Daily FX Market Roundup February 25, 2019
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
We are starting this busy trading week with solid gains in equities and currencies. Thanks to President Trump who officially delayed the next round of tariffs, all of the major currency pairs are trading higher led by gains in the Australian and New Zealand dollars. While the president hinted at this outcome last week, investors were relieved that his views did not change before an official announcement was made. Of course, the decision to extend the deadline was an easy one because it creates good will without a real commitment. Still, investors liked that it was open ended and that the truce will last until the summit between President Trump and President Xi next month. Assuming that both sides continue to make progress, Trump says they will be planning for a Summit at Mar-a-Lago to conclude an agreement.
Speculation has now shifted from an extension to a conclusion of the trade war. Memorandums of understanding are being drafted in 6 key areas that include cyber theft, intellectual property, currency and non-tariff barriers. While there will be legs to this rally, it's important to understand that a final trade agreement could take many forms. The US could promise to keep tariffs where they are (with no further increases) and review them in a few months/years or they could abolish them completely. There’s also the possibility that a deal “might not happen at all” according to Trump but he’s motivated to get it done.
Fed Chairman Powell is headed to Capitol Hill Tuesday to testify before Congress. His prepared comments on the economy and monetary policy will be released at 9:45AM NY/14:45 GMT and they should drive EUR/USD, AUD/USD and NZD/USD higher. If the trade deal gives Powell a new sense of optimism, risk appetite will improve, lifting high-beta currencies. If he remain cautious, stresses the need for patience, talks about the downside risks to growth and the possibility of fewer rate hikes, the US dollar will fall, which should still be positive for EUR, AUD and NZD. USD/JPY on the other hand will rise on optimism and fall on pessimism. EUR/USD ended the day at its highest level in more than 2 weeks but it remains firmly within its recent range. A move above 1.1390 is needed for the upside breakout to be real.
Sterling extended its gains above 1.31 versus the U.S. dollar after Prime Minister May delayed the “meaningful vote” to March 12, two weeks before they are scheduled to leave the European Union. This decision should have been negative for the currency but investors believe that by running down the clock, May leaves Parliament with no choice but to take over the Brexit process. She’ll have to request an extension of Article 50 or risk being shut out of negotiations. There’s talk that the European Commission could consider a 2-year delay and the Labour party is moving toward supporting a second referendum. Both choices are better than the current course, which is what investors are banking on.
The Canadian dollar was the only major currency that failed to benefit from the risk rally and oil prices are to blame. Crude tumbled more than 3% after a tweet from President Trump that simply said “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile!” While there was no specific threat, investors feared that the president, who hasn’t tweeted about oil since December, is returning to his criticism of the alliance. It is also a nudge to Saudi Arabia who previously raised output on the back of pressure from the Trump Administration.