Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
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Chief Investment Strategist
Could the USD change direction on further risk aversion?
John J. Hardy
Global Head of Macro Strategy
Summary: The US dollar has sold off sharply on Trump’s tariff announcement, but could further risk aversion see the US dollar firming suddenly in the near term even if it is set to weaken in the longer term?
Yesterday saw a justified meltdown in risky assets as markets absorbed the blow of Trump’s far larger than expected tariff rates the US will impose on global trading partners, with the mercantilist policies of China and southeast Asia most clearly in the cross-hairs of the Trump administration. So far, the euro, yen and especially the Swiss franc have served as safe havens, while the US dollar weakened broadly. The narrative driving the US dollar lower is one of reduced portfolio allocations to the US as the policy will bring most disruption to the US economy in the near term. As well, the market is aggressively positioning for the Fed to deliver more cuts this year – at current count a full 100 basis points of easing by year end. The inflation outlook has certainly been helped along by the collapse in crude oil prices yesterday as well, with OPEC+ dramatic policy move to raise production yesterday more than anticipated, perhaps a bid to put the US shale market out of commission.
But I wonder if we may be at risk of a sudden reversal in the very short term to some of the current market developments if the ugly moves in global markets turn into a more pronounced deleveraging event. The AUDUSD move overnight is an interesting one in that light – after all, who wants to load up on AUD when the US tariff schedule could crater demand for Chinese exports and any stimulus China is set to announce is aimed more at consumption rather than the old fashioned kind of massive fixed asset investment that used to mean huge demand for all that Australia exports? In short, if markets turn truly white knuckle, the market may just be looking for liquidity, which could mean demand for US dollars and a USD spike, at least against the less liquid and traditionally pro-cyclical currencies, from sterling and the Swedish krone, to Asian currencies, etc.
Chart: GBPUSD
GBPUSD rushed higher as the US dollar weakened on the back of Trump’s Liberation Day tariffs. It feels extremely unusual to see sterling ripping higher against the US dollar in a time of severe market distress and I wonder if this move above 1.3000 can hold if we are set to suffer further volatility across global markets. Certainly, the Bank of England is also at risk of some repricing lower here as well. Longer term, the US dollar’s trajectory is set to go lower, but I wouldn’t count out the ability of the greenback to make life difficult for the bears in the near term.
Today is a tricky one for FX traders as we have the US jobs report, with no visibility on what it will deliver as data is conflicting, if increasingly concerning. Then we have Fed Chair Powell speaking somewhat late in the session. Remember that he introduced the word “transitory” again when talking about the inflation impact of tariffs. Will he want to push back a bit on the market’s aggressive pricing of the further cuts this year or encourage it by raising the level of concern on the economy, especially the labor market?
And then we have the over-arching problem that we still must wait for next Wednesday to see if all of the tariffs announced on Wednesday will be allowed to go forward, or if there is room for deal making.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
As noted above, I wonder if the smaller currencies could come under pressure here if market distress continues here. Specially, have investors overplayed the Europe fiscal expansion and asset reallocation card in the near term? If so, the SEK could be in for a painful short-term reversal of its remarkable strengthening move. Silver certainly in a world of hurt after yesterday’s move!
Table: NEW FX Board Trend Scoreboard for individual pairs. AUDUSD can’t decide what it wants to do, while USDCNH reversed back lower after the Trump tariff inspired spike – still rangebound. Silver’s collapse is set to put it on a negative trend reading versus most currencies today. NOKSEK flipped to a negative trend reading after yesterday’s oil price collapse.
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