Will Risk Trends and Dollar Take to Recession, Trade Wars or Stimulus?
Fundamental Talking Points:
- A run of major central bank policy updates these past week has focused the market's attention on systemic risks and shortcomings
- Major central bank leaders are due to speak this week and effectiveness is a familiar topic, meanwhile economic health and trade wars are key
- Key event risk this week includes Monday's PMIs, the RBNZ rate decision and US PCE deflator
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Monetary Policy Carries Over as Volatility Source This Week
This past week, the top fundamental theme was the state of global monetary policy. With the Fed at the center of eight significant central bank updates - all within a 24 hour period - it was difficult to miss the pressure. Ultimately, the rate cut from the US central bank moved along our transition to a more dovish policy course. Yet as much support as was mustered between the rate cuts (including the ECB's the week before) and the commitment to hold up existing, aggressive programs; there wasn't much in the way of progress for the speculative markets. Perhaps the concern of effectiveness has gained more traction than the traditional formula of 'more stimulus means more market gains' has entailed previously. If that is the case, there is a significant risk to market buoyancy moving forward.
Growth A Headline Theme Already
One of the rotating fundamental themes of overriding importance, the general state of global growth took on significant importance this past session. The run of global PMIs for the month of September has already started as of Monday between the release of the Australian, European and US updates. To represent Asia for the week (Japanese figures were deferred a day), the Aussie update was mixed owing to a strong recovery in services but the manufacturing measure slipped into contractionary territory - a reading below 50.0. The Eurozone measures were unmistakably poor with a particularly troubling showing for manufacturing that seems heavily anchored to Germany's own collapse in factory activity. As for the US, the data was all above water even if the service sector reading (the bulk of GDP) was short of forecasts. Ahead, keep tabs of the market's interest in growth troubles more than the data listings themselves - speculative responsiveness is the most important criteria to fundamental influence bar none. Three Charts for
Top Themes: USDCNH; Treasury Yield Curve; Gold
As we move into a new week likely populated with just as many unscheduled pitfalls as calendar updates in data, it is worth holding out benchmarks to keep quick tabs on all the critical rotating themes. For recession fears, the market has truly seized on the state of the US Treasury curve. I place greater emphasis on the 10-year to 2-year spread. Though it didn't flip as quickly as the economist-favorite 10yr3mth, it has moved back above the zero mark which makes it prone to sharp interpretation should it drop back below the benchmark. For monetary policy effectiveness, there is no better measure than gold. The precious metal is considered a safe haven but its more remarkable value for current conditions is as an alternative to traditional currency that is being uniformly devalued as side effect of accommodation aimed at economic objectives. In particular, I place higher value on gold priced in a mix of the most liquid currencies. As for trade wars, the most sensitive and liquid measure without controls may be AUDUSD; but it is exactly those curbs behind USDCNH which make it a better barometer of our particular situation.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.