Morning Commentary: Less is More

Foreign Exchange - Morning Commentary
Less is More
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Markets have kicked off the second half of 2019 with a risk positive mentality after the G20 meeting between presidents Trump and Xi reestablished trade talks.  Equity markets are broadly higher with strong gains in Asia carrying over to Europe and North America.
 
While the tone in the markets has improved, it is important to remember that this truce alleviates the immediate risk, but the underlying core issues still remain.  This means that there is risk that this breakthrough could be a short lived one.  At a minimum, expect a bumpy path for negotiations.  For now, the markets will take this win and shift its attention back to economic data and the likelihood for central bank rate cuts throughout the second half of the year. 
 
To this end, currencies find themselves in an ironic position where less is more.  While a vast oversimplification of the currency markets, higher yielding currencies tend to outperform lower yielding ones.  However, we are not in “normal” times, and as such, lower yielding currencies are positioned to benefit the most from a global slowdown. 
 
Low yielding currencies, by definition, have less room to ease policy.  In an environment where central banks around the world are all cutting rates, those currencies with less to cut should benefit as other currencies cut more and reduce relative interest rate differentials.  Of course, all this is contingent on data justifying a cut. 
 
Over in Europe, weaker-than-expected PMI data drove the euro down in early trading although the common currency did manage to retrace roughly half of its losses.  While this data was from pre-G20, it certainly does not meet the ECB’s requirement for “improving data.” 
 
Over in the US, the critical government employment report is released this Friday.  Last month’s employment report came in significantly weaker than expectations and markets will be looking at this month’s report as confirmation on whether or not the market’s current Fed rate cut assumptions make sense.    
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Oil is trading higher on the session after OPEC comments that recommend an extension to oil cuts that could push into 2020.
  • U.K. manufacturing PMI data disappointed, coming in at 48 against expectations for a 49.5 print. 
  • President Trump made a surprise visit to the Demilitarized Zone between the two Koreas and became the first US president to set foot in North Korea.  Both countries have indicated that talks will continue with Trump hinting at the possibility for sanctions to be lifted should negotiations go well. 
  • The Bank of Japan released its Q2 Tankan report.  Both large and small manufacturing data disappointed with this most recent Tankan report the weakest in nearly three years.
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