Morning Commentary: The Little Boy Who Cried Wolf

Foreign Exchange - Morning Commentary
The Little Boy Who Cried Wolf
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
For those who don’t remember this story, the title is an Aesop’s fable about a little boy who repeatedly tricks villagers into thinking a wolf is attacking the town’s flock of sheep. The little boy falsely cries “wolf” multiple times as the villagers respond and come running to protect the flock. After the villagers are tricked numerous times by the boy’s false claims, when there is an actual wolf attack, they ignore the boy’s cries for help and the flock is destroyed.

The White House, through pronouncements and/or tweets, have tried to micromanage market expectations about an imminent breakthrough on trade and conclude Phase 1 of this drawn out negotiation. Given U.S. and global equities bias toward optimism, they tend to react positively to the more upbeat headlines like last Friday’s statement; Larry Kudlow said we were coming down to the final “short strokes” which helped boost U.S. stocks once again.

But, the more negative headlines are taking on the character of the Aesop fable. Just a short while ago, headlines came out from the White House that China is more pessimistic about the chances of reaching a trade deal. The market’s reaction is increasingly more muted to the negative headlines because the market knows it is political posturing and understands that a deal will ultimately need to be signed as President Trump needs to shore up his base for the 2020 election with the farmers and manufacturers who have been bludgeoned by the tariffs.  

There will be continuous headlines and tweets concerning trade with China over the days and weeks ahead. Markets have been increasingly conditioned to parse the statements and to not overreact to the ones that they consider to be inflammatory and overpromise or underwhelm.
  • China unexpectedly cut the 7-day reverse repo rate by 5 bps to 2.50% which is the first cut since 2015. This move follows a similar cut in the 1-year lending facility at the beginning of the month confirming the Chinese central bank’s (PBOC) dovish bias to support the economy and avoid any liquidity issues as we approach year end. Chinese equities closed higher on the session, but the CNY has weakened following the negative headlines on the trade prospects.
  • The British pound (GBP) is the top performing major currency this morning on the back of polling that is showing that PM Boris Johnson’s Tory Party is consolidating its lead. Labor is now trailing the Tory Party by 14% compared to 10% at the start of the month. The GBP is nearing its best levels seen in October just shy of $1.3000.
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