Market has short attention span on trade war fears

The G-10 rundown

USD – as noted above, the USD rally could switch gears depending on whether US yields rebound and possibly rally more against the lower yielders rather than the G10 smalls, but regardless, it will take a considerable sell-off to turn the tide from here.

EUR – EURUSD still asking to probe the massive 1.1500 pivot zone, but see value beginning to mount rapidly below that level. EU existential risks linked to Italy have faded as the BTP 2-year is back down to 62 basis points at present. But the threat to Merkel’s leadership should receive more attention over the next couple of weeks.

JPY – the JPY cross sell-off was quick and brutal but hasn’t sustained, calling into question whether the trade war threat can derail markets for now. If US yields rise again, the yen could slip back to defensive mode – the next session or two is critical.

GBP – two months of nothing in EURGBP says it all. And how does one price a parliamentary victory today in the “meaningful vote” issue – as more likely to lead to an eventual Bremain or as simply increasing uncertainty, which is nearly total anyway? Tomorrow’s BoE seems unlikely to produce major developments, but given the 50/50 probability of an August hike, scrutiny clues will be intense.

CHF – Italy-linked existential worries have faded quickly, but German-linked uncertainty has suddenly spiked – with EURCHF anchored around the 1.1500 area for now. If EU-linked worries remain sidelined and global bond yields rise, the focus on USDCHF could pick up if parity comes into view again (massive resistance line just above 1.0050 extending back into 2017).

AUD – a modest bounce in the Aussie’s fortunes from yesterday’s low as Asian markets have tried to engineer a bounce. Still, key commodity prices aren’t supportive and Australia’s exports feed Asian export powers, so the country/currency is one of the weaker links in a trade war scenario.

CAD – the loonie has been in for a drubbing on the recent drop in oil prices and the worry that China could focus on US energy exports for future tariffs, as this could see North American crude grades trading at even steeper discounts. USDCAD has broken free and no real resistance until 1.3700-plus.

NZD – AUDNZD managing a bounce as Asian markets revived slightly. New Zealand reports Q1 GDP tonight – a miss would be very badly received, given the RBNZ’s insistence that policy could move in either direction.

SEK – EURSEK has rallied sufficiently to neutralise the downside threat, but further upside would likely require further signs of EU economic weakness or a new aggravation of EU existential risks/fresh ugly decline in risk appetite.

NOK – a Norges Bank meeting tomorrow with little strong signaling expected given the lack of any urgency from Norway’s data to tighten the timeline for eventual hikes. Risk appetite and oil the likely deciding factors.

Upcoming Economic Calendar Highlights (all times GMT)

   • 0800 – South Africa May CPI
   • 0800-0945 – ECB’ speakers at Sintra conference
   • 1330 – ECB’s Draghi, Fed’s Powell, BoJ’s Kuroda, RBA’s Lowe at Sintra conference
   • 1400 – US May Existing Home Sales
   • 1430 – US Weekly DoE Crude Oil/Product Inventories
   • 2245 – New Zealand Q1 GDP