Morning Commentary: Holiday Cheer

Foreign Exchange - Morning Commentary
Holiday Cheer
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
It’s hard to believe that today marks not only the start of the last full week of the year but also the last full week of the decade.  With markets in full holiday mode, things have been predictably quiet.    

One of the exceptions to this has been the announcement from China that it would lower tariffs on 859 types of products to below the rates countries with free trade agreements with China currently enjoy.  This move comes amid signs that the US and China could be close to signing a trade deal that would hopefully put to rest the tit for tat tariff war that has lasted nearly 2 years.  While the tariff cut applies to all of China’s trading partners, today’s actions appear to open the way for China to import more from the US without violating international trading rules against managed trade. 

While this is certainly a positive for the markets and supports the narrative that the Phase 1 deal could be signed in early January, there are reasons to remain cautious.  Overall, key structural issues between the US and China still remain unresolved and are unlikely to be fully resolved anytime soon. 

Beyond this, Brazil and Argentina represent examples of countries that find themselves back in the tariff crosshairs even after reaching a deal with the US.  As we touched on in recent commentaries, the US has threatened tariffs on Brazil and Argentina due to “currency manipulation” that has resulted in “unfair” trade in agricultural goods.  While the currency for both of these countries are weaker, Argentina is in the middle of a financial crisis and Brazil’s central bank has cut rates to an all-time low as the country battles weak growth and inflation.  The point being, history has shown us that no deal is actually a final deal.  
  • Canadian MoM GDP missed expectations, coming in at -0.1% against expectations for a 0.0% print.  While USDCAD did weaken slightly, the overall move was muted and the currency pair has since gained back the majority of its losses.  USDCAD continues to benefit from being a relatively high yielding currency due to the BoC’s resilience against the global wave of dovish central banks.   
  • The next governor of the Bank of England will be Andrew Bailey.  Mr. Bailey is currently the head of the UK’s Financial Conduct Authority and will take over for Mark Carney on March 16. 
  • The New York Federal Reserve’s $35 billion liquidity operation that covers the year-end period was undersubscribed, providing some relief to the markets that the steps taken by the Fed to ensure adequate liquidity appear to be working.  While there are some cautious optimism, the markets are still commanding a premium for December 31 funding.
  • Boeing CEO Dennis Muilenburg has announced that he will step down.
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