Morning Commentary: The Best Defense is a Good Offense

Foreign Exchange - Morning Commentary
The Best Defense is a Good Offense
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, global markets continue to price in an optimistic outcome to Phase 1 of the U.S. – China trade talks. This morning, many commentaries are carrying stories about both the U.S. and China rolling back trade tariffs as part of the Phase 1 negotiations adding to the positive sentiment over the past 72 hours.  Global equities continue to surge to all-time highs fueled by trade optimism and last week’s better-than-expected U.S. economic data; commodity prices and G7 interest rates continue to reflect that optimism rising over the past three days. The U.S. dollar is stronger overall for the second day in a row with the exception of the Chinese yuan (see below).

This market reaction is welcome news for President Trump. With the impeachment hearings going into a new phase, President Trump will need to show some victories and go on the offense as he prepares for 2020 citing his handling of the economy and improved trade practices with China and others. U.S. GDP in Q4 is forecast to slow further (nearly 1%) and with manufacturing and farm jobs cratering, he will need to shore up his base and undecided voters.

Two Republican states go to the polls today to elect a new governor, and President Trump cannot afford further economic or political damage. He needs a trade victory, to get farmers and manufacturers back in business, and to get the economy back on track to deflect against the upcoming impeachment hearings. These two elections bear watching.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The Chinese yuan has broken back through the key psychological level of 7.00/$. Optimism surrounding the trade negotiations has propelled the currency higher in four of the past five sessions. Adding to the positive psychological backdrop for the equity markets overnight was the fact that the Chinese central bank (PBOC) cut its 1-year lending rate last night for the first time since 2016 by 5 bps to 3.25%.
  • The Reserve Bank of Australia (RBA) kept interest rates unchanged as widely anticipated at 0.75%. The statement from the RBA implied that low interest rates would be required for an extended period of time but that was already known. The implied probability of another Aussie rate cut in December has fallen sharply from nearly 70% in early October to under 20% today. The Aussie dollar has been rising sharply over the past weeks on the hope and optimism surrounding a Phase 1 trade deal.
  • The U.S. trade deficit for September came in at expectations at $52.5 billion. Pointing again as to why President Trump needs a trade victory with China, the trade deficit is 5.4% higher than in the same period of 2018 and the trade deficit overall is higher from where it was when President Trump took office. U.S. consumer demand remains insatiable for foreign-made goods despite the tariffs.  The good news within the report was that the trade deficit with China fell by 3.1% and imports from China fell by 4.9% to the lowest level in three years.
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