Morning Commentary: High Stakes Poker

Foreign Exchange - Morning Commentary
High Stakes Poker
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Investors headed for the exits yesterday as the deterioration of U.S.-China relations dented business confidence and prospects for the global economy. However, the markets are attempting to stabilize this morning after the emotionally charged reaction to the escalation of the U.S.-China trade war and the additional fear of a currency war.
Late yesterday afternoon, the U.S. Treasury called out China as a currency manipulator in reaction to China allowing its currency to weaken sharply on Monday in reaction to the White House’s threat of additional tariffs on Chinese exports. The last time the Treasury called out a country as a currency manipulator was China back in 1994.
Asian equity markets opened deeply in the red when the Treasury made its announcement, but China’s central bank (PBOC) intervened in the currency markets today to stabilize the USD/CNY; that action has helped to steady the markets for now. European equities are slightly stronger and G7 interest rates are correcting higher after the enormous drop in yields over the past five trading sessions. The U.S. 10-year yield has dropped 30 bps since last Wednesday as markets price in concerns about further damage to the global economy with no end in sight for the trade war between the U.S. and China.
The stakes are extremely high for the global economy as the trade war morphs into a cold war between the U.S. and China. Equity markets have remained buoyant and largely ignored the economic evidence of a global slowdown, instead seeing a silver lining in almost all the positive or negative news. Part of the optimism was based on continued dovish central bank policies combined with the hope that the U.S. and China would resolve their differences; part of that equation is no longer true. For those that know their history, the Great Depression was made much worse by countries raising tariffs, protectionism, and competitive currency devaluations. We should all hope we don’t go down that path again.
  • The Reserve Bank of Australia (RBA) kept interest rates unchanged at 1.0% as expected. The RBA had cut rates in both June and July, and markets had anticipated that they would be on hold in August. But, the RBA has indicated that a period of low rates will be required given all the global economic uncertainty. The probability of a rate cut in September is at 52%, and for October, it is at 71%. The Aussie dollar is up for the first time in almost three weeks.
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