Much Darker Moods

Five decades of trade under GATT
Resulted in policies that
Increased global trade
While tariffs did fade
And taught us the term, technocrat

Then followed the WTO
And new rules that they did bestow
The Chinese then joined
(And some say purloined)
Much IP which helped them to grow

But in the past year attitudes
Have shifted to much darker moods
So trade growth is slowing
As nations are showing
A willingness to stir up feuds

It seemed that half the stories in the press today were regarding trade issues around the world, notably the ongoing US-China trade talks, but also the struggle for the EU and China to put together a communique after a locally hyped trade summit between the two. Shockingly the EU is also unhappy with Chinese IP theft and their subsidies for state-owned companies that compete with European companies. Who would have thunk it? But in their ongoing efforts to maintain the overall world trade order, they found some things on which they could agree in order to prevent the meeting from becoming a complete fiasco.

In addition, today we hear from the IMF with their latest global economic updates that are widely touted to have an even more pessimistic view than the last one which, if you recall, produced substantial downgrades in economic growth forecasts. IMF Managing Director Christine LaGarde has been quite vocal lately about how all the trade spats are slowing global growth and she continues to exhort everyone to simply get back to the old ways. Alas, the trade toothpaste is out of the tube and there is no putting it back. It will likely be several more years before new deals are inked and the new trading framework fleshed out. In the meantime, expect to see periodic, if not frequent, discussions on the benefits of free trade and the good old days.

The question remains, however, if the good old days was really ‘free’ trade. Arguably, the fact that there are now so many ongoing trade issues globally is indicative of the fact that, perhaps, freedom was in the eye of the beholder. And those voters who saw their jobs disappear due to the ‘benefits’ of free trade, have clearly become a lot more vocal. Like virtually everything else in life, the case can be made that trade sentiment is cyclical, and there is a strong argument that we have seen peak trade for this cycle. The reason this matters for the FX market is that restrictions on trade will result in changing fortunes for economies and changing flows in currencies. It is still far too early to ascertain the direct impact on many currencies, although given the increasing probability that this will reduce risk appetite, it would be fair to assume the yen and dollar will be beneficiaries over time.

The Brexit saga, meanwhile, continues to rush toward the new deadline this Friday without any resolution in sight. Not surprisingly, trade plays a big role in this process, as the ability to negotiate new trade deals for the UK was a key selling point in the vote to leave. While PM May’s minions continue to have discussions with Labour to find some kind of compromise, they have thus far come up short. At the same time May is heading to Brussels to meet with Frau Merkel and Monsieur Macron in an effort to find some support for her request for another extension to June 30. At the same time, the Euroskeptics in her Tory party back home are trying to figure out how to oust her from Number 10 Downing Street, although, like the Brexit process, they have been unable to arrive at a coherent solution. With all this drama ongoing, and the emergency EU summit scheduled for tomorrow, the pound continues to hover around the 1.30 level. The one notable thing about the pound has been the reduction in market liquidity as fewer and fewer traders are willing to run positions with the potential for a bombshell announcement at any time. And seriously, who can blame them? The situation remains the same here where clarity in either direction will result in a sharp movement, but until then, flat is the best way to be!

Overall the dollar is under modest pressure this morning (EUR +0.15%, JPY +0.15%, CAD +0.2%), and in truth was in similar shape yesterday. The thing is, the magnitude of the movement has been so limited, I am reluctant to give it any credence with regard to a trend. In fact, since the dollar’s rally peaked last summer, we have been essentially trendless. I expect that this will remain the case until one of the big stories we have been following; trade, Brexit or central banking, has a more distinctive outcome than the ongoing uncertainty we have seen lately. Well, I guess that’s not completely correct, the central bank story has been one of universal dovishness, but the result is that no currency benefits at the expense of any other.

Turning to the data this week, prices are the focus with CPI tomorrow, and we also see the FOMC Minutes and hear from the ECB. And boy, do we have a lot of Fed speakers this week!

Today NFIB Small Biz Optimism 101.8 (released)
  JOLTs Job Report 7.55M
Wednesday CPI 0.3% (1.8% Y/Y)
  -ex food & energy 0.2% (2.1% Y/Y)
  FOMC Minutes  
Thursday ECB Rate Decision -0.4% (unchanged)
  Initial Claims 211K
  PPI 0.3% (1.9% Y/Y)
  -ex food & energy 0.2% (2.4% Y/Y)
Friday Michigan Sentiment 98.0

We have nine Fed speeches including Chairman Powell three separate times although there is absolutely no indication that any views are changing within the Mariner Eccles Building. However, with the increasing drumbeat of pressure from the White House for the Fed to ease policy further and restart QE, it will be very interesting to see how Powell responds. While early indications were that he seemed impervious to that pressure, these days, that doesn’t seem to be the case.

Ultimately, there is no reason to believe that the FX market, or frankly any market, is going to see much movement today given the lack of new catalysts. As I wrote above, we need a resolution to shake things up, and right now, those are in short supply.

Good luck
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