Morning Commentary: Competing Political Crises

Foreign Exchange - Morning Commentary
Competing Political Crises
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Early on in September, markets were upbeat on the prospect that the U.S. and China would restart trade talks in October and hopeful for a partial or limited breakthrough that would pave the way for further negotiations and a return to normalcy. Equities and interest rates moved higher in tandem as the “risk-on” sentiment in the market rippled through various asset classes.

Now, the positive momentum generated at the beginning of September has dissipated as markets are overwhelmed with continuing uncertainty generated by too many competing political crises including Brexit, Mideast turmoil, reduced expectations for the U.S.-China trade talks and the impeachment inquiry in the U.S. House of Representatives. G7 and U.S. interest rates have now fallen eight days in a row as the markets downgrade future growth that is already reeling from the impact of the trade war and tariffs.

For those not familiar with the impeachment process (witnessed three times in our country’s history), it is a multi-step, multi-month process. The most recent historical episode took place in 1998 when the House of Representatives attempted to impeach President Clinton. This situation will remain fluid and filled with twists and turns. Not only will it impact the White House and the ability of President Trump to lead and govern, it potentially will impact the U.S.-China trade negotiations, USMCA, and future Federal Reserve monetary policy with potential ramifications for the Democratic primaries.

Yesterday, the U.S. dollar weakened on the news from the House of Representatives regarding the impeachment inquiry as U.S. interest rates fell again; today, the U.S. dollar is stronger as investors look for yields and safe havens. Continuing global uncertainty will keep investors and traders on the defensive. We strongly advocate to our clients that they remain tactical, and not strategic, in these uncertain times and take advantage of any opportunity the market sends their way.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The Reserve Bank of New Zealand (RBNZ) kept interest rates unchanged at 1.0% as expected. The initial post-meeting commentary and language was less dovish than anticipated, and NZ interest rates and the Kiwi both advanced briefly but fell on the back of a statement that the economic outlook remains soft. The probability of a rate cut on November 13 is nearly 78%.
  • The Bank of Thailand also kept interest rates unchanged at 1.50% as expected. The market interpreted today’s commentary as a dovish hold as the central bank cut its growth rate for the year from 3.3% to 2.8% and also lowered next year’s growth rate. Low inflation and sluggish growth will continue to keep market expectations tilted on the dovish side for additional interest rate reductions.
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