Morning Commentary: A Rising Tide Doesn’t Lift All Boats

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

A Rising Tide Doesn’t Lift All Boats Share this story: Andrew Kositkun Foreign Exchange Head Trader

The US 10-year yield is continuing to move lower and is sitting near its 3 year lows as markets continue to price in expectations that a global slowdown could trigger global central banks to start a synchronized easing cycle.  For a sense of scope, today’s 10-year yield is ~90% lower than it was back in 1981 when the 10-year yield was ~15.9%.    As foreign exchange is an asset class that is driven by relative comparisons, a simple interpretation would be that exchange rates should remain range bound as banks move in the same direction.  However, this clearly is an oversimplification.   Beyond the different characteristics of currencies (safe haven, reserve, commodity etc.), history has shown that global tensions tend to rise during periods of synchronized easing.  Case in point, in 2010, Brazilian Finance Minister Guido Mantega popularized the term “currency war” to criticize the then unconventional practice of QE.  2013 saw a reemergence of currency war concerns with Japan’s “Abenomics” program and the Fed’s announcement of unlimited QE.  However, a key aspect to remember is that those “currency wars” were more about the spillover effect than outright intervention.  Additionally, the acceptance of these unconventional policies was only achieved as a negotiated truce at the 2013 G20 meeting.    The take away from this is that there isn’t a guarantee that the world will continue to be accepting of unconventional policies as a norm in the coming global easing cycle.  While President Trump’s criticism of other countries’ easing programs may be more visible, the friction over other countries’ actions are unlikely to remain unique to the US.  This means that markets not only have to be aware of which countries are easing but which of those easing central banks have an increased sensitivity to the actions of other countries.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Investors should circle September 9 on their calendars as a key Brexit date.  News reports out of the UK are indicating that this will be the date that Remainers will make a push to keep the UK from exiting without a deal.  As a reminder, UK Parliament is on recess until September 3.  The Hong Kong airport remains closed for a second day in a row.  Risk sentiment around the world remains negative as Hong Kong and Argentina add additional drags to existing concerns on slowing growth, increased tariffs and US and EU politics.  The US 3-month/10-year yield curve is inverted by ~33 bps, the most inverted it has been this cycle as recession concerns build.  US headline CPI met expectations with core CPI beating expectations. Poor economic data continues out of Germany with the investors’ economic expectations section of the German ZEW survey missing expectations and printing at its lowest level since 2011. Chinese news sources report that the US and China will hold talks again in two weeks, providing support the CNY and AUD.  Additionally, the US will delay soe tariffs until December 15.  The People’s Bank of China set the currency’s reference rate at 7.0326 per dollar, which is slightly stronger than analyst estimates.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!

Follow City National Bank on social media:

Non-deposit investment products: • Are not FDIC insured, • Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and • Are subject to investment risks, including possible loss of the principal invested. This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2019 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC