All That They’ll Wreak

The G7 gathers this week
With six of them sure to critique
How President Trump
Was too quick to plump
For tariffs, with all that they’ll wreak

As the NY session opens, the dollar has recouped some of its recent losses, although movement overall has been slight. Yesterday saw a mixed session in equities, Treasuries rally sharply late in the afternoon after the Brazilian real fell dramatically along with the Bovespa in Sao Paolo, and the dollar stem its early session losses. In other words, the session devolved into a classic risk-off scenario, arguably led by growing concerns in Brazil. In addition to the ongoing emerging market volatility, market chatter is focused on just how hawkish the Fed will be next week (look for confirmation of a total of 4 rate hikes this year), and what exactly the ECB is going to tell us about the end of QE (less than the market is now looking for). But those meetings are the back half of next week. Before then, we have much else to digest.

First we saw some important data overnight from both China and Japan. Chinese trade data showed a surprising decline in the surplus to $24.9B in May, well below the expected $30B. The big surprise was imports, which rose a stellar 26%! (Maybe there is some method to Trump’s seeming madness). At any rate, the market response has been to see CNY fall about 0.2%, a fair amount in a currency as closely managed as it is. The other noteworthy news overnight was Japanese GDP data, where Q1 was revised lower to -0.6% annualized, a very disappointing outcome, and one which speaks to the idea that the BOJ is nowhere near ready to start exiting QE. In what can be no surprise to veteran yen watchers, the yen rallied in the wake of the report, and is now up 0.3% on the session.

Thus far the rest of the G10 bloc is showing only limited movement, but we are continuing to see pressure increase in the EMG space. As mentioned, BRL fell nearly 2% again yesterday and closed above 3.90 (4.00 is coming soon!) But in addition, MXN is lower by 1.2% this morning, trading above 20.50 as a combination of concerns plague the currency. First off is the increasing likelihood of AMLO becoming the next president of Mexico, bringing along his virtually Marxist views on the economy. Second is the fact that the most recent comments about NAFTA from the White House indicate that progress remains slow and that the president is considering two bilateral deals rather than a reboot of NAFTA. That is seen as a distinct MXN negative as evidenced by today’s movement. And finally, looking at the weakness in BRL, there are still many in the markets who use MXN as a proxy for all LATAM risk given it has the best liquidity if the bloc by far, and who are simply following BRL lower via positions in the peso.

This brings us to the G7 meeting. I find it quite interesting how much credence is suddenly being given to a gathering that has lost its luster, and arguably its raison d’etre, ever since the advent of the G20 in 1999. But there is much being made over comments that French President Macron will not sign a communiqué if the US’ tariffs on steel and aluminum are not lifted. As well, Chancellor Merkel is focused on obtaining exemptions for European companies that do business with Iran, which are now in breach of US rules since the US left the Iranian nuclear agreement. In fact, every member has their own pet peeve, each of which pits their nation against President Trump. I would wager that if you looked at the past 20 G7 communiqués, not one of them had any impact on markets. And I see this as yet another in a long line of useless rhetoric. Each leader is playing to their home crowd on a global stage. And ask yourself this, what would happen if the G7 did not issue a communiqué? I assure you the market impact would be nil.

And that’s pretty much all there is today. US data is completely absent and Fed speakers are muzzled due to the proximity of the meeting. We do see Canadian employment data, however it will need to be extraordinary to change views. Remember, Governor Poloz is laying the groundwork for an August rate hike, and perhaps another in November. I am skeptical we get both, but cannot rule out the first one. However, given oil’s recent sharp price declines, I imagine the CAD is going to have a very hard time rallying on positive news.

With the week drawing to a close, I expect that we will see position squaring, which given the week’s activity, probably means we can see a small amount of further USD strength. But the reality is that next week is what traders are looking toward, with Wednesday and Thursday the keys. Until then, don’t look for much.

Good luck and good weekend