Jay Powell certainly dialed down the hawkish rhetoric before the Senate Finance Committee in the second part of his “Humphrey Hawkins” testimony. While the dollar has backpedalled on the responsively dovish remarks, equity markets didn’t acknowledge the softer language as major stock indexes were trumped by the President imposing tariffs on steel and aluminum imports, all but assuring an escalation of global protectionist policies and a possible outright trade war. A trade tantrum has left global equity indices in a sea of red.
It was a dizzying day for markets, which were turning positive until Trump's ”America First” tariff torpedo struck Wall Street, sending markets plummeting. In concert, both fixed income and gold rallied as investors piled into safer investments.
Oil Markets
Oil's markets had a tough go of it this week as concerns about rising shale production dominated traders psyche. But at the end of the day, the WTI 60 dollar floor looks well supported by the OPEC compliance narrative. And with the dollar looking a bit fragile after Jay Powell soft-shoed back on in a hawkish day one delivery, prices have bounced convincingly higher.
Oil traders are latching on to a possible re-emergence of weaker dollar/oil price correlation narrative as currency markets start tracking towards the psychologically crucial DXY 90.00 support level.
Gold Markets
With the balance of risks skewed towards testing the critical $1303 level overnight, gold investors needed nerves of steel to stay in the game. But patience was rewarded when Powell dialed back hawkish inference, and prices rallied hard on the Trump’s ”tariff torpedo” as investors flocked to haven assets. Gold sentiment has gone through an upside-down week, but underlying support from both risk aversion and a probable uptick in inflation should keep the $1300-1303 floor in check, even more so if the weaker USD narrative comes back with a vengeance.
All eyes will be on China trade-related headlines which could lead to a high level of investor angst. With Senior Level Politburo ministers in the US attempting to diffuse trade wars, the coincidental timing of Trump’s trade tariffs is about as big of a political snub as it gets and we should expect some retaliation from mainland China.
Currency Markets
Japanese Yen
JPY crosses are feeling the pressure from the global equity market sell-off as the yen’s haven appeal remains in vogue. Also, BOJ continues to go about business while quietly tapering asset purchase. With equity markets looking lower and all things being equal, we should expect downside pressure to remain on USD/JPY.
The Euro
Happy to have taken a week off on euro positioning despite missing a good buying on dip opportunity. Although history suggests the euro will gain significant momentum after EU political wobble, the big dollar didn’t play out as planned this week .The EUR/USD market remains in range trade stasis awaiting a definitive hawkish shift from the ECB. But it’s as sure of a bet as one can get in FX markets that the ECB will continue to march towards policy normalisation and the EUR will remain bid on dip
The Australian Dollar
The Aussie has picked itself off the canvas, but given its prominent position in the global supply chain, a possible regional trade war escalation will continue to weigh on sentiment. AUD is the worst performer among the G10 overnight, trading down towards 0.7730 following weaker Australian CAPES numbers. And with risk trading very poorly, the market will continue to favour short Aussie until a definitive USD selloff re-emerges.
FX Asia
Traditionally there has been a very high correlation between regional currencies and export performance, and given the amount of complacency leading up to last night's trade tariff event, investors need to tread carefully in the local market as the regional markets are very export-sensitive. But given the lack of an exacting crystal ball narrative how a possible trade war will play out, it’s not the best of time to jump into the EM Asia FX muck just yet, and probably more prudent to wait for the emergence of the dollar downtrend before re-engaging in local positions.