(Update 1) The winds of a trade war are howling

Midday update

Another day another conundrum

Regional equity markets are faring much better as investors emotions have tempered, but in general, markets remain in wait and see mode
Clarity is power, but given the lack there off, it’s a struggle to get back in the saddle, as a sense of once bitten twice shy continues to permeate.

None the less, the spoils of trade war have attracted bargain hunting but completely trusting the markets in the aftermath of yesterdays meltdown is bordering on too soon too quick as sentiment remains very apprehensive.

The thematic moves currently playing out appear to be more or less position driven and given the lack of data to sink one’s teeth into; its back to the divergent narratives while hoping to sell Euro at much better levels

But with everyone talking, and no one trading, perhaps best to pack in and live to fight another day.

Morning Run

The winds of a trade war are howling

The winds of a trade war are howling as a tariff -induced polar vortex has frozen out investors dead in their tracks. It’s been an intense 24 hours of attrition which has seen many a savvy investor fold like a cheap deck of card, but for those that survived the carnage, the spoils of war may be there for the taking or more likely the fading.

Investors complacency has given way to sheer terror as there can be very little doubt that the US and China have locked horns in a legitimate trade war as battle lines get drawn, and investors hunker down with safe havens preparing to ride this one out.

Oil Market

Oil naturally was another major focal point as Saudi – Russia alliance continues to double down pushing for much more massive 1.5 mil production hike against a generally more OPEC pleasant hike of 300-500 K barrels. Of course, much of this could be little more than posturing designed to influence members to take a consensual step to 700 K barrels increase.

And indeed, trade war escalation has been a significant distraction while putting a more offered tone to the market on global growth concerns and adding another unwanted layer of uncertainty.

But the fine-tuning approach makes so much more sense not only from a producer perspective but would also reduce the chances of making a significant policy error during these unsettled times. Indeed, lots of moving parts.


Gold remains bearishly offered, and It’s all about the dollar strength as the greenback rockets higher on EM and commodity currencies as well as the  China meltdown. And at least for the time being the markets have utterly forsaken the idea that the US trade war escalation could become ultimately detrimental for the dollar. But it’s the enormity of the EMFX meltdown that has investors chasing the dollar buck as capital outflows into the haven US treasuries is the flavour of the day.
Predictably with the move to 1275-70, retail buying interest has started to wane, but all eyes remain on currency markets and especially the Euro after Mario Draghi all but reaffirmed the ECB’s dovish stance as currency vol’s have now switched into panic mode.

Gold will continue to be sold on rallies in this bullish USD environment.

Currency Markets

Very thematic !!!!

EUR: Under pressure from Draghi confirming ECB dovishness

AUD: Metals have been stricken by trade tensions, causing consternation on virtually every commodity desk. As such the Aussie will remain under pressure as fear of a full-blown  trade war looms

JPY: Market continues to buy dollar elsewhere given the overhang from trade war risk.

Asia FX: the winds of a US-China trade war are howling and as storm clouds brew investors are running for the umbrella of haven assets.

The regional sentiment is an enormous risk- off, and local stock market toppled on global growth concerns. Look no further than USDCNH touching 4.48 as capital outflows intensify. And look no farther than the melt on the Shanghai composite to support that view.

MYR: only weakened slightly above 4.00. Despite uncertainty over the fiscal deficit. The MYR is better insulated from external trade shocks than regional peers due to oil but should continue to trade with a negative bias as regional sentiment continues to wane.

Keep in mind the MYR had weakened dramatically on the post-election outflows, so the Ringgit is not suffering from the unwinding of short dollar risk as some of the regional peers Positioning is much cleaner and slightly long biased.

I think this partially explains why the MYR has held up relatively well today, considering all the regional negatives.

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