It's abundantly clear that US equities are the tail that wags the dog at the moment, driving sentiment in FX. A rebound on Thursday was quickly erased by soft quarterly results from Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) then markets got another reason to worry as the yuan touched a 10-year low. US Q3 GDP is up next and the 25K level in the Dow remains a key focus for bulls and bears.
It's rare for equities to be as dominant in day-to-day trading as they are at the moment but higher rates and a trade war are an unusual combination that's suddenly put markets on edge.
Equities in the US, China, Japan and Europe have bounced around since early in the month with an overwhelming bias to the downside. The FX moves in comparison have been modest but AUD/JPY remains a good barometer of global growth and should be watched closely in the days ahead as it approaches the lows of the year.
Ahead of US GDP
Meanwhile, the global economy isn't showing any real sign of strain. Economic data is solid throughout most of the world. We will get another example on Friday with US GDP. Theconsensus is for a 3.3% rise but estimates range from 2.4% to 4.1%.
In this report the composition will be especially important as recent skews to exports and inventories could mean a large miss or point to one-off growth that won't last. Counter-intuitively, A strong headline figure may hurt markets most because it will ensure the Fed can continue to hike and push up Treasury yields.
At the same time, the market may have found a new worry as the Chinese yuan hit a 10-year low against the US dollar in Asia-Pacific trading. The moves in the currency are tiny and the weakness overwhelmingly reflects the broad US Dollar strength but the yuan level is hyper-politicized at the moment and the move towards 7.00 in USD/CNY has put pressure on risk trades and the commodity currencies.