Yen rises, global risk appetite weakens on latest Trump move

Markets have opened the week on a sour note on Trump’s latest move to limit Chinese investment in US companies in industries thought linked to national security, from aerospace to robotics. The previous rounds of threatened tariffs are set to go into effect on July 1. As well, China cut its bank reserve requirements by some $100 billion to offset some of the pressure from deleveraging in the shadow banking sector and purportedly to support smaller businesses.

The contrast of China’s easing with the US Federal Reserve’s tightening is glaring and China has allowed the yuan to weaken more rapidly than at any point since last September (that fall in the yuan only came after a rather brutal episode of yuan strength). Speculation is mounting on whether China will mobilise the exchange rate as a weapon in the trade showdown with the US, although this would present risks to its hopes to promote the CNY’s use in trade.

Elsewhere, Turkey’s election saw a sufficiently strong result in favor of President Erdogan that he can avoid a second run-off round. The lira was stronger in response, though I am struggling to understand why outside of a sell-the-rumour, buy-the-fact response to this major event risk, as Erdogan will need to reassure foreign capital that he will not interfere with necessary central bank policy medicine or take other steps, like unaffordable fiscal stimulus. Credit spreads improved across EM’s late last week, also providing a more supportive backdrop for TRY.

After this election, Erdogan has more leeway to control the fate of the country’s policy now as sweeping new powers for the executive now go into effect. As a Bloomberg headline trumpets, “Erdogan election triumph takes Turkey into the era of one-man rule”. 

In Europe, an emergency mini-summit over the weekend shows the level of discord over how to deal with migrants into the Eurozone. Italy’s new government presented a 10-point plan to deal with migration and off-load the pressure on Italy. At issue is whether asylum seekers must stay in the country where they arrive and their cases are being processed. Countries on the Mediterranean, especially Italy and Greece, who have dealt with the heaviest inflow of migrants, feel that arriving at its shores is the same as arriving in the EU. There was no concrete outcome to the talks and this week’s EU Summit is unlikely to produce any deepening agreement either. All of this comes as Merkel must deal with a deadline from her coalition partner CSU and its leader Horst Seehofer, on whether to accept entry by migrants being processed by other EU countries at its southern border.

Chart: EURJPY

EURJPY looking heavy again after multiple recent attempts to punch down through the 127.00 area. The EU potential combination here of a phase of aggravated political uncertainty in the EU and weak risk appetite globally could favour further downside for the pair into the 125 level that was tested during the large flare-up in EU spreads after the formation of the populist Italian government.