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No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

John Kicklighter, Chief Strategist

Volatility Talking Points:

  • The upcoming 48 hours will be rife with scheduled event risk tapping active themes, but liquidity is still a systemic impasse
  • Growth concerns were again headline news as a new poll on the US economy leverages the concerns festering in Treasury yields
  • Trade wars didn't offer a shift in the US-China line nor will related data Thursday, but Treasury's mention of the Dollar is concerning

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

Recession Fears are Spreading to Once-Impervious Polls

Fears over the health of the global economy are nothing new. We have seen a moderation of official government growth measures while more timely, private readings (like the monthly PMIs last week) have signaled a drift dangerously close to stall speed. Yet, through the release of so much troubling data, we have seen an effort to downplay the concern through various means: complacency; promises of fresh stimulus; emphasis of alternative sources of growth; etc. One such outlet that was active this week was the strength of the US consumer - one of the largest collective economic influences in the world. The Conference Board's August sentiment survey Tuesday was hailed by the US government and its caveats and context were played down by the market. Yet, a new Quinnipiac survey released this past session offered some pressure on these bastion of safety for diehard optimists.

According to the survey conducted over the past week, a greater number of respondents saw the US economy declining (37 percent) versus those registering improvement (31 percent) since the Presidential election in 2016. Further reflecting our current conditions, the portion of the pool that believed President Trump's policies were hurting the economy rose to 41 percent while those suggesting it helped moved to 37 percent. The ongoing trade wars likely played a significant roll in that outcome.

In the larger scheme of things, this survey carries little weight itself; but in the context of a growing list of troubling signals with fewer footholds for hold out enthusiasm, it carries greater fundamental weight. From the market's perspective, the more prominent and timely updates on economic projections were issuing further signals of pain this past session. The US 30-year Treasury yield dropped to a fresh record low on both a close and intraday basis. The 10year2year curve was bumped off Tuesday's low, but it was still firmly negative. That signal and the economist's preferred 10year3month spread are still throwing their supposed 'recession' warnings.

Chart of the 10-Year to 3-Month Yield Curve, S&P 500 and US Recessions (Monthly)

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

Chart creating using the TradingView Platform

Trade Wars are Moving Closer to the Core of Financial Stability

Speaking of trade wars and the pressure they inflict upon growth forecasts, US President Donald Trump attempted another cursory defense of the onerous economic conflict with China. He suggested he could quickly settle a deal with China and be deemed a 'hero', intimating that he was holding out for something more fundamental. Changing the perceived trade abuses of the world's second largest economy was a point on which the President feels he has unwavering economic support, but this poll - and a growing list of indicators - seems to refute. Meanwhile, there were none of the extreme updates on the US-China conflict that we have seen detonate volatility in the markets in previous weeks. Notable headlines on the topic include the Commerce Department receiving 130 applications from US firms to sell their products to blacklisted Huawei and interesting reports exploring the risk that China may use corporate 'social credit' to increase pressure on foreign companies - potentially beating Trump to the punch with his threat to pull US businesses out of China.

Chart of USDCNH (Daily)

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

Chart creating using the TradingView Platform

The truly interesting update on the trade front was less tariff related and more core to the standing of financial norms. Late in the day Wednesday (early Asia), US Treasury Secretary Steve Mnuchin remarked that the White House was not actively pursuing intervention on behalf of the US currency, but he did state the government had weighed countering the strength of the Greenback. That may seem a simple statement, but it is a dramatic reversal to decades of ardent policy signaling. Administration after administration has made clear that it is taking no hand in the direction of the world's top reserve and that there was no concern with the currency's strength. To upset this norm is no small alteration given it is considered an absolute reserve, absolute currency haven and the pricing mechanism for much for much of the financial world. It is not an exaggeration to say that manipulating (devaluing) the Greenback would have severe ramifications for the global system - not to mention an expedited effort to permanently diversify away from the currency. Less turnover translates into lower liquidity which in turn boosts volatility.

Chart of DXY Dollar Index and Aggregate FX Volatlity Index (Daily)

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

Chart creating using the TradingView Platform

Scheduled Event Risk is Due to Pick Up but Liquidity is Still Fading

Looking ahead to the final 48 hours of this trading week, there is no shortage of meaningful event risk on the docket. Friday's data set will hold a general monetary policy tone with top listed US and European inflation data on tap to fuel already charged rate (cut) expectations for September. Yet, before that raft of data, there will be a more circumspect growth and trade war tone in the data through Thursday. On the economic side of things, there is a direct 2Q GDP update for Brazil - though its global implications are likely more reserved than even the final reading for the German equivalent on Tuesday - the details of that run offering important insight for Europe's largest economy. More ancillary - but still very important - is German employment numbers and the weekly US consumer confidence report from Bloomberg. The more targeted theme will be around trade wars. US trade data is of particular interest, but Canadian current account and Australia capex shouldn't be discounted for this connection.

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

Whether or not event risk can create market-moving sparks depends on the transmission abilities of speculation. In other words, the theme in question must carry enough weight to move enough market participants to generate volatility and subsequently trend. That is a tall order from the data we have on tap today. The European sentiment surveys and US trade report are certainly linked to key themes, but they will struggle to shift the perspective for either. That is the limitation in 'normal' conditions, but what we face is anything but normal. As we close into the weekend, we are approaching holiday trade with the globally-observed (in market activity at least) US Labor Day holiday ahead of us, there is an expected drain on participation. This warps market capacity, and traders should abide that limitation.

Chart of Seasonal S&P 500 Performance and Volume by Month

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

Top Concerns for Dollar, Euro and Pound

As we weigh the systemic restrictions, it is important to recognize that the markets will return to more productive actions after the lull passes. It behooves us to prepare for the return of liquidity and in turn the return of volatility. Prepping our fundamental standing, that means identifying the most important driver for the market in question. For the US Dollar, this is not an easy answer. There is considerable debate as to whether the Greenback is most driven by Fed forecasting, recession fears, the risk of reserve status owing to trade wars or some other systemic issue. Where there is disagreement on what is most important, there is a lack of definitive fundamental drive. That is more than clear in the lack of Dollar projection. I don't see that changing during this low liquidity period. Mind your expectations for Greenback moves.

The world's second largest economy was delivered a tangible improvement to its landscape recently. The collapse of the Italian coalition government could have developed into a stability risk for the Eurozone, but instead it seems to have been a genesis for stability. This past session, it was reported that Five Star was discussing a coalition with the Democratic party which would temper the pressure in the anti-EU perspective of Italy's ruling government. Italian yields have dropped with this development, but the Euro hasn't rallied. Perhaps the expectation of a ramp in ECB stimulus is warding off any bullish interest. There is evolving speculation on what the central bank intends to do next week, but an open-ended QE program (similar to the BOJ's) seems increasingly likely in the limited range of options from this extremely dovish - and increasingly desperate - central bank.

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

For targeted influence, the British Pound is the major with the most direct fundamental associations. Already anchored to the singular influence of Brexit uncertainties, the UK's split from the EU proved an charge this past session. Headlines were set off Wednesday by reports that Prime Minister Boris Johnson had met with the Queen, requesting that she suspend Parliament. The controversial politician is looking to shutter the Houses for four weeks for what he suggests would allow the government to table new legislation. Yet, most - including MPs - believe these is a maneuver aimed at throttling the opportunities to avoid a no-deal outcome in the Brexit negotiations. The Sterling didn't break convention when it dropped on the news, but is this move a self-sustaining drop? We will find out.

Chart of Equally-Weighted Pound Index and CBOE’s Pound Volatility Index (Daily)

No Dollar Assurances in Treasury Downplaying Intervention, Absorbing Headlines for Later

Chart creating using the TradingView Platform

If you want to download my Manic-Crisis calendar, you can find the updated file here.

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