Morning Commentary: The Trend is Your Friend

Foreign Exchange - Morning Commentary
The Trend is Your Friend
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday, the US Treasury Department released its latest semi-annual “Macroeconomic and Foreign Exchange Policies of Major Trading Partners” report.  The most significant finding in the report was the removal of China as a currency manipulator.  This move continues the trend of positive trade-related headlines and clears away an obstacle ahead of the expected signing of the Phase 1 trade deal this Wednesday. 

While the delay in the release of this semiannual report wasn’t significant compared to past delays, the timing of the release makes one believe that the politics around a possible Phase 1 deal played a role in determining the report’s outcome.  To this point, verbiage from the FX report explicitly calls out a currency agreement as well as enforceable commitments within the Phase 1 deal, although it really shouldn’t be much of a surprise that politics played a role in the currency manipulator decision.  To be sure, Treasury Secretary Mnuchin’s move to formally label China a currency manipulator this past August was a controversial move. 

For starters, the August announcement was made despite China not meeting the criteria for a currency manipulator as outlined in the 2015 law.  Instead, Mnuchin had to use a 1988 trade law that has a looser definition of currency manipulation in order to justify his decision.  Moreover, the International Monetary Fund, in September, found that the Chinese yuan was fairly valued and market data showed that Chinese authorities were actually working to strengthen the yuan.  These issues aside, trade optimism has been the dominant theme in the markets so far this year and the official removal of China from the list of currency manipulators only serves to enhance this. 

To this point, there certainly have been signs of stabilization in PMI data, but the rebound in growth has been uneven with EM Asia improvement more pronounced than DM—see Germany.  Moreover, it is important to remember that geopolitical risks have receded and are not fully resolved.  As such, keep an eye on incoming data, with Chinese data a particular focus this week.  This Friday brings a slew of reports (GDP, industrial production and retail sales) that should inform whether China can reach its 6% growth rate.  While there is optimism in the markets, expect rallies to be capped until there is a meaningful improvement in global data.
  • US CPI came in softer than expected printing a 0.2% MoM increase against expectations for a 0.3% gain.  Core CPI, which excludes the more volatile elements, also disappointed as it came in at 0.1% MoM against expectations for a 0.2% increase. 
  • The Treasury Department’s semi-annual currency report added Switzerland as a tenth country on the monitoring list.  This move was a mechanical one as Switzerland surpassed the thresholds on at least two of the three criteria as outlined in the 2015 law.   
  • Brexit trade negotiation difficulties have started to build.  Yesterday, the European Commission stated that existing reciprocal access to fishing waters must be maintained, a stance that goes against what the UK desires.  Additionally, global investment banks are pushing to maintain access to the EU markets.  Clearly, these two issues are just the beginning and illustrate why an extension to the current timeframe is needed.       
  • Chinese trade data showed massive jumps in both import and export numbers.  YoY exports increased 7.6% against expectations for a 2.9% increase and imports increased 16.3% against expectations for an 8.6% increase.  While base effects played a role, there is hope that an easing of trade tensions can keep the positive momentum going.
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