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FX markets have been seeming indifferent to a lot recently, with most major pairs confined to sideways ranges despite the exceptionally large deluge of geopolitical and trade war risk headlines in the past two months.
The US President Trump today implicitly put the Fed under pressure to keep interest rates low. This has put the dollar under considerable pressure on the FX market. The Fed’s policy in the next couple of month will be decisive for the future course of the US currency’s exchange rates.
We should get used to volatile presidential tweets. But today’s one brings a new quality into his tweet storms- at least from the FX market’s perspective. The content of his tweet obviously is complete nonsense.
Versus the US dollar: The Chinese renminbi gained significantly over the course of the last quarters (nearly 9% year on year). There is no Chinese “devaluation game” visible. Sure, the renminbi exchange rates are still not completely market driven. But the PBoC’s reserves (which have remained more or less constant for a while, after they had fallen until end-2016) at least indicate that there is little market pressure to the one or other side.
One may argue that China’s capital account policy is hindering usual free market forces. But that’s certainly not a situation anybody would earnestly describe as a “devaluation game”.
On the flip side, true, the Russian ruble recently very significantly devaluated. But that’s entirely a rational market reaction on the new very strong sanctions against Russian companies. The very man who ordered these sanctions can hardly blame Russia for these logical and foreseeable consequences the FX market drew from the US political measures.
Well, however, that’s not the striking point. The point which makes this tweet a burden for the US currency is the fact that Trump connected his pointless allegations with the Fed’s monetary policy. His tweet implies that stopping the Fed’s hiking cycle would be a sensible reaction to the (real) RUB weakness and to the (imagined) CNY weakness. On this issue the sum of all fears of USD bulls condensates.
The U.S. President Donald Trump and Japan’s PM Shinzo Abe are scheduled to meet today to discuss the lingering trade tensions. Amid this development, investors also closely watch out if U.S. officials attempt to pressurize on Japan after the U.S. Treasury’s semi-annual currency report published on Friday kept Japan on a monitoring list for possible manipulation. In addition, Trump has been accusing China and Russia of devaluing their currencies.
Wider rate spreads are providing more visible support for USD, and could yet encourage a break higher, but what’s missing is clear evidence of the US economy yet pulling ahead. Trade tensions and a fiscal risk premium remain pertinent issues. The portfolio is now neutral USD in G10. The portfolio has clung to longs in European FX as these had what we assumed was a defensive flavor (short USDCHF, long EUR vs AUD and NZD) and so suited to equity weakness. But FX-risk relationships are breaking down, in addition to which European FX is challenged by a virtual freefall in economic momentum. Courtesy: Commerzbank
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