Morning Commentary: All Quiet on the Western Front

Foreign Exchange - Morning Commentary

All Quiet on the Western Front

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Analyst
As we kick off a shortened holiday week, the currency markets, as expected, find themselves in quiet trading.  Adding to the typical holiday lull is the partial government shutdown that is now in its 3rd day.  For those curious, 25% of the government has shutdown.    
However, this quiet lull that is categorizing the markets today could very well turn out to be the calm before the storm as news flow over the weekend appears to show that Republicans and Democrats are no closer to a deal and this shutdown could extend into the new year.  If this standoff extends through December 28, it will then roll over to the new congress and a Democrat controlled House. 
Adding to the sense of uncertainty in Washington DC has been the abrupt resignation of Defense Secretary James Mattis and reports that President Trump discussed whether he could fire Fed Chairman Powell.  On this last point, the president has the ability to remove a Fed Chair for cause, however you would believe that this hurdle of cause is high and if Powell were to be removed, the markets would have a very strong negative reaction. 
In an effort to ease concerns, Treasury Secretary Mnuchin announced that he spoke with top executives at 6 large US banks and they all indicated there is "…ample liquidity for lending."  From all indications, Secretary Mnuchin was attempting to ease market concerns but very well did the exact opposite.  While the stock market has sold off sharply, there wasn't really any concerns about liquidity.  However, the markets are very much on edge, leaving some wondering if there is something Mnuchin knows that the markets don't, especially given that the easier way to check on liquidity would be to call Jay Powell.  On this last point, we would like to point out that this is a messaging issue, not a liquidity issue, as all signs point to more than adequate liquidity on top of continued strong economic data. 
While the US dollar has held up relatively well, we remain concerned over the USD as it remains vulnerable to a loss of confidence in US lawmakers.        
  • Top Chinese officials have announced plans for "significant" cuts to taxes and fees in 2019 and signaled expectations for easier monetary conditions.  For the history buffs out there, the language used was very similar to the language used in 2014 right before China cut its interest rates and bank reserve requirements.
  • The UK Parliament is on recess until January 7 meaning the markets should be in for a much needed break from Brexit news.
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