Morning Commentary: Making a Bad Situation Worse

Foreign Exchange - Morning Commentary
Making a Bad Situation Worse
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets are in a mild risk-off mode today with global equities and interest rates moving lower in tandem. Commodity prices are mixed, but the U.S. dollar is stronger against the major and emerging market currencies. But this situation is very fluid as news has just broke that Gordon Sondland, the U.S. ambassador to the EU, will testify this morning that there was a “quid pro quo” arrangement with the Ukraine and that he worked at “the express direction of the President.”

Prior to the Gordon Sondland news, markets had further downgraded the prospects of a Phase 1 trade deal with China on the back of the U.S. Senate unanimously passing legislation in support of the pro-democracy movement in Hong Kong and an annual review of Hong Kong’s special trading status. The House of Representatives has already passed a bill in support of Hong Kong and the two bills need to be reconciled before going to the President to be signed to become law. China has already threatened retaliation if the bills become law. The situation could become even more complex if President Trump vetoes the bill but the Senate overrides his veto with a 2/3 majority vote.

All in all, the market’s reaction to all of this news has been muted for now. But, all of these political issues make it increasingly more difficult to conclude a trade deal with China and diminishes President Trump’s presidential clout.  In the background remains the prospect of the U.S. applying more tariffs on China in December if a deal cannot be worked out. Markets will remain volatile and anxious regarding the prospects of a trade deal with China and further political developments regarding impeachment.
  • The British pound (GBP) has been fairly volatile overnight. The first of a series of debates between PM Boris Johnson and Labor leader Corbyn took place last night and early polling after the debate had PM Johnson winning with a razor thin 51-49% lead. The GBP weakened initially as Corbyn’s results exceeded expectations, but the implied betting odds remain near 70% of a Conservative majority after the election on December 12. The GBP has recovered all its losses to be nearly unchanged from last night. 
  • The trade war continues to take its toll on the global economy. Japan reported very weak October trade data with a trade deficit instead of a trade surplus. Exports contracted by more than expected at 9.2% YoY while imports contracted 14.8% YoY. This was the 11th straight month of export contractions. The JPY, which had been in mild green territory, is now weaker on the session.
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