Morning Commentary: Women and Children First!

Foreign Exchange - Morning Commentary

Women and Children First!

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Global equity markets, emerging markets, and commodity prices are all taking on water again as the markets prepare for an escalation in the U.S. – China trade war that potentially will have far reaching effects for the global economy. Markets are in full “risk-off” mode today; G7 interest rates are falling in reaction to the weak global equity prices and safe haven currencies are on the rise with the Swiss franc and Japanese yen outperforming and the U.S. dollar (DXY) remaining nearly unchanged for the fourth day in a row. The VIX (volatility index) is at its highest level since January 9.
The catalysts for this shift in market dynamics are President Trump saying that China “broke the deal” and a ratcheting up of the rhetoric on both sides leading the U.S. to potentially put in place additional tariff sanctions on more Chinese goods this Friday. The situation will remain very fluid as Chinese Vice Premier Liu will lead the Chinese trade delegation as they arrive today for further trade talks. Markets had been pricing in a trade deal in May or June so all these new developments suggest that a major repricing is underway in the markets.
Markets will remain on edge over the next 48 hours. The situation will remain very fluid as headlines and/or tweets could set off chain reactions in both positive and more negative directions. In foreign exchange, the DXY index remains comatose overall despite the highly charged reactions in other major asset classes. But within the DXY index, emerging market currencies and commodity-linked currencies are sharply weaker today while safe haven currencies are on the rise. If no resolution to this escalation in the trade war is concluded by tomorrow, expect more of the same Titanic-like effects in the market.
  • The U.S. Trade deficit for March came in near expectations at -50.0 billion. The main story within the report was that our trade deficit with China decreased to the smallest trade deficit within three years as imports slowed and exports advanced.
  • U.S. PPI for April came in weaker than forecast with PPI rising by 0.2% keeping the YoY rate at 2.2%. Ex-food and energy also rose less than forecast at 0.1% also keeping the YoY rate at 2.4%.  Jobless claims came in slightly higher than forecast at 228,000. The combination of weaker data and weak global equities has resulted in lower U.S. interest rates today.
  • Canada posted a much-larger-than-expected trade deficit for March at –C$3.21 billion with a sharp upward revision in February’s trade deficit. The Canadian dollar is down for the fourth day in a row and is near the low of the year.
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