While market volumes are predictably light, investors continue to strike a year-end cautionary tone as December optimism is gradually giving way to 2020’s uncertainty. This despite "Trump's trade deal in the bag," according to the Presidents hawkish trade adviser Peter Navarro.
Sure, the worst-case of a tariff escalation scenario has been seemingly averted. But, once the P1 deal is signed, investors will then press to consider the P2 risks, after all how much more progress can be realistically expected ahead of the US elections next year.
Beyond everything else, the P1 deal is still 'skinny' relative to a full trade de-escalation scenario.
And, with the U.S. election risk brought forward due to the impeachment process, the polling uncertainty adds another level of unwanted unpredictability and might even supplant trade policy doubts as to the primary bullbeggar in 2020.
Oil markets
Oil prices have followed the general de-risking drift into year-end, despite a rise in Middle East tensions and last week's bullish-for-oil-price inventory draws as the broader markets appear to be losing some of that holiday cheer. I think the same holds for the oil markets given the speculative length into year-end.But traders are also probably sitting tight ahead of the EIA release of October U.S. crude production figures today. This report is significant, not only given the length in the market positioning, but it's expected to show robust continuous growth in the agency's short-term outlook.
Gold markets
Gold is receiving an undercurrent of support into year-end from lower U.S. bond yields, persistent geopolitical risks, and ongoing U.S. economic uncertainty.
But with the weaker U.S. dollar narrative gathering steam into the 2020 election year, risk hedgers are starting to flock to the security of gold rather than the dollar.
Currency markets
I should set aside trying to resolve the market's view that the USD weakens as the euro strengthens, and the yuan weakens into 2020 for next week. As well I should avoid getting caught up in the year-end housekeeping duties as forex traders execute their left-footed tangoes into the year-end turn.
RMB has been strengthening against the dollar in the wake of the phase-1 trade detente.
The RMB is the purest barometer to understand the broader USD dollar movement amid U.S.-China friction. Yes, the euro matters, but the renminbi is by far the most significant driver of the U.S. dollar across EM and does leave a significantly large footprint across G-10. So, if the consensus is right on a weaker yuan, the market is probably wrong on a weaker USD dollar narrative. If there's going to be a big move lower in the dollar next year, the stronger yuan will need to do some of the heavy liftings.
The USD/CNY fix was again lower than expected yesterday. Spot eventually came off to catch up with the weaker USD yesterday. However, CNH is still underperforming the basket—probably due to increasing PBoC rate cut expectations.
The ringgit was playing a bit of year-end catch up to its export and commodity inflow currency peers.
Given Malaysia's close trading ties with China, with the PBoC’s strong-arming lenders to adopt a new loan pricing regime, this should improve monetary policy transmission to economic sectors that need it the most, thereby becoming a positive for the ringgit from an improved regional trade flow perspective if the policy measures boost China's real economy.