At times the price action in FX events, like yesterday impeachment push might make one wonder whether the FX market cares about anything anymore.
However, if there's one area of responsiveness for the markets its surrounds the outlook for trade negotiations between the U.S. and China, and it's the far-reaching impact on risk appetite.
While traders still appear to favour a risk-off bias as doubts about a U.S.-china deal remain and even the recent string of global PMI portraying a global economy in a world of hurt, those too suggest the market remains a better seller of risk
I don't think traders are clear on what to make of the recent trade and political development emanating out of Washington and that could increase uncertainty and therefore weigh on risk sentiment.
Despite several goodwill trade gestures traders think that a trade truce alone might not be enough to shift the weaker Asia FX currency tide.
So until there is a definitive signal that a portion of U.S. tariffs is getting removed, local traders could remain USD buyer on dips hedging against the more significant tail risk, a break down in trade talks which could dramatically weaken the yuan and drag the rest on ASEAN currencies into the strong dollar vortex.
Also, the lack of Chinese easing continues to weigh on regional growth and equity sentiment, which hardly provides an inspiring backdrop to buy the Yuan or other Asian currencies for that matter.
The Malaysian Ringgit
A big day for the Ringgit as the WGBI FTSE Russell review, where Malaysia faces the risk of being excluded, is at the Asia close today. So, we expected the MYR to trade in tandem with the CNH today.
Bangko Sentral ng Pilipinas (BSP)
Along with the market consensus, we expect a 25bp BSP cut to 4% on Thursday. I would be a shocker f the central bank didn't cut, and the risk is skewed for a more dovish retort. Critical in this view is that Inflation is below the BSP's target band, and could even move lower with food and energy prices moderate
Morning Note
Light at the end of the trade war tunnel
Global equity markets raced higher after President Donald Trump suggested that U.S.-China trade deal could come sooner than expected. Moreover, at the same time heralding a limited trade deal with Japan. Investors have been "trade war" bearish for so long that any sliver of optimism is cheered. However, with definite signs of a trade thaw emerging that trade calm certainly trumped the impeachment probe as the S&P 500 halted a three-day slide, the dollar rallied, and yields on 10-year U.S. Treasuries rose towards 1.75%
The limited deal with Japan is enormous on two fronts. First, it suggests the President is open to " interim " trade deal possibly signalling he is willing to negotiate one with China. Second, the agreement with Abe is a massive win for U.S. farmers as it will eliminate or reduce tariffs on 7.2 billion of U.S. food and agricultural products (USTR).
The U.S. Farm Belt has been in a world of pain from the escalating trade battle. However, the U.S. food agricultural sector is precisely one of those segments of the economy that a President must defend. Next up, the manufacturing industry?
On the broader picture, it provides excellent optics to rural America and will solidify his approval rating in areas that effectively won him the presidency. Indeed, this could be a critical foreshadowing of things to come as the U.S. administration, given the political thunderheads forming over capital hill , will be looking to protect as well as distance the President from the impeachment process and what better way to do that than put pen to paper on a U.S.-China trade deal , even a limited one.
Oil markets embrace a trade calm reprieve
Oil futures got a reprieve from the selling onslaught as prices got up off the mat due to the trade thaw. Signs of easing trade tension has overshadowed the bearish raft of indicators that saw oil prices topple head over heels this week. Investors have been clamouring for any positive sign from President Trump on the trade war front, so the calming trade news flow may be convincing enough for traders to take even more bearish chips off the table.
Oil prices have been under pressure all week on reports that Saudi Arabia was doing fast work on restoring output after the terrorist attacks. However, price action has been exacerbated by blustery bearish headwinds.
So, with the supply risk premiums evaporating and the oil fear factor but a distant memory. Demand worries are back competing for attention after the global manufacturing slump worsened this week after the German PMI point to and economy on the edge of recession.
Also, the oil market is dealing with another unexpected crude build as stocks rose 2.4 million barrels which is bearish relative to consensus.
Gold markets rocked on two fronts
The more tangible trade calming news flow sent the U.S. dollar surging and bond yields rising, leaving the massively long COMEX and ETF gold positions prone to a significant correction.
Gold, higher U.S. yield and a strong U.S. dollar simply don't make for good bedfellows.
While the COMEX and ETF have remained robust, there is a significant element of the market missing in action. Physical demand remains weak and too could have helped ice the rally
Physical demand typically is a high point for the gold market at this time of year. Usually demand out of India tends very strong in the lead up to the wedding season and ahead of festivals while physical buying from China tend to pick up preparation for peak demand around the Lunar New Year. It's not there, and this is a sector of the gold complex that quite possibly should not be ignored.