Yuan watch
The acceleration towards an all-out trade war between the U.S. and China appears to have been averted, at least for the moment, with China's Central Bank fixing the yuan at a stronger level than expected. As well U.S. equities were nudged along by comments from Larry Kudlow, chief White House economic advisor, who said "the reality is we would like to negotiate," and "things could change with respect to the tariffs."
The USDCNY fixing below 7 had a soothing effect with global equities reversing earlier losses, but this is about China proving a point. By rolling out their first trade war Howitzer, the Pboc conclusively demonstrated its capacity to steer global markets while effortlessly neutralizing the "currency manipulator" tag that could have mushroomed into overblown proportions.
Permitting the currency to move above CNY7, then nudging it back below, signals to the U.S. that China has full control of the yuan, demonstrating they can quickly weaken as a tariff offset, at will.
While the PBOC continues to toe the line that they will not weaponize the yuan in the trade spat, they have demonstrated that they also have a brawny tool at their disposal.
Markets have gone full circle again hoping for the best while preparing for the worst where even the tiniest gestures could see investors respond more positively than warranted given how emotionally invested market participants are as the trade war remains intricately interwoven into the tapestry of virtually every trading decision.
Over the short term, this currency calm does signal openness to talk and could lead to more positive price action, but over the medium-term, based on a year-long track record of one step forward, two steps back, the state of affairs by all appearances will probably deteriorate further and increasingly impact the global growth outlook. Which means safe havens should remain in fashion.
Gold markets
Gold remains bid despite an equity and USD comeback, supported by looming trade war risks as the increasing trade tensions will regressively impact the global growth narrative. This suggests the Fed will be forced to make another dovish about-face which will drive the demand of yen, Swiss franc and gold.
Escalating U.S.-Sino trade tensions and financial market and geopolitical uncertainty continue to overwhelm risk sentiment so, despite equity markets showing some signs of life, global risks remain elevated enough, and risk-off sentiment strong enough, to continue to support and push gold prices higher.
Oil markets
With traders teed up to sell into an API inventory bounce, the larger than expected draw was unable to boost oil prices. But it's a bearish signal nonetheless when a bullish inventory draw fails to get a rise out of the market, which obviously have bigger fish to fry.
But more damning for price action is that traders are now pricing in worst-case scenarios as the prospects for a full-blown global trade war are looking increasingly likely by the week. It is trade war where traders will be taking their cues as to where oil is headed next.
As well, omnipresent risk in the Middle East, slowing U.S. supplies and OPEC compliance continue to support fundamentals for oil. The imminent and ever-present peril from the U.S.-China trade spat will continue to hang like an anvil above the head of the global economy, so it is challenging to see sentiment improving any time soon.
Currencies
Euro
U.S. yields are falling faster than the rest of the world's and with UST -Bund differentials compressing to the lower level in 18 months the EUR/USD remains anchored to 1.1200 level in early trade.
Malaysian Ringgit
The ringgit continues to trade off the back footm weighted down by the prospect of escalation trade tensions and a deep dive lower in oil prices overnight.