Morning Commentary: Wait and See

Foreign Exchange - Morning Commentary
Wait and See
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
As we kick off the final month of 2019, the markets find themselves, once again, in a wait and see mode.    

Over in China, a couple pieces of news came out over the weekend.  The first was stronger than expected manufacturing PMI data, with the Caixin rising to 51.8 versus expectations for a 51.5 print.  This reinforced the positive momentum from China’s official manufacturing purchasing managers’ index that recently moved above 50 for the first time since April.   The second piece was China’s response to the US over its law supporting Hong Kong’s protesters that avoided steps related to trade.  Instead, China will take steps to sanction US human rights organizations in Hong Kong and suspend Hong Kong port visits by US Navy ships.

Bigger picture, as it relates to China, the evolution of the Phase 1 deal with the US remains the key issue.  Late Friday, it was reported that the US is considering new regulations that would further restrict suppliers to Huawei.  This runs counter to the Administration’s recent decision to grant some reprieves on the existing ban.  From China’s point of view, it continues to insist that tariffs rollbacks, and not simply delays, are required for any Phase 1 agreement.  While these are many of the same issues that have always been surrounding US-China trade talks, the impending December 15 tariff increase deadline raises the already high stakes.  With negotiators likely to follow the usual script of brinksmanship, expect tensions to rise further.            

Beyond this, the UK election and central bank meetings should be the other key themes for the week.   Five voting polls were released over the weekend and showed that little has changed.  The Conservatives continue to lead but have seen their lead narrow.  The GBP has had a limited reaction to the release of these most recent polls, suggesting that a Conservative majority is largely priced in. 

With regards to central bank meetings, no surprises are expected.  The RBA meets tonight and the BoC meets on Wednesday with both banks are expected to keep rates unchanged.  However, it is possible that the RBA delivers an easing bias in line with recent central bank comments. 
  • The Fed is considering introducing a new rule that would allow inflation to run above its current 2% target in an effort to avoid low US price growth.
  • German Chancellor Angela Merkel’s ruling coalition suffered another blow when the Social Democrats picked government critics Norbert Walter-Borjans and Saskia Esken as new party leaders. Merkel’s CDU party has indicated that it will not renegotiate the terms of their alliance, which could lead to new elections.     
  • New ECB President Christine Lagarde will be questioned by European lawmakers today with her plans for a reassessment of the ECB’s mission likely a key topic of discussion. 
  • In a tweet, President Trump said the US will re-impose steel/aluminum tariffs on Brazil and Argentina due to both countries “presiding over a massive devaluation of their currencies.”
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