Morning Commentary: A Rising Tide Doesn’t Lift All Boats

Foreign Exchange - Morning Commentary
A Rising Tide Doesn’t Lift All Boats
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The US 10-year yield is continuing to move lower and is sitting near its 3 year lows as markets continue to price in expectations that a global slowdown could trigger global central banks to start a synchronized easing cycle.  For a sense of scope, today’s 10-year yield is ~90% lower than it was back in 1981 when the 10-year yield was ~15.9%. 
As foreign exchange is an asset class that is driven by relative comparisons, a simple interpretation would be that exchange rates should remain range bound as banks move in the same direction.  However, this clearly is an oversimplification.
Beyond the different characteristics of currencies (safe haven, reserve, commodity etc.), history has shown that global tensions tend to rise during periods of synchronized easing.  Case in point, in 2010, Brazilian Finance Minister Guido Mantega popularized the term “currency war” to criticize the then unconventional practice of QE.  2013 saw a reemergence of currency war concerns with Japan’s “Abenomics” program and the Fed’s announcement of unlimited QE.  However, a key aspect to remember is that those “currency wars” were more about the spillover effect than outright intervention.  Additionally, the acceptance of these unconventional policies was only achieved as a negotiated truce at the 2013 G20 meeting. 
The take away from this is that there isn’t a guarantee that the world will continue to be accepting of unconventional policies as a norm in the coming global easing cycle.  While President Trump’s criticism of other countries’ easing programs may be more visible, the friction over other countries’ actions are unlikely to remain unique to the US.  This means that markets not only have to be aware of which countries are easing but which of those easing central banks have an increased sensitivity to the actions of other countries. 
  • Investors should circle September 9 on their calendars as a key Brexit date.  News reports out of the UK are indicating that this will be the date that Remainers will make a push to keep the UK from exiting without a deal.  As a reminder, UK Parliament is on recess until September 3. 
  • The Hong Kong airport remains closed for a second day in a row.  Risk sentiment around the world remains negative as Hong Kong and Argentina add additional drags to existing concerns on slowing growth, increased tariffs and US and EU politics. 
  • The US 3-month/10-year yield curve is inverted by ~33 bps, the most inverted it has been this cycle as recession concerns build.  US headline CPI met expectations with core CPI beating expectations.
  • Poor economic data continues out of Germany with the investors’ economic expectations section of the German ZEW survey missing expectations and printing at its lowest level since 2011.
  • Chinese news sources report that the US and China will hold talks again in two weeks, providing support the CNY and AUD.  Additionally, the US will delay soe tariffs until December 15. 
  • The People’s Bank of China set the currency’s reference rate at 7.0326 per dollar, which is slightly stronger than analyst estimates.
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