Morning Commentary: Currencies Leading the Way

Foreign Exchange - Morning Commentary
Currencies Leading the Way
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
It has been another turbulent 24 hours regarding headlines revolving around the U.S.-China trade talks. A continuous stream of headlines and denials had markets anxious, apprehensive, and fretful as to the state and duration of the proposed two-day talks beginning today, but overall, there is renewed optimism about a mini-deal that could pave the way for future negotiations.

As we arrive, equity and interest rates markets are mixed, but the U.S. dollar is under pressure as many major and emerging market currencies are responding to stories about a currency pact with China. Details surrounding the discussions of a currency pact are limited, but the market is connecting the dots and looking at this framework as a potential mini-Plaza accord (1985). The Plaza Accord was an agreement between the G5 Nations to manipulate exchange rates by central bank interventions and actions to depreciate the U.S. dollar relative to key currencies to help reduce the large and growing U.S. trade deficit.

While many key currencies have appreciated overnight, it is a large leap of faith to assume that a currency pact with China has potential ripple effects for other countries and currencies. Back in the 1980’s, global coordination and cooperation on multiple issues was an important characteristic of the times. There were times when G5 central banks and other central banks coordinated their monetary policies for maximum impact.

Today, global coordination and cooperation play second fiddle to economic nationalism. While the U.S. has a massive trade deficit and many other key trading partners have large trade surpluses, it is doubtful that a mini-Plaza accord could be reinstated to set in motion a weaker U.S. dollar. But for today, currencies are leading the way respective to other asset classes, and markets will remain highly attuned to headlines surrounding the trade talks.
  • The British pound is lagging behind many other major currencies this morning on the back of much weaker economic data. Industrial production and manufacturing production for August came in at -0.6% and -1.7% respectively; both indices are well below expectations with 10 of the 13 manufacturing sectors posting declines.
  • U.S. September CPI was unchanged against expectations of a gain of 0.1%. This is the weakest reading for CPI since January and follows a miss in PPI earlier this week. Increases in the cost of food and rent was offset by sharp decreases in the price of energy and used cars and trucks. YoY CPI remained at 1.7% and ex-food and energy, YoY CPI remained at 2.4%. U.S. interest rates are slightly higher on the session following higher EZ interest rates.
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