The US Dollar
For the most part, the majors are still bobbing around in less turbulent equity market seas, but a few interesting themes have generated some crosswinds (though no convincing directional ideas). The German Constitutional Court decision – massive normalization of USD funding – continued outperformance of the NASDAQ and the rebound in oil. But all are providing a mixed picture for the dollar.
The market continues to debate the German Constitutional Court ruling; Equity markets don’t seem to care, whereas the Euro has been taking peeks below 1.08 as BTPs spooked but have presumably been supported since then by ECB buying. Still, this is a messy situation all around, suggesting the path of least resistance for the EURUSD could remain lower.
The British Pound
The Pound burst through technical resistance at 1.2420 after basing a few times in the recent weeks, and with UK construction PMI for April printing much worse than expected, the Pound has been well offered overnight.
But the key for the Pound’s medium-term fate is that the UK looks set to miss the July 1 deadline to extend the transition period that ends on Dec. 31. The risk of an unintentional "no-deal" Brexit will rise in the medium term and could continue to hobble the Pound.
The Japanese Yen
The USDJPY is losing the knock-on effect of rebalancing flows from Japanese pension funds, which have been buying foreign stocks. And it’s very debatable if these flows will continue, which leaves USDJPY susceptible to a significant move lower. Equity outflows have ebbed, and there are signs of the Japanese starting the process of divesting from foreign companies, along with Japan's U-turn on globalization, suggesting the path remains lower.
The Australian Dollar
The Aussie remains under the cosh, primarily due to US equity market weakness overnight. Still, as trade war clouds loom ominously, AUD bulls are striking a cautionary tone as the US new trade figures spell trouble for China and the trade deal. Trump this week threatened to terminate the agreement if China fails to meet those purchasing commitments, which could open the door for Trump to impose additional tariffs on Chinese goods.
The Chinese Yuan
As we morph from the equity rebound, flatting the curve and Fed largesse theme to the more sinister blame game which raises the prospect of China repatriations, it might be time to dust down the trade war tool kit as President Trump's preferred modus operandi to punish China is through trade and tariffs.
Even with the election coming up, trade tariffs play to the base and, through his lens, tariffs probably do not pose much risk to the equity market beyond a short-term hiccup. And he’s probably right as the average tariff on Chinese goods entering the United States went from 3% to 19% while the S&P 500 went from 2600 to 3300.
At a minimum, a tit for tat verbal jousting escalation looks probable. Still, with Trump peeking around the curtain looking to storm the election stage, we could see some targeted tariffs reinstated after phase one of the re-opening is successfully underway. With the carry cheap, it might be worth putting on a hedge now instead of trying to time the tariff reinstatement trade to perfection.
The Malaysian Ringgit
The MYR, not unlike the plethora of EM FX, is looking for crude oil prices to definitively base, preferably at a significantly higher level before the green light turns on. With oil prices stabilizing and the race to the bottom abating, there remains a significant supply overhand to work through. So, for the Ringgit to fire on more than one-cylinder, China's economic recovery has to shine through. Still, with trade war storm clouds starting to gather on the horizon, nothing ever feels safe as the wrath of Trump can pivot on a dime.
The Rest of the bunch
Whether any of this matters very much depends on how tensions escalate and drive CNH weakness and spill over into China-sensitive currencies like AUD, KRW and TWD. But ultimately it boils down to whether tariffs get reinstated.
In the meantime, as that political imbroglio simmers on the back burner, the USD can selectively sell-off if investors differentiate those economies returning to business as usual sooner.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support