Morning Commentary: Too Many Negatives Could Begin to Bite

Foreign Exchange - Morning Commentary

Too Many Negatives Could Begin to Bite

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
The perpetual upward trajectory of U.S. equities appears to have hit some strong headwinds. Most recently, there has been too much negative news in the short term for even the most optimistic of forecasters. A slow gradual rise in U.S. interest rates and strong corporate earnings have been the fuel that has negated even the worst of geopolitical tensions, trade tariffs and friction, and rising oil prices.
Now the combination of rising oil prices, a very rapid rise in U.S. interest rates, Italian budgetary angst and EC friction and most importantly, U.S.-China trade tensions appears to be getting worse. Over the weekend, a rare public confrontation between the top U.S. and Chinese diplomats marked a new level in the increased trade friction between the top two economies of the world. In addition, there are increased stories and commentaries in the market about the U.S. calling out China as a currency manipulator in the next few weeks adding more fuel to the fire.
In the short term, U.S. exceptionalism regarding above trend growth and the prospect of even higher U.S. interest rates continues to put upward pressure on the U.S. dollar against almost all major and emerging market currencies. While the U.S. economy continues to sail along and has digested eight Fed rate increases, a too rapid rise in U.S. interest rates might change the dynamics.
Since Friday, U.S. 10-year yields made a new high of nearly 3.26% which is a seven-year high. A continued sharp rise in U.S. interest rates and too strong a U.S. dollar combined with increased U.S.-China trade could provide too much of a headwind for even the U.S. economy to digest.
  • The Brazilian real (BRL) is one of the few currencies to be in positive territory against the U.S. dollar since Friday. The BRL is up by nearly 2.67% since Friday based on the election results from Sunday’s election where a conservative and reformed oriented candidate outperformed.
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