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Markets Morning - President Trump hits Fed hikes and takes a pop at CHina and EU currencies

Market Analysis /
Greg McKenna / 20 Jul 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome


Market Summary (7.38 am Friday July 20)

China opened the door to a significant Yuan devaluation yesterday with comments from it’s forex regulator reflecting an apparent laissez-faire attitude toward the rise in USDCNY and the impacts it might have on the Chinese economy.

That set in train a solid surge in the US dollar across the board. One which saw offshore Dollar/Yuan up through 6.80 and onshore close to that level. It also drove the Euro down to 1.1577, saw USDJPY back above 1.13, the Pound down near 1.2950 and the Aussie around 0.7322.

But that was before CNBC scooped the market with an interview in which President Trump suggested he wasn’t happy with the Fed raising rates and then highlight that the EU and China are getting a lift as their currencies weaken and the USD strengthens. It was a layman railing against Fed hikes and that’s where most of the coverage went. But it’s the comments on China and the EU currencies in the context of the trade war which I find most interesting. We’ll hear more on that if the USD strengthens materially.

So, as I write the USD is still strong and off the post-Trump highs, but has given back a significant portion of its gains. The DXY is at 95.16 up 0.1%, Euro is at 1.1645 largely unchanged while USDJPY is back at 112.41 for a loss of 0.3% as risk goes a little offered. Sterling is still weak at 1.3014, down 0.35%, as Brexit uncertainty and weak retail sales (-0.5%, 0.2% exp) undermined its prospects.

The Chinese Yuan has lost 0.8% in onshore terms and 0.66% in offshore terms now at 6.7883 and 6.7701 respectively. That and growing concerns about the impact of the trade war on growth have weighed on the Aussie dollar which was pretty strong after yesterday’s massive 50k jobs print. It’s a little less than a cent off the highs at 0.7357 for a loss of 0.5%. The Kiwi lost 0.65% to 0.6746 and the CAD is 0.73% weaker with USDCAD at 1.3267.

Currency is now part of the trade war folks – but the commodity bloc may lag even if the USD comes under pressure given Trump's rhetoric fairly screamed doubling down against the EU and China in this battle.

To stocks then and the S&P 500 faded into the close with the index falling 0.4% for a close at 2,804. Earnings aren’t terrible but prices were under pressure from the soured sentiment in global equity markets it seems with only utilities higher on the day. The Dow finished half a percent lower at 25,064 while the Nasdaq lost a similar amount with the 100 index closing at 7,352.

Speaking of that sour tone Chinese markets were lower yesterday and then Europe fell with the DAX down 0.6% and the CAC off 0.5%. The FTSE was 0.1% higher.

Here at home the ASX finished up 18 points yesterday but the rally faded into the close as sentiment soured in Asia. SPI traders have only knocked 8 points off prices overnight which to me seems a little light given the President has signaled an appetite to continue this trade war which will impact growth – but perhaps the fall in the Aussie has offset some of that concern.

On commodity markets copper was absolutely belted last night falling 2.2% in HGc1 terms to $2.69. Industrial metals broadly were lower as well. No amount of USD intervention by the president will change the fact that there is a growing jaundice feeling about the outlook for global growth. Oil was a tale of two markets with WTI up 0.86% to $69.35 for the front contract the day before roll while the second WTI contract rose 0.3% to $67.95. That’s one heck of a spread. Brent on the other hand fell 0.45% to $72.58.

Gold was under intense pressure at one point trading down to $1211 but it’s back at $1223 now for a loss of just 0.23%. Bitcoin is up 1.85% to $7461. If you ever wanted a good example of why it’s an attractive asset for many folks and traders then just look to the intervention of the President this week in Pharma’s, the Fed, and forex.

Elsewhere US 2’s are at 2.59%, the 10’s are at 2.84%, and the curve is at 24.70 points. Jobless claims hit a fresh near 50 year low and the Philly Fed was stronger than expected at 25.7.

On the day it’s fairly quiet. We get Kiwi visitor arrivals and then Japanese inflation data before tonight's release of German PPI. We also get inflation and retail sales in Canada.

Macro Stuff that affects everyone and everything – either today or eventually


  • President Trump deals himself into everything.  And last night it was US interest rates and the US dollar as I’ve highlighted above. But don’t read what I write, don’t read what the press says about what he said. Watch the video embedded in this CNBC story of the actual words he used. My takeaway is that while the focus was on the interest rate comments it’s what he said about forex and about the Euro and especially the Chinese Yuan that are important.  Watch all the way to the end because he mentions China twice.
  • And it is worth pondering whether this is a President who is going to break with 25-30 years of tradition in not interfering in Fed policy deliberations going forward. While the economy is doing well he’ll probably say what he told CNBC, that is “letting them (the Fed) do what they fell is best”. But if things slow down or if markets react adversely to further hikes then that tone might change and his intervention might increase.
  • What I saw in that brief excerpt is a President who is going to drive his trade and tariff policy forward regardless of outside objections. And on that front it is worth reiterating once again that the US seems keen to pursue this trade war because it’s “not a big deal” economically as the President is want to say. Reuters reported this morning that trade attack dog Peter Navarro said, “We got two economies that add up to around $30 trillion in annual GDP. The amount of trade we’re affecting with the tariffs is a rounding error compared to that…My point is that it’s much less disruptive than these headlines would suggest, and it’s much more constructive as we see the adjustments made in terms of where investment is going to go and where we’re going to build”. This is not an Administration that will back down unless it’s forced to – likely by the market rather than a foreign government.
  • And to that end, Citibank cut its forecasts on global equities and especially EM stocks last night. That said Citi analysts did say, “although we are turning more cautious, we think it is too early to call the end of this nine-year global bull market.”.
  • And on growth. The BdF said in a report that the trade war could knock 3% off global growth. Reuters has more here.
  • And while they characterised it as “preparing for all eventualities” the EU is warning business to prepare for a no-deal Brexit. Fits with the GBPUSD outlook below.

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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