Another Freaky Friday

Another Freaky Friday

The tale of the tape seldom lies, well at least today’s virtual one, which has been swinging widely on the seismic shifts in trade war sentiment. Also, Friday was no exception when calm gave we to horror as panic-stricken investors ran for the exits. Friday’s soft March US jobs and bellicose trade war rhetoric were the main ingredients amongst a toxic brew of factors that sent US stock markets plunging.

Much ink has been spilt over trade wars in the last few days, and we now wait to see what the Trump administration does next. China’s Ministry of Commerce press conference on Friday was relatively calm, so we are back to hand-in, handout as the ball is squarely in President Trump’s court.

And while the market base case scenarios remain no full out escalation, last week’s ruckus does suggest both sides are floating more than just ” trial balloons” so investors remain incredibly jittery as China my not ” blink first “. Nevertheless, soothsayers Mnuchin and Kudlow were out ahead of the market open trying to calm investors nerves both suggesting that there will be no trade war.

The never-ending choplogic of trade war rhetoric is likely to grumble on for the near future, with most of the impact on equities. However, FX remains somewhat jaded by all the nonsense knowing it’s little more than a fool’s errand to chase these type of markets, getting tugged and pulled in every direction. Most currency traders believe the quarrelsome debate between China/US will end up in concession. However, to a tee, all are aware that the tail risk for escalation remains “ginormous.”

Following a weaker US job report on Friday, the market will pivot to the March US CPI inflation print & FOMC minutes, which are both due on Wednesday. However, we are unlikely to get anything new in the minutes after Fed Chair Powell’s Friday speech held an unchanging tone that he has yet to see concrete signs of building price pressures. While Presidents Trumps twitter account and headlines risk with continues to permeate every nook and cranny, Wednesday CPI data will to top this week’s calendar.

However, simmering below the surface is Robert Mueller and the investigation of Russia interference in the US elections of 2016 will continue and may cause some worrisome headlines.

Tensions with Iran will also come to fore as Trump’s May deadline to decide whether to leave the nuclear deal draws near. But the appointment of John Bolton increases risk around this decision.
Buckle it’s going to be another roller coaster ride this week.

Oil Markets

Despite some bullish signal emerging last week, crude oil prices tumbled on Friday after President Trump had ordered new tariffs levied against China to the sum of 100 billion. While its possible and escalating trade war could dent global growth sentiment, the real fear is that China if pushed hard enough, could slap a tax on US oil imported into China.

Also, US exports going through the roof U.S. crude oil exports rose to 2.175 million barrels per day, or more than 15 million a week, at the end of March which is more than offsetting the Venezuela supply disruption. And when you consider Russia was testing the upper limits of the OPEC compliance, and despite Russia oil minister openly supporting the deal, there are growing concerns Russia will be first to buckle. With US, production and exports filling the current global production void, if Russia ramp up it will throw the delicate worldwide supply and demand balance out of whack and prices will tumble.
Gold Markets

Gold risk reversals have increased ten folds since ‘trade wars’ began two weeks ago, as gold remains one of the critical havens plays this year. Gold prices will continue to run incredibly headline sensitive as trade war rhetoric is expected to dominate the landscape this week. However, with Friday much weaker than expected US payrolls data, Gold prices will also take their cue from the XAU-DXY inverse correlation, as the US dollar should trade with a softer bias to start the week.

Currency Markets

My main takeaway from last week after USDJPY failed to break 106 when China issued the Soybean tariff is that I need to look beyond trade war equity led to risk aversion to supporting a long-term bullish JPY narrative.

And despite the enormous volumes going through in NY Friday, the market was unable to take out 106.75 suggesting that currencies traders are taking a ” this too shall pass” approach to trade war rhetoric.

Japanese Yen
Tariff headlines continue to dominate although price action would suggest it’s becoming less intensive with each release. More like the North Korean peninsula that triggered massive waves of shock but ended up with tepid waves of awe.

Non the fewer a good chunk of the markets continue to view longer-term bullish JPY with Reserve manager buying and Abeixit simmering under the surface.

The Euro

The divergence of data momentum between the US and Europe would suggest less EURUSD bullishness Most likely a range bound trade until we get a definitive shift in ECB which should start to build in May.

The Malaysian Ringgit

The US jobs report came in less than expected, which is supportive for the MYR and should keep the market more disposed to maintain a long MYR position despite the upcoming elections.
Concerning the elections, I continue to favour a long MYR through the event, as there is no real political risk.
Nevertheless, with the BNM likely in a little rush to raise interest rates soon due to lower inflation while considering that global trade war continues to frame local sentiment, the MYR will be hard pressed to make significant gains this week

 

 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes