Morning Commentary: Market Nuances Are Important

Foreign Exchange - Morning Commentary

Market Nuances Are Important

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
We have been writing for most of the week that the markets have been stuck in the mud with many asset classes seeing little to no movement as it appeared we reached an equilibrium point with investors and traders largely sidelined waiting for new signals. A combination of factors have come together since yesterday that have caused traders and investors to take notice and the markets have reacted.
It appears that China and the U.S. will begin a new round of trade talks raising hope that the two sides may be able to find enough common ground to ease tensions.  China has received an invitation from the U.S. to renew trade talks and representing the White House will be Treasury Secretary Mnuchin and not Trade Representative Lighthizer or Peter Navarro. Nuances are important; President Trump has not imposed any additional tariffs on China in combination with the fact that Secretary Mnuchin (more centrist) is leading the group and the fact that Washington initiated the olive branch are being seen as positive signs.
This has helped the emerging market sector to claw back recent losses and combined with an unexpected sharp increase in Turkish interest rates today (see below), has given a short term boost to emerging market currencies. The ECB kept interest rates unchanged (as expected) but many of ECB President Draghi’s comments were surprisingly upbeat and a bit optimistic and combined with a weaker U.S. CPI this morning, has caused the U.S. dollar to weaken against many of the major and emerging market currencies.
Markets are always looking forward and the potential restarting of U.S – China trade talks is a positive for global growth. This combined with progress on U.S. – Canada NAFTA talks and more recent optimism surrounding Brexit negotiations have changed the market dynamics for now. How long this near term momentum will last is not known but all the most recent news is positive for keeping the world economy moving forward.

  • The Turkish Central bank shocked the market this morning by raising interest rates 625 bps to 24%. Most economists were looking for a more modest rate increase given the constant and consistent jawboning for lower interest rates by PM Erdogan. The Turkish lira has been sharply higher on this news but is consolidating its gains up by near 2.70% and pulling along many other of the emerging market currencies.
  • The Bank of England (BOE) voted unanimously to keep interest rates unchanged at 0.75% after hiking interest rates in August. But the BOE upgraded its view of the economy and noted recent strengthening in wages. The British pound is stronger on this news but lagging behind the euro and other key European currencies.
  • U.S. CPI for August came in softer than expected at 0.2% against expectations of a gain of 0.3%. CPI YoY fell from 2.9% to 2.7% and ex-food and energy also fell YoY from 2.4% to 2.2%. U.S. interest rates are fractionally lower adding to the U.S. dollar woes.
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