Midday update
So what was with all that clamoring about trade war when I walked in this morning? The equity world looks as content as a cucumber, and indeed trade frictions don’t seem to have unnerved Asian investors as regional equity bourses are trading in the green. However, since bottom picking is not my forte, I will let the chips fall as they may knowing full well we are little more than a headline away from for another risk-off episode.
USD/JPY is turning into one of those fear of missing out type trades as traders continue jumping from what not to what’s hot. Seeing good bids out of Tokyo retail all morning, and not too surprisingly we’re testing the primary resistance level between 112.25-35 on the possible shifting Japanese investor preference, one can only imagine where the spot will trade if an unlikely wave of risk on kicks in.
Morning run
A tenuous and unstable state of affairs
The prospects of another round of US tariffs directed at China have resurrected fears that the trade skirmish between Washington and Beijing could escalate with some investors now fearing a full-blown global trade war could be a reality. But the most damning signal is that dialogue between the two superpowers is pretty much non-existent, and with a diplomatic solution appearing more unlikely as the days go by, markets will remain on the defensive.
But with about seven weeks before the new tariffs kick in, if there is a will there could be a way. However, with no senior-level discussion scheduled on the near-term horizon, markets will likely remain in a very tenuous and unstable state of affairs until officials get back at the negotiating tables.
As for woeful Wednesday, Trade war headlines continued to exact a full court press on stocks, oil and EM FX. But the day also provided an unexpected turn of events on USD/JPY which bucked conventional risk off wisdom and surged higher as US Treasury yields moved north, but with USD/CNH adjusting convincingly higher, the USD/JPY now appears trending in sympathy with the broader dollar/ASIA basket. Indeed, Japanese investors are not in the repatriating haven mood but may be increasingly looking toward the US markets as their essential investment vehicle which could support USD/JPY even in a risk-off environment.
Oil markets
An extremely active session in commodities overnight with crude prices spilling lower across the board as $200 billion of additional tariffs on Chinese goods took its toll. While oil prices are following the risk-off move but adding more fuel to the fire was President Trump’s comments on Germany’s energy policy which he is suggesting is being "held captive by Russia.” Also weighing on prices was the lifting of the force majeure at Ras Lanuf, Es Sider, Hariga and Zueitina suggesting that Libyan exports from its eastern ports will quickly resume to previous levels and this report has exerted pressure on bullish sentiment overnight. But the 0.6% rally in the USD is also weighing on commodity sectors
West Texas Intermediate crude oil moved lower in sympathy with a weaker Brent market on even after the DOE reported a much larger-than-expected draw, but with imports falling by 1.6 million barrels per day but the decline in imports could be writing off due to July 4th holiday hangover and the deluge in the Texas coast due to heavy rains. But still not a particularly bullish signal.
Metals Markets
The metals complex is getting hammered with copper plummeting to one-year lows. Of course, trade tensions are harmful to the base metal complex, but the fear that an escalating trade war will severely dent global growth assumptions is inflating the sell-off. Predictably the Aussie dollar is taking it on the chin given it precarious position in the base metal supply chain into China.
Gold Markets
In the Gold sector, there has been nary a haven bid to be found as the surging USD has driven gold lower and within an eyeshot of the critical 1240 level. But with a broader equity sell-off failing to materialize in US markets, there has been a real scarcity of defensive allocations into Gold overnight.
Currency Markets
What’s hot what’s not? Well, I’m glad I reminded myself that trade wars are good for the USD while holding an unwavering conviction that USD/CNH has no place to run but higher on any escalation.
CNH: Yes, this 200 billion is a significant escalation in the trade war between China and the US, and yes, the RMB complex should remain to be the epicenter of currency trade where the visible big-picture developments should see a bullish skew for the USD. And while it’s entirely possible the Feds may enter the equation at some point denting the dollar’s appeal, we’re nowhere near meltdown level just yet, suggesting there is more juice to be squeezed on the long USD RMB complex.
JPY: it will be tough for traders to change gears from depending on the risk aversion signals to the reality of shifting Japanese inventor behavior which may be looking outbound for yield. It might be time to start viewing USD/JPY strategy through a different lens.
MYR: The BNM held a very even tone at yesterday’s MPC favoring policy continuity. A very sharp move by a Central Bank veteran knowing full well that keeping policy measures at hand for possible darker days ahead makes perfect sense especially with no real reason to signal a dovish shift at this stage.
But more aggressive trade war fears are coming home to haunt as the fear that an escalating trade war will severely dent global growth assumptions and trigger a commodity market rout. Oil markets are not immune to this calculus, and the sudden drop in oil prices overnight is weighing on the MYR sentiment.
But equally concerning, is the lunge higher in USD/CNH which should continue to exert pressure across regional currencies.
I’m always looking for a silver lining in the Ringgit cloud, but everything is looking ever so tarnished today suggesting we could press higher as regional sentiment wanes.