Talking Points:
- US tariffs have been triggered, but the full rollout has been staggered as has the retaliation and so too the risk trends impact
- Neither NFPs nor tariffs have decided the Dollar's bearing and motivation, what can revive a trend for this currency?
- Why Gold, Oil, the Chinese Yuan, Canadian Dollar and Swiss Franc should be on your radar
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Unresolved Risk Trend Conviction on the 9th Anniversary of the Market Recovery
We have been awaiting the approval of the US steel and aluminum tariffs for some weeks now. This past Thursday, US President Donald Trump approved the taxes on these specific imports along with some caveats to soften the blow to the global economy and the United States' trade relations. Yet, the next phase of the world's slide into protectionism didn't seem to trigger the risk aversion its broader implications would insinuate. That is likely due in part to the delay of full implementation and the fact that the world's largest economies have yet to retaliate. According to authorities, there was a 15 day grace period for countries to argue/negotiate their exemption and there is lingering speculation/hope that the US will further ease the effort by the March 23rd cutoff. Yet, should China or the European Union decide not to wait to issue its reply, capital markets will not be able to avoid the impact. In the meantime, the S&P 500 and Dow ended the past week on a strong note. Friday was the 9th anniversary of the market's Great Financial Crisis low. Yet, further speculative run will prove a struggle considering there wasn't much discount to benchmarks in the lead up to the tariffs induction.
Dollar Left in Its Range Without a Clear Drive
Another benchmark asset that has not found satisfaction with the Trump tariffs is the US Dollar. The ICE Dollar Index remains clearly stuck within its range. There is considerable debate as to whether a trade barrier from the US would be bullish or bearish, but fewer would expect it to be a 'non-event'. The volleys in a global trade war will inevitably impact the most heavily used currency in the world - especially when it is as the center of its unfolding - but like risk assets, there is reason to await clarity on how the engagement will shape up. In the meantime, there are other themes that could readily jostle for influence over the currency but seem to still leave it uninspired. Rate expectations for example was nudged this past Friday by the biggest 'beat' in payrolls since November 2009, but the Dollar's yield advantage rendered little appetite for the currency. Wages are still lacking for inflation which would further translate into a more hawkish regime. That said, the implied yield through years end according to Fed Funds futures has developed a wide gap with the bearing of the currency. It isn't clear whether there is simply not enough fundamental motivation to drive the Dollar or perhaps too much.
The Difference Between the Euro, Loonie and Franc
While the Greenback accounts for the vast majority of FX trading amongst the majors and in the broader market in general, there is more motivation and opportunity with certain other currencies that shouldn't pass unappreciated. While EUR/USD is as landlocked as the DXY Index due to its Dollar connections, the Euro's developments should be monitored closely. The tariffs response from the EU and Eurozone arguably carries the most weight in the next stage of the global trade war than from any other country. The Italian election's uncertain outcome still threatens the stability of the Euro-area. And, the ECB is clearly displeased with the level of the Euro even though they are boxed in by their mandates and extreme policies. For the Canadian Dollar, there is far less conflict in the fundamental hierarchy which makes it significantly more 'tradable'. While the outlook is not particularly robust for the Loonie, there is a retreat from the worst case scenario pricing it was suffering from through this past week. And, since there is a counterpart in all pairs, traders should look for a cross that doesn't present too much conflict to slow a trade opportunity. The Franc may very well be that currency. Take a look at USD/CHF, CHF/JPY and CAD/CHF.
Appreciation for the Chinese Yuan, Oil and Bitcoin
When prominent trends are fewer and volatility tempers, the natural response by market participants is to seek out the core markets to try and strong arm opportunities that aren't present or prepare for an eventual return to tempo. However, we should also keep in mind that it is important to adapt to the trade conditions we are presented with. Ranges are more prevalent now than trends, and that is why crude oil makes for a more interesting chart to me than a dubious USD/JPY reversal effort. Bitcoin is also starting to present significantly better options as it responds to technicals and increasingly trades like a typical asset. As for the Chinese Yuan, it is certainly not the pinnacle of a market-determined exchange rate. That said, it stands at the forefront of the protectionism upheaval and transfer of global influence. We discuss key themes, distinct event risk and actual trade potential in this weekend's Trading Video.
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