FX Update: Markets riding roller coaster of trade headlines

Reader’s note: most of the below  was composed before the late breaking news from Bloomberg citing officials saying that a phase one US-China trade deal remains on track despite all of the aggressive  exchanges between the US and China.

We noted the head-scratching combination on Monday of weak equities and weak safe haven bonds after US Commerce Secretary Ross said the US plans to implement the December 15 round of tariffs on the remainder of Chinese imports if no trade deal is struck. Cue yesterday’s comments from US President Trump on possibly delaying any trade deal until after the election, which makes the first threat even more serious for global markets. In reaction, equities were once again weak, while safe haven bonds swung around from weakness to pronounced strength – a more traditional state of affairs.

As for FX, we have seen more of the JPY and CHF strength we  would normally expect in these circumstances, but the transmission into FX has been unusual in other ways, most notably in the fairly weak US dollar here and the lack of more weakness in currencies traditionally more sensitive to risk aversion (and China worries) like AUD and NZD. Hard to tell whether this latter behavior can persist. We did note on today’s Market Call that not all warning bells are ringing equally in our measures of risk aversion. One barometer of trade hopes – the USDCNY – is pointing in the wrong direction as the rate edged above 7.07 at one point during this morning.

Headline risk is extreme over coming sessions as we all know that Trump can do anything at any time. Would a slight deepening of this equity sell-off see him delaying or vastly reducing the December 15 round of tariffs, for example – leaving the market hopeful that the situation will simply be on hold for a year or more? We shall see, in the meantime, let’s have a look at the incoming data, especially today’s US November ISM Non-manufacturing survey and tomorrow’s  US November jobs  report. Market expectations for the Fed have been oddly inert over the last couple of days, with expectations only about 5 bps lower through early next year after yesterday’s developments, for example. Expect a larger jolt to the outlook on bad data misses out of the US. (And as if to make the point – just before wrapping up today’s commentary we see the headline from Bloomberg that “US and China move closer to trade deal despite heated rhetoric”)

Chart: USDJPY
We note the recent triple divergence in USDJPY (three new highs in price, each at a lower high in the MACD) and the vigor of the recent sell-off that suggest the risk of a major turn lower here. Of course, if we turn right back around and see the US and China able to reach a basic phase-one deal as indicated in a late breaking article just before pixel-time, we could yet get caught in another “pump and dump” cycle typical of headline driven markets. Weak US data is a different risk, however, for USDJPY than trade-deal news.