Morning Commentary: “To Jump Out of the Frying Pan into the Fire”

Foreign Exchange - Morning Commentary

“To Jump Out of the Frying Pan into the Fire”

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The sense of this expression has always been to escape one evil predicament by leaping into another condition that is just as bad or potentially worse. Yesterday, markets breathed a sigh of relief as a temporary truce between the U.S. and China over trade and a reestablishment of trade talks provided a short term positive risk sentiment for investors. As we pointed out yesterday, the truce alleviates the immediate risk, but the underlying core differences between U.S. and China still remain; we can anticipate a long and drawn out negotiation and a bumpy ride for the markets.
One of the key stories this morning is that the U.S. is now proposing $4 billion worth of tariffs on EU goods regarding an Airbus-Boeing dispute. It would appear that the White House is jumping from the frying pan and into another fire as the EU has readied their own retaliatory tariffs should the U.S. choose to initiate these tariffs; this could lead to another long and drawn out negotiation that will once again impact the global economy in a negative manner.
The timing of this potential trade action can certainly be questioned given the ongoing concerns about future growth here and abroad as the U.S.-China trade war has already taken its toll on the global economy. The proposed tariffs will only add to the strained tensions between Washington and Brussels over trade and other geopolitical issues. The market reaction has generally been muted so far with G7 interest rates lower, global equities mixed, and the U.S. dollar (DXY) slightly weaker after yesterday’s gains.
  • The Reserve Bank of Australia cut interest rates by 25 bps to 1.0% as expected. Governor Lowe signaled that the central bank would likely pause after back-to-back rate cuts to monitor the impact on the Aussie economy. The Australian dollar is the top performing major currency today and has been exhibiting signs of bottoming over the past weeks as the market senses that the end of the rate cutting cycle is near for Australia.
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