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Collinson FX: February 22, 2019 - US/China trade deal works against Kiwis

by Collinson FX 24 Feb 2019 03:42 PST 24 February 2019

Collinson FX: February 22, 2019 - New US trade deal works against Kiwis and Okkers

The Fed minutes included the new ‘patience’ mantra, but did hint that the removal of economic and trade uncertainty, would encourage a return to the more hawkish policy being pursued previously. The Fed also said that they would continue to normalise the Fed’s Balance sheet through contraction, but also sighted the removal of this stimulus as a risk to the economy? The mixed messages are a sign of conflict between the hawkish policy, they wish to pursue and the reality they have to live with. The march towards a normalised balance sheet and interest rates, resulted in a huge sell-off in equities and massive political pressure coming to bear. The release of overnight economic data was, in general, weaker. The Philly Fed survey contracted, while the Leading Index and Durable Good Orders both went south and Existing Home Sales contracted. The softer data supported the Fed’s current dovish monetary policy allowing the Dollar to stabilise, with the EUR holding 1.1350, while the GBP trades 1.1330.

Australian Employment data was strong, with rising job growth and participation, while the headline rate of 5% continued. This allowed the AUD to surge back through 0.7200, although this spike was short-lived. Rumours of curbs to Chinese imports on Australian coal, in retaliation for the Huawei 5G network decision, was enough to collapse the currency. The AUD plunged to trade 0.7070, dragging the NZD back to 0.6800, as both are now suffering the displeasure of China. The Chinese market is key to these trade exposed currencies, as has been demonstrated by the suffering, experienced during the US/China trade wars. China is now imposing punishment on Australia and NZ for rejecting Huawei’s participation in domestic 5G network. It is no coincidence that China and the US are coming close to the trade deadline of March 1st. There is talk that a Memorandum of Understanding (MOU) is under draft. This will force China to take more US exports thus allowing them to cut from existing suppliers, NZ and Australia among them.

Larger political games are afoot and it will be hard for these commodity exporters to mitigate.

Collinson FX: February 21, 2019 - No Deal Brexit likely

Markets were quiet ahead of the release of the Fed Minutes. The Fed has been under extreme pressure to relax their hawkish monetary policy and buckled. They adopted the term ‘patient’ with regards their tightening of monetary policy. The minutes may well reveal the thinking of the FOMC. Since the reversal in their policy, bond yields have retreated, as has the Dollar. Despite the weak economy in the EU, the EUR has regained 1.1350, while the GBP has traded back to 1.3050. The GBP continues to outperform, despite the chaos surrounding Brexit, which continues. After the British Labour Party suffered defections, so to has the Conservative party, with a few members defecting to the new Independent (Pro-remain) Party. PM May returns to Brussels, to attempt a last-ditch effort to re-negotiate Her terrible Brexit deal. Hopes are not high and a ‘No-Deal’ Brexit becomes increasingly likely and attractive.

The trade exposed, commodity currencies, have been major beneficiaries of the progress on the US/China trade negotiations. The AUD has pushed back to 0.7180, while the NZD has settled above 0.6850. It is a matter of ‘be careful what you wish for!’. Any trade deal will involve a massive increase in US exports to China, which will necessarily involve cuts to other major suppliers? The Fed minutes may cause some disruptions to markets, if they reveal any sort of lack of commitment, to the Fed’s actually ‘patient monetary policy’.

Collinson FX: February 20, 2019 - USA China trade deal on track

Equity markets in the US opened strongly, after a long weekend allowed them to digest the big gains of the previous week. Markets have been focused on the US/China Trade negotiation process, which have been progressing well, supporting global growth prospects. The whole ‘circus’ shifted from Beijing to Washington, to continue the process. Treasury Secretary Mnuchin commented that the progress was ‘so far, so good’. The risk off sentiment has allowed the US Dollar to soften, with the EUR moving up to 1.1350, despite weak ZEW Sentiment from Germany and the EU. The GBP took advantage of the softer reserve, pushing back to 1.3060, despite the Bexit chaos. The British opposition Labour party has suffered a split, with renegades supporting another referendum, allowing some breathing space for the Tories.

The growing confidence surrounding US/China trade talks has allowed the trade exposed, commodity currencies to post gains. The RBA released minutes from their recent meeting, which warned of ‘significant uncertainties’, weakening the local currency in domestic trade. The RBA warned that global trade wars and local consumption were risks. The housing market has been undergoing a serious correction which is starting to impact the consumer and GDP growth. The softer currency experienced a sharp turnaround in fortunes in overnight trade, due to the improving trade prospects. The AUD pushed up to 0.7170, while the NZD regained 0.6850, after underperformance on domestic markets.

Trade developments remains the main game in town.

Collinson FX: February 19, 2019 - Global confidence grows

Markets continue to ride the wave of confidence, flowing through markets on the back of speculation over US/China trade negotiations. The high powered US trade delegation, lead by Treasurer Mnuchin and Chief negotiator Robert Lighthizer, had a strong week in Beijing culminating in a meeting with President Xi. The whole circus now moves back to Washington, as the building crescendo, points to an agreement by the March deadline. President Trump has hinted at a summit at Mar-a-Lago in early March. This has particularly benefited the trade exposed currencies, which suffered the most, over the extended trade wars. The NZD has surged through to 0.6840, while the AUD consolidates above 0.7100, unaffected by the lack of local data. The RBA is set to release the minutes from there latest meeting, which may reflect the dovish statement released and release major risks to the Australian economy.

The growing confidence in global growth prospects, has allowed equities to rally strongly, aided by dovish Central Bank commentary. The only caveat that must be considered is that a likely deal would result in a massive upswing in US goods flowing in to Chinese markets, which would surely lead to cuts in current suppliers? The EUR regained 1.1300, while the GBP pushed back towards 1.3000, still mired in Brexit chaos. There was a split in the British Labour opposition overnight, ensuring the Government does not stand a unified opposition over Brexit, ensuring Tory infighting remains the main game in town. US markets were closed for a US long holiday weekend, so expectations remain high, with an open tonight.

Collinson FX: February 18, 2019 - Markets rally in US and Europe

Markets rallied across Europe and the US to close a strong week. US China Trade talks in Beijing have been progressing well, with President Xi meeting with US Trade delegate leaders, Mnuchin and Lighthizer. The whole negotiation circus moves back to Washington next week, as the crescendo builds to the March deadline. Trump has spoken of the strong progress and perhaps a slight postponement to the deal. It is proposed that Trump’s Florida resort, Mar-a-Lago, may be the venue for the summit and the signing ceremony. This assisted the trade exposed currencies with the NZD trading 0.6850, while the AUD pushed up to close around 0.7140.

The European Central Bank surprised markets, when ECB Board member Benoit Coeure, stated that the economic slowdown in Europe had been more ‘pronounced than expected and ’hinting that ‘QE’ would be extended. It was a surprise when the ECB President announced an end to QE, as the ‘free money’ philosophy seems consistent with the Socialist platform. This did little to support the flawed currency, which slipped back below 1.1300, while bond yields slipped and equities spiked. The GBP floundered as the Brexit chaos continued, with the GBP fell to 1.2880, with PM May losing yet another key vote. The Brexiteers refused to support a proposal to remove the prospect of a ‘No Deal Brexit’. There is a split in the Conservative Party, with the ERG supporting Brexit, but there is no collapse in the Government. The reason for that is the opposition Labour Party is equally divided. Opposition leader Jeremy Corbyn, will not accede to the centre faction, who demand another referendum. It is a slow motion train wreck.

Markets will focus on the US/China trade talks, as the March 1st deadline approaches.

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