Morning Commentary: Beware the Law of Unintended Consequences

Foreign Exchange - Morning Commentary

Beware the Law of Unintended Consequences

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
There is an eerie calm in the markets this morning after the U.S. raised tariffs on $200 billion of Chinese imported goods to 25% at midnight last night in the hope of extracting trade concessions from China. Yesterday, markets were hopeful that the mere threat of using more tariffs was just a bargaining ploy to cause China to acquiesce to U.S. demands. Market optimism surrounding a near term successful conclusion to these trade talks is slowly beginning to fade, but they remain hopeful.
Asian equities began in the red but Chinese state authorities bolstered their market near the end of the session to finish in positive territory, and many other Asian equities finished in positive territory setting a constructive tone for Europe. U.S. equities are scheduled to open lower. G7 interest rates are nearly unchanged with the exception of Canada, commodities prices are flat lining, and the U.S. dollar (DXY) is weaker against most of the major and emerging market currencies.
On March 2, 2018, President Trump said “Trade wars are good and easy to win.” That does not appear to be the case any longer as China digs in and does not appear to bend to the will of the U.S demands. The law of unintended consequences could come into play here as China will no doubt retaliate, and U.S. manufacturers and farmers will bear the brunt of the White House’s strategy which could result in a slower U.S. economy, weaker U.S. equity prices, and political dissatisfaction with President Trump and the White House. Hope springs eternal; trade talks will continue again today.
  • Canada is one of the top performing currencies today on the back of a spectacular April jobs report. Market expectations were for job gains near 11,000 but April posted the largest job gains in Canadian labor history of 106,500. The UR dropped from 5.8% to 5.7% and the labor force participation rate rose from 65.7 to 65.9. Canadian interest rates are higher and has helped to pull the Canadian dollar higher.
  • U.S. CPI rose in April by less than forecast at 0.3% and the YoY rate rose from 1.9% to 2.0%. Ex-food and energy, CPI rose just by 0.1% in April, but the YoY rate rose from 2.0% to 2.1%. U.S. interest rates are nearly unchanged on the session.
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