Morning Commentary: A Sliver of Hope

Foreign Exchange - Morning Commentary
A Sliver of Hope
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets and investors have tried to remain hopeful and optimistic that the U.S. and China will reconvene trade talks and find common ground to end their trade war. After all, there is way too much at stake, not only for the U.S. and China but for the global economy, to continue the Cold War and the ratcheting up of tariffs against each other. Today, markets are rejoicing in the simple fact that the two superpowers have agreed to meet sometime in October in Washington at a date to be determined.

This small breakthrough has brought renewed hope for the markets after the rapid deterioration in relations last month that led to extreme volatility for the markets. Global equity markets are all higher today, and G7 interest rates are rising sharply. Commodity prices are rising and the two key sensitive safe haven currencies (Swiss franc and Japanese yen) are both weaker while the U.S. dollar (DXY) is lower for the third day in a row.

While the meeting in October is welcome news for the markets, it does not necessarily imply a thawing of relations surrounding key issues or a softening of their respective political and economic postures. Hope is a good thing, and perhaps enough economic pain has been delivered to each side through the use of tariffs and the downstream impact for their domestic economies to find some new common ground. Today, markets and investors will remain upbeat and look forward to the U.S. jobs report tomorrow.
  • German factory orders for July disappointed once again. They came in much weaker than forecast at -2.7% which brings the YoY rate to -5.6%. This was no problem for the euro or for German interest rates as they are both higher today.
  • Sweden kept interest rates unchanged at -0.25% as expected, but the central bank kept its forward guidance in place for the next rate hike toward the end of 2019 or early 2020. Markets had expected a more neutral stance by the central bank given the global move afoot to cut interest rates; the Swedish krona is the top performing G10 currency this morning up nearly 1.00%.
  • The U.S. ADP Employment report (precursor to tomorrow’s Labor Department report) came in much stronger than expected with a gain of 195,000 against expectations of a gain of 148,000. The correlation between the two reports is moderately strong and has helped to put a charge higher in U.S. interest rates for today.
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