News over the weekend from the G20 gathering in Buenos Aires has helped to give global equity markets a pre Christmas lift. Following a one to one dinner on Saturday between President Trump and President Xi of China the two have agreed to a trade war truce.
The outcome is that no new trade tariffs will be enforced for a period of 90 days whilst the two countries try to sort out their differences. Furthermore, this morning newswire reports cite directives from the top, on both sides, to cease the current tariff implementation.
So, understandably equity markets, most notably in China and the US have gotten a real lift this morning. Now add that to the news that Saudi Arabia and Russia have apparently agreed to work together to limit supply, and of course Oil is charging higher at the same time. Seeing the most recent move lower in WTI was in part linked to the equity markets; the positivity for both seem to be feeding off one another this morning.
As far as the major currency markets are concerned; the reaction to this has so far been limited to the commodity currencies, namely the AUD, NZD and CAD. The CAD is also getting a tailwind, not just from the equity space, but also from that higher oil price.
The AUD is gaining as it is the perceived major beneficiary from any positive US/China trade news and the fallout of that this year is what has largely been driving the AUD lower for several months now. Hence it’s perfectly understandable that the AUD should be a major recipient and beneficiary of this good news.
Meantime, the G4 currencies, the USD, EUR, GBP and JPY are really not yet much changed and perhaps, most surprisingly of all, the JPY is not weakening much against the USD either where one might expect that to the case. However, where the JPY is losing ground most immediately is versus the likes of the AUD, CAD and NZD.
The pound is still of course hostage to the next Brexit headline and the EUR has reasons of its own not to gain withfaltering economic data and rising political uncertainty across the region. We are led to believe that France is close to calling a state of emergency if the civil unrest there deteriorates any further.
On the positive side of the equation it does increasingly look like Italy will cave into pressure from Brussels to bring its proposed budget back underneath a 2%deficit of GDP.
The USD also has reason most immediately to lose some steam due to rising doubts over future Fed policy given the Fed chief’s comments last week. However, further confirmation of a slow down in US rate increases is surely still required.
So, the upshot for the FX markets at the start of this week is certainly not at all one dimensional in terms of the any of the G4 currencies and looks like focusing more on those commodity currencies where there is more to be gained if China and the US do come to some sort of agreement. An agreement that prevents the trade war the markets have been most concerned about in 2018.
That implies a focus on the CNY too of course, but that’s not a currency that is yet fully convertible. Besides which, the CNY will continue to be closely and continually scrutinized by the US anyway-unless it strengthens of course!
So right now we are back to where I started on this currency theme which is outperformance for the commodity currencies and all their various cross components, versus all of those G4 currencies I previously mentioned. That’s unless this newoptimism fades of course, but in the short term, and this side of the New Year, that doesn’t look likely. Meantime, Santa is putting those equities back in his sack!
Key economic releases due this week
03/12- 2.45pm November US ISM manufacturing index
04/12- 3.30am Reserve Bank of Australia Interest rate decision
-Benchmark rate expected to remain unchanged at 1.5%.
05/12- 9.30am UK November services PMI index
05/12- US markets will be closed out of respect for George Bush senior.
05/12- 3.00pm Bank of Canada Interest rate decision- Benchmark rate expected to
remain unchanged at 1.75%.
07/12- 1.30pm US November monthly jobs report