Talking Points:
- The Chinese Yuan is rallying (USD/CNH dropping) as China makes moves to gain global influence amid US withdrawal
- Crude oil and Pound keep their volatility levels high but their fundamental motivations differ dramatically
- A divergence in risk-motivated assets offers further evidence that complacency wide spread and deep
The US ADP payroll report is the lead in to Friday's NFPs. Sign up for the live coverage webinar on the DailyFX Webinar Calendar to see how the event impacts the Dollar and rate forecasts for the June 14th FOMC decision.
Big moves within these otherwise complacent markets are increasingly difficult to miss. One of the most remarkable moves this week is the sudden surge from the Chinese Yuan (the tumble from USD/CNH). The move is the second sharpest in the offshore currency's relatively short life. As complicated as a direct trade as their pair may be, its developments are important for anyone that is keeping tabs on the global financial system. While there are technical aspects supporting this jolt of activity, the real current follows deeper fundamental concerns - namely, politics. The US is moving increasingly away from a globalist economic position to one that shows more elements of an isolationist agenda. This past week's NATO and G7 summits only solidified that tendency. With the world's largest economy withdrawing, its second largest member sees the opportunity to solidify its position after a tenuous but rapid ascendance. China has made considerable moves to draw tighter connections to other key global players and regions which increasingly makes it an indispensable wheel in the machine. That can help expedite the country's opening of its financial system, offer better pressure relief mechanisms for future crises and systemically change the flows of capital around the world. While most political developments carry significant market influence, they are generally focused in on more immediate (months to perhaps a few years) circumstances. This development more definitively change the landscape through the foreseeable future.
Another significant mover this past session which is likely to maintain its activity level was crude oil. The commodity posted a sharp drop on the session and the explanations applied were generally formulaic. While it is certainly likely that waning confidence in OPEC production cuts and the complicating influence of the shale production along with the moderation in consumption (seasonally adjusted) all have an impact on prices; these strong moves within broader range seems to reflect underlying conditions well. Complacency has turned off most markets from prevailing trends and the surge in participation behind oil futures trading ensures there is plenty of market to still express volatility. Expect more activity without clear, long-term bearings and an abundance of explanation. Meanwhile, the Pound put in for a wide range day with another political focus. With the UK general elections a week away and recent surprise vote outcomes in the Brexit (EU Referendum) and US Presidential election, expect the market to fixate on any updates on the country's lean. The closer the outcome looks - or even more significantly if the Prime Minister seems on track to lose majority - the more dramatic the impact on the Sterling.
Political and trade developments seem to be taking the active influencer roles over risk trends and monetary policy. Yet, the latter motivations are unlikely to remain dormant for long. Risk trends in particular are a constant volatility threat - especially when markets are this complacent, even oblivious to unstable conditions and an abundance of threats. The S&P 500 wavered slightly this past session and the VIX only barely climbed above 10. The true problem arises in the divergence in the performance of risk-oriented markets. For monetary policy, the docket ahead will start the drum beat for the FOMC rate decision on June 14th. The ISM manufacturing report will reflect on the health of a sector that has been the focus of the new administration while the ADP payrolls figures will set the marker for anticipation in the May NFPs. We discuss active movers and deep moving fundamental themes in today's Trading Video.
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