Morning Commentary: Europe Up – Asia Down

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Europe Up – Asia Down Share this story: Alan Rose Foreign Exchange Head Trader

As we arrive this morning, European currencies (majors and emerging) are generally all stronger while Asian currencies are steady to lower with the South Korea won and Indian rupee down the most approaching 1%. The main cause of this dynamic is the fact that the Trump administration appears to be close to announcing a 10% tariff on Chinese goods. While this is an improvement from the potential announcement of 25% tariffs, it puts in jeopardy whether there will be any U.S. – China trade talks.   Asian equities all in the red this morning (Japan closed for a holiday) with the Hang Seng down 1.30% and the Shanghai Composite down by 1.11%. The Shanghai Composite index is near its lowest level in four years. While Asian equities overall remain highly concerned about future trade and growth prospects centered on China, the Chinese yuan continues to remain remarkably stable since the beginning of August after falling sharply in June and July.   We have spent a lot of time discussing the future course of trade and trade deals with China and NAFTA getting most of the attention. Behind the scenes, interest rate differentials between the U.S. and Europe and the U.S. and Japan continue to widen out and should be causing the U.S. dollar to outperform but in the short run, those signals are being ignored. U.S. - German 2-year spreads are at near 332 bps – that is the widest spread since 1990. U.S. – Japanese 2-year spreads are at 288 bps – the most since 2006 and are up by 85 bps this year and the Japanese yen is actually stronger since the beginning of the year.   Between the on again and off again trade talks and lack of historically relevant interest rate correlations, this makes for a difficult time predicting and forecasting short and medium term moves in the currency markets. We do not foresee an end in sight and anticipate foreign exchange markets to remain difficult to predict and continue to encourage our clients (importers and exporters) to remain tactical and not strategic at this time…take advantage of the opportunities when they arise.

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