sentiment was evident as Asian equities fell, US Treasury yields moved lower, and the safe-haven Japanese Yen edged higher. The Dollar Index slumped to an eight-week low as market pessimism combined with poor labour data and the expectations of a Fed rate cut all contributed to the Dollar sell-off. Trump has often hailed his friendship with President Xi; however, the attempt to corner him into a meeting may backfire, hurting his bid for the 2020 Presidency. An unforeseen by-product of this situation may push China and Russia closer together, in opposition to perceived US hegemony.
Bottom line: The scene is ripely set for a G-20 showdown—President Xi has been put in the toughest position of his six-year rule—cave to Trump and risk looking weak at home or decline a meeting and accept the economic ramifications. The outlook seems frostier, but both Chinese and US interests hinge on striking an amicable deal.
Don’t take the lead
Inflation expectations—and by extension, global growth—are under heavy scrutiny at the moment, but the market may be trying to lead the Federal Reserve where the data doesn’t point. The three dovish Fed officials who have changed market expectations of the central bank’s upcoming July meeting to a rate cut were seemingly reacting to the increased trade uncertainty constraining growth. In fairness to them, it’s hardly an easy judgement. The underlying inflation picture is very strong but business investment has been lacklustre, trade protectionism threatens to reduce business growth and tax the consumer, and the news flow conveying these dynamics has swung on a daily basis. Monetary policy is simply not as reactive as Donald Trump’s Twitter feed. The backpedal on the Mexican tariff scare and oil price consolidation—Jeff Currie, Head of Goldman Sachs’ Commodity Research, anticipates Brent Crude to stay range-bound for the rest of 2019—might mean some of the impetus for policy easing at the Fed is no longer present. The 21-basis point drop already factored into the July meeting might even be right, but that might be the end of the show. That means the further 40 or so basis point decline priced in for 2019 would need to be unwound.
Bottom line: The latest Dollar sale below the trade-weighted 200-day moving average is predicated upon a very accommodative response from the Federal Open Market Committee (FOMC), that simply is a foregone conclusion. Were the global growth backdrop to become more friendly, the Dollar sell-off could unwind in quick fashion and the equity rally with it.
The Pound Index remains at the lower end of its year-to-date range, with no obvious catalyst to change course in the short-term. The pair may find clear direction this afternoon as US inflation is expected to fall, putting less pressure on the Fed to cut rates.
The pair could extend its long-lasting decline if the Euro Index pushes past resistance found last week and in March. Sterling has been unfazed by recent weak economic fundamentals and looks likely to trade flat for the remainder of the week.
The pair continues its June rally pushing towards the 200-daily moving average of 1.1365—a key level or resistance. If the recent spike in risk appetite starts to fade, EUR/USD trading back in the 1.11 – 1.13 range looks likely.