FX Playing Catch Up to Equities Volatility

Highlights for this week

Risk-off has been the overriding theme this week following President Trump’s threats to levy more extensive tariffs on imported goods from China. This has triggered a wave of headline risk ahead of the next round of trade talks starting today.

Trump’s move to increase tariffs on China has deepened a market sell-off, with global equities suffering some of the biggest declines of the year. In the forex space, aside from the go-to safe haven currency plays (¥, CHF), FX ranges have some catching up to do, since they have not priced in fully a trade war by the world’s two largest economies.

Over the next 36-hours there remains three possible outcomes:

(1) U.S-China negotiations manage to bridge the gap this Thursday and the U.S rescinds the tariff hike

(2) U.S hikes tariffs Friday morning, China walks-out and the deal is off

(3) U.S announces tariff hikes (but commencing at a later date) and both sides try to come up with a deal before the tariffs come into effect – this seems the most probable outcome with the template similar to the drawn out USMCA trade negotiations between US, Canada & Mexico.

Note: Trade Representative Lighthizer confirms the U.S will raise China tariffs effective 12:01 am EDT on Friday if no deal.

The volatility gauge (VIX) has been sliding for much of this year before its +80% abrupt jump this week that has managed to send it to its highest close since January.

Iran rolls back pledges under nuclear pact

Iran announced mid-week it was scaling back curbs to its nuclear program under a 2015 deal with world powers and is threatening to do more – including enriching uranium to a higher level – if countries did not shield it from U.S. sanctions.

Central banks

Reserve Bank of Australia (RBA) left their cash rate target unchanged at +1.50% – it was not expected. The central bank does have a ‘downward rate bias,’ but seem to be shifting the goal posts considerably on when making a cut. Policy makers are to pay much closer attention to the labour market in coming meeting, as there is still spare capacity in the economy. Next rate cut is expected mid-year as the RBA wants to see unemployment fall further to get inflation going.

The Reserve Bank of New Zealand (RBNZ), as expected, cut their OCR (official cash rate) by -25 bps to +1.50% and cited inflation and employment for the rate change. Governor Orr adjusted their rate path for another cut (first rate cut since 2016) this year. He believes policy makers are now in a good position to observe data as situation unfolds.

The Bank of Japan (BoJ) March minutes this week showed that most policy members agreed that it would take time to hit +2% price target and that its appropriate to persist with monetary easing.

Norway’s central bank (Norges) left their deposit rate unchanged at +1% as expected. The decision to keep policy steady was unanimous, however, policy makers did bring forward its next potential rate hike to June according to their statement. “The outlook and balance of risks suggests that the policy rate will be raised in June 2019”. The prior view was in H2 2019.

Note: Norges has raised the Deposit Rate on two occasions since Sept 2018 by a total of +50 bps. The last hike was back in March.

Market consensus believes the Central Bank of the Republic of Turkey (CBRT) has limited FX ammo to fight a weakening TRY – so we are back in the scope of CBRT needing to hike rates to prevent the lira going much weaker.


The U.K. government says it’s “hopeful” that an agreement can be reached on a consensus approach to Brexit with the opposition Labour Party. PM Theresa May has hinted that some kind of customs union could be a compromise. Brexit chatter remains too quiet as its trumped by U.S-China trade concerns.

Economic events

On the Economic Calendar, tomorrow its Canadian employment change (May 10) and the market is expecting a strong report for April, with unemployment remaining at +5.8%, +11.6K new jobs being added.

A panel of energy ministers from major oil producers, including Saudi Arabia and Russia, known as the JMMC, meets on May 19th to discuss the oil market and make recommendations before the 176th OPEC Meeting on June 25.

Market concerns

• New trade war fronts opening up US/EU, US/USMCA, US/MEXICO
• U.K/Brexit fallout
• US-China trade deal – details may emerge
• Trans-Atlantic trade tensions to intensify
• OPEC, Saudis, Venezuela, Libya & Trump
• Iran is threatening to close the Strait of Hormuz
• Venezuela/Russia/U.S tension
• Geo-political concerns in Iran, Russia, Ukraine & France
• India/Pakistan – tension remains high amongst two nuclear nations
• U.S ramps up trade talks with India and Turkey
• ‘Twitter Trump’

Next week: GBP average earnings index & AUD wage price index (May 14), CAD CPI, U.S retail sales & AUD employment change (May 15), AUD Parliamentary Elections (May 17).

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.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell