Market Drivers June 26, 2018
Dollar finding bid across the board
Trump walks back from threats
Nikkei 0.02% Dax 0.49%
Europe and Asia:
The dollar was broadly higher in Asia and early European trade today after Trump administration walked backed its comments on trade.
Trump senior advisor Peter Navarro told CNBC yesterday that the administration currently does not have any specific countries targeted. His comments came after news reports that had Wall Street reeling over the prospect that the U.S. could prevent companies that had at least 25 percent Chinese ownership from buying businesses that possessed “industrially significant technology.”
“There are no plans to impose investment restrictions on any countries that are interfering in any way with our country. This is not the plan,” he said.
As we noted yesterday if backpedaling was a sport Mr. Navarro would get a gold medal as his words contradicted much of the rhetoric last week which indicated that the Administration would become decidedly tougher on China in its trade policy. Indeed the markets unwound much of the USDJPY rally post news but the pair managed to stabilize at the 109.50 level as the worst of the trade rhetoric appears to have eased. For now, a modicum of relief has washed over the markets and risk aversion flows have ceased. With little data on the docket today, there is little to drive trade, but if equities and bond yields rally USDJPY should make another run at the 110.00 level.
Meanwhile in UK cable took a tumble after incoming MPC member Haskel testimony tilted more to the dovish side. Although Mr. Haskel noted that there was scope for rate tightening he specifically stressed that it must be limited in scope as uncertainty due to Brexit dominated UK economic conditions. Cable dipped towards 1.3200 but held the level for now, although it could probe that figure if dollar gains further strength as the day proceeds.
Finally, USDCNY has been trading at 6-month highs, with markets speculating that the PBOC will devalue the currency in face of the all the trade talk from Trump. We seriously doubt that this will occur, as this is the one policy action that is sure to enrage Trump and more importantly gather much political support for the idea that China is “cheating”. For now, the PBOC does not need to do anything to weaken the yuan as the market is naturally doing it for the bank in gradual phases. There were legitimate concerns that the PBOC would have no choice but to act if the yuan had not moved as the yuan “basket” against other major G-11 currencies would strengthen too much, but for now, the adjustments are being made by the speculators and the PBOC is only too happy to have their help.