Constrained

The ECB Minutes explained
That policy must be maintained
Though IP is falling
The euro keeps crawling
Much higher, and must be constrained

While the trade story remains a key driver of market sentiment, and therefore markets, it appears that we are in the middle of a temporary lull in the story. Or at least, the rhetoric has been toned down somewhat. With that said, the two stories of note overnight were that President Trump is pushing for specificity on the mooted $100 billion in tariffs. While this may be merely a negotiating tactic, it also could lead to $100 billion in tariffs being implemented. The word from the White House is that the president strongly believes that playing hardball is working, and he is not about to back off. At the same time, in what could be seen as a distinct positive on the trade front, Mr Trump also indicated that the US might be interested in rejoining the Trans-Pacific Partnership (TPP), a trade pact of 11 nations with Pacific Ocean shorelines excluding China. The idea here is that by rejoining the TPP, the entire group will be able to put even more pressure on China’s trade policies. In the end, I think it is premature to consider that the trade issues have peaked. However, given the law of diminishing returns, I think that the ongoing story is likely to be less and less impactful on markets going forward. In an interesting twist, Chinese trade data last night showed that the nation ran a ~$5 billion trade deficit overall in March, well below expectations. However, that was their total global trade stance. The Chinese surplus with the US grew by 19.4% to $58.25 billion, something that will not serve to mollify the administration. In sum, expect more rhetoric but until there are actual tariffs imposed, this should fade into the background.

There is another sentiment driver in markets as well, and that is the potential for increased conflict in the Middle East on the back of a response to Syria’s alleged chemical weapons usage. The impact here has been on the oil markets, where prices continue to rise to levels not seen since 2014. Of course, there has also been the synchronized global growth story that supports further demand for the stuff. FWIW short of a region-wide conflict, I don’t see this story having the legs to impact global markets. However, if things do escalate, we could see oil shipments from the region fall driving prices higher and that would be a decided negative for the global economy and the equity markets. My gut tells me the dollar would probably edge higher on this outcome, but it would not run away.

Something with a more direct impact on the FX markets were the ECB Minutes released yesterday. If you recall, at the meeting three weeks ago, the ECB surprised many pundits by removing the sentence about increasing QE if necessary, which at the time was seen as hawkish. But despite that change, the Minutes read far more dovish than hawkish, with the council expressing concern on the impact that trade actions might have on the Eurozone economy and counseling “prudence, patience and persistence” in their removal of policy accommodation. The euro fell 0.4% on the release, and remains under modest pressure this morning. Adding to the pressure on the euro yesterday was the Eurozone IP decline of 0.9%, its third consecutive fall. As I have mentioned in the past it certainly seems like Eurozone growth peaked in Q4 of last year as not only are the surveys showing declines, but the hard data is also under pressure. Now this could be a seasonal European thing and the data will start to rebound going forward, but given that this phenomenon is occurring here at home as well as throughout most of the G10, it could also be that we have seen the peak in global growth. If that is the case, it will certainly complicate central bank desires to normalize monetary policy.

Overall, the dollar is under a bit of pressure this morning as the week comes to a close. The pound is actually one of the leaders this morning, rising 0.35%, as market participants continue to look for a 25bp rate hike at next month’s BOE meeting. This is interesting to me as the UK data has been generally disappointing alongside the rest of the G10, with IP falling and GDP estimates being revised lower. But there is increasing confidence that Governor Carney will pull the trigger and move. AUD is also firmer this morning, actually up 0.55%, after the release of the RBA’s Financial Stability Review, where they continue to tout strong global growth helping to underpin domestic economic strength. Interestingly there was no mention of trade tensions, which given that China is their largest export market, was a bit surprising. But in the end, an upbeat forecast about the Australian economy has been enough to underpin the currency.

Beyond those two currencies, and excluding the RUB (+0.4%), which is likely to see ongoing volatility given the sanctions situation, the rest of the market has done very little. The euro is a touch lower and the yen has weakened by 0.3%, but in general, all the currencies remain in their trading ranges with no indication they are about to break out. In fact, despite all the volatility that we have seen in both equity and bond markets of late, the story in FX is much less interesting. It appears we will need to see actual policy changes to get things moving again.

This morning brings two final pieces of data, Michigan Sentiment, which is expected to slip slightly to 101.0, and the JOLTS Jobs report, with the median expectation at 6.143M job openings, again a touch softer than last month’s reading. We also hear from three Fed speakers, Rosengren, Bullard and Kaplan. At this point in the cycle, it is possible there are nuanced differences between Chairman Powell and the other Fed members given that we have seen a bunch of data since the last meeting. However, there has been no indication that the Fed is concerned about any slowing of the growth trajectory in the US, and I expect that we will hear the consensus view of either two or three more rate hikes this year. In other words, there is nothing to indicate that the Fed is going to slow down, and not enough data yet to imply they should speed up. So I look for another lackluster trading day in FX, with movement more likely to unwind the overnight activity than to extend it.

Good luck and good weekend
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