Morning Commentary: Optimistic or Pessimistic?

Foreign Exchange - Morning Commentary
Optimistic or Pessimistic?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets remain very volatile and emotionally charged regarding the U.S. – China trade talks as the Friday deadline of the imposition of additional U.S. tariffs on Chinese exports approaches. The situation is very fluid and for what it’s worth, President Trump just tweeted that China is coming to the U.S. to make a deal; U.S. stock futures responded positively to the headlines but many remain less optimistic about a positive outcome for these talks.
Thanks to the constant bombardment of news headlines and tweets, there is plenty of news to fortify different viewpoints and positions, whether optimistic or pessimistic, and that in itself will continue to create a volatile and emotionally charged market. U.S. stocks fell sharply yesterday as did Asian equities overnight, but European equities are mixed as many in the market remain hopeful for a positive conclusion to these trade talks.
The use of tariffs is a very blunt instrument to gain leverage against a trading partner, but our relationship with China is very complex. Not only are they a trading partner but they are a competitor and an adversary. Many in the U.S. and in the White House see China as the greatest economic and national security threat that the U.S. has ever faced.
The negotiations revolving around the necessary changes on our trading relationship are not negotiations between two similar systems seeking closer ties as many would like to believe. This is a fundamental clash between two very different political and economic models; China is very reluctant to make the necessary changes that the U.S. is demanding and continues to backpedal away from previous commitments. Markets will remain on edge as we approach Friday’s deadline on whether the U.S. will impose more tariffs on Chinese exports. Continue to expect a lot of volatility in the near term.
  • The Reserve Bank of New Zealand (RBNZ) cut interest rates as expected by 25 bps to 1.50%. The RBNZ signaled potentially one more rate cut in 2020 which suggests they are not in a hurry to cut rates again. New Zealand interest rates are nearly unchanged on the session and the New Zealand dollar has bounced sharply off its lows to be only slightly weaker from last night’s close.
  • Germany reported much-better-than-expected industrial production data for March. Expectations were for a contraction of 0.5% but instead it rose by 0.5%. Overall, Germany growth remains weak as the EU cuts its German growth forecast to 0.5% this year.
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