The trade tariff news tweeted by President Donald Trump on Sunday sent the Asian (and
more especially the Chinese) markets into a tailspin. So, after several months of what have
generally been described as ‘positive’ discussions it looks like we might end up with a new
set of increased US tariffs come the end of this week- that’s progress?
Well, according to the US, the Chinese have back-peddled on earlier commitments so it was
time for ‘The Donald’ to weald the big stick I guess? Irrespective of that the Chinese are still
sending a trade delegation to the states this week, so perhaps its entirely possible that the
situation can still be turned around. I think that possibility is probably why the markets have
not completely imploded at this stage.
However, and from my own perspective, I see little point in trying to spin anything out of
this other than to focus on the facts of where we are right now, which looks like back to
square one doesn’t it? Anyway we shall just have to see how the week progresses as there’s
probably more twists and turns to come before it is out.
Perhaps, the more interesting thing to emerge over the past couple of days has been fresh
moves by the PBOC (Peoples Bank of China), further cutting their RRR (Reserve Ratio
Requirement) for certain smaller Chinese banks. This looks very much like evasive action
given the latest Chinese PMI data and perhaps more especially, given the US rhetoric on
trade this week.
Meantime, the Reserve Bank of Australia surprised quite a few market pundits overnight
when they decided to leave their key benchmark rate unchanged at 1.50%. The consensus
had been for a 25bp reduction today and that prospect coupled with the latest US/China
news had sent the AUDUSD down to as low as 0.6963 yesterday. Well, understandably the
price has spiked back up overnight following the RBA’s policy decision.
What that outcome has also done; is to cast doubt over the prospect that the RBNZ will
change their benchmark rate tomorrow. Right now the consensus is that they still will, but
given that the RBA hasn’t budged, then one has to question that. Naturally if they do cut
their benchmark rate to 1.5% from the current 1.75% then it will surely have an impact,
most immediately on the AUDNZD. Mind you that cross has already lifted from a low
yesterday of 1.0518 to as high as 1.0643 as I write this update, around 6.30am this morning.
Elsewhere, the Japanese markets have reopened after a 10day ‘Golden Week’ break and
understandably its not been a happy ending for the Nikkei today as it plays catch up with
the Chinese bourses. Understandably the JPY has been the main beneficiary of all the latest
news with the USDJPY close to 110.50 this morning.
As for the dollar more generally; well, that’s been a bit of a rollercoaster since the
unemployment figures last Friday; where on the one hand the blow out payroll numbers
helped the USD index move briefly back above 98, only for the lack of wage growth to send
it immediately lower again. I did say on Friday morning; that it would be the wages numbers
that would probably dictate where the dollar ended the week.
Consequently, with wage growth static as +3.2% annualized in April, the fact that the US
unemployment rate fell to 3.6% didn’t matter much at all. The thing to note in that number
is that it’s probably down to a decline in the participation rate as much as it is anything else.
Hence the dollar is a little lower this morning with the EURUSD back above 1.12 and the
GBPUSD recovering yesterday’s losses too as it pushes back near 1.3125.
As far as the pound is concerned we are told that May and Corbyn are close to a deal. As
close as the Chinese and the US are on trade perhaps? What is clearly ridiculous about that;
is whatever May and Corbyn might yet agree on is surely irrelevant if they still cannot get it
past the commons, let alone past the EU- unless the withdrawal agreement is suddenly and
miraculously up for renegotiation now? Anyway, until such is known there’s plenty of time
for yet more blustering, prevarication and hot air I suppose?
So, as far as the rest of this week is concerned, with a fairly benign set of data release
events due now, its all eyes on China, the US and parliament I suppose. I repeated last week
that I was cautious when it came to the equity markets and given the moves of the past
24hours I am still in that mode.
Volatility and price indecision is never something to ignore, especially when seen at record
levels. Naturally, volatility spiked on Sunday night/Monday morning with all the robots
being the new ‘Lemmings’ on the street. Whilst it might be ebbing back right now, I certainly
wouldn’t rule out another surge before the week is out.
Important Economic Releases Due This Week
07/05- 10.00am EU Commission Economic Forecasts
08/05- 3.00am NZD-RBNZ Monetary Policy Decision
(Benchmark rate expected to be cut to 1.5% from current 1.75%)
08/05- 6.45am Swiss April Unemployment Report
08/05- 7.00am German March Industrial Production
08/05- 12.30pm ECB President- Mario Draghi Frankfurt Speech
09/05- 2.30am China April Annualized CPI Inflation report
10/05- 9.30am UK Q1 GDP Estimate Revision (Expected to be revised higher)
10/05- 1.30pm Canadian April Unemployment Report
10/05- 1.30pm US April CPI Inflation Report