Nary a Worry

Apparently tariffs are not
The problem that people had thought
With nary a worry
Investors still scurry
To buy all the stocks that are hot

The dollar, however, ignored
The rally and looked rather bored
But later this week
We’ll hear Draghi speak
Then Friday’s employment’s explored

One has to be impressed with the speed with which tariffs went from ‘the worst thing ever’ to ‘no big deal’. If market activity at the end of last week was indeed due to the President’s announcement of tariffs on imported steel and aluminum, and that certainly seemed to be the case, then yesterday was all about the blowback that followed that announcement, not only from the nations directly impacted, but from the GOP congressional delegation as well as numerous major US companies. At this point, there is no way to know whether these tariffs are going to ultimately be emplaced or not, but the market has clearly decided that the answer is not. What that does is set us up for further volatility if they actually do come about.

But away from the tariff discussion, there was not much else of note to drive markets. Yesterday’s ISM Non-Manufacturing data showed continued strength in the US economy, printing at 59.5, slightly below the previous month but above expectations. However, in the current market, at least in the current FX market, data of that sort has limited impact. Rather, traders went back to their continuing bias for a weak dollar, and while yesterday saw little movement in the buck, since Europe opened this morning, we have seen it pressured lower. In fact, the euro has rallied in the past hour by 0.5%, although the only data released was third tier in nature. We have seen a similar rally in GBP, and there was no data on which to base the move. Even more impressively, AUD is higher by 0.7% in that time span. Now last night, the RBA left rates on hold at 1.5%, which was universally expected, and when looking at interest rate differentials, US 10-year yields are actually higher than those in Australia. The last time this was the case was in 2001, and AUD was trading below $0.50, as opposed to today’s levels around $0.78. Obviously, there were many other different things ongoing then, but it is an interesting point to be made. However, the market movement has been just in the past hour, long past the time of the RBA decision.

Interestingly, the yen has been lagging this move, but that is more likely because Kuroda-san was testifying for a second time at his confirmation hearings, and he walked back the discussion about ending QQE in 2019 when he expects inflation to achieve their 2.0% target. Now it was always silly to me that they could have such a precise forecast for something like inflation, especially given that over the past decade, the BOJ has proven it has no idea what drives the statistic. So the idea that they would change policy instantaneously at a time twelve months from now because of their inflation forecast was always unlikely. After all, they have been saying for the past five years that they would achieve their target within the next twelve to twenty-four months, and yet here we are with CPI there below 1.0% five years on! At any rate, the yen lost some of its impetus from those comments and has lagged other currencies, strengthening only 0.1% today.

Away from the G10, we have seen a more mixed picture, although the dollar is predominantly weaker here as well. For example, ZAR has rallied 0.75% after a better than expected GDP outcome as investors continue to favor the new Ramaphosa administration. Similarly, KRW is higher by 0.6% after news that North Korea would be willing to explore talks with the US leading toward denuclearization hit the tapes. But in general, it seems there doesn’t need to be a specific catalyst today, we are seeing risk being embraced, as evidenced by equity market rallies around the world, and the dollar is suffering as well.

As to the session here today, the only data point is Factory Orders (exp -1.2%), which is not typically a market mover. In addition, we hear from three Fed speakers, Dudley, Brainerd and Kaplan, which means things are likely to sound slightly more dovish than not. But really, that’s all we’ve got today. The background picture remains one where US growth continues apace, and the biggest question is just how aggressive the FOMC is going to be this year. Starting tomorrow, we get much more market information with both an ECB and BOJ meeting on Thursday and payroll data on Friday. If we continue to see AHE push higher, like last month, you can be sure that the equity markets will have a shaky time as expectations of four Fed hikes this year grow further. But that is still a few days away. For today, the dollar is under pressure and likely to remain so.

Good luck