A raft of economic data today means the market's focus is on beats and misses
The return of onshore China investors after a ramping up in US-China tensions failed to light off any fireworks again today on USD/CNH and Chinese equity markets.
But will the better than expected China April trade data provide a spark to reignite those trade war flames? I would not be surprised if President Trump is nursing a Diet Coke right now while glossing over the country breakdown within China's import data. Indeed, he might be looking to storm the election stage right out of the gates tomorrow with tariff threats in tow. But I think this view is mostly falling on deaf ears at this time.
The market remains entirely complacent to trade war risk writing it down to political grandstanding. Still, the problem with that playbook is the sinister retribution usually occurs in the final chapter when the tariffs have reveled, and it is too late to react.
But within that context, risk markets continue to trade favorably on the China trade beat. But it is not lighting up currency risk as USD/CNH stays bid as the Yuan remains the easiest and most precise way to express a hawkish trade war view.
It seems to me that currency traders are into chapter one of the trade war playbook while the equity markets Teflon persona remains intact as CTA algorithms are trading like an Energizer bunny, and keep on coming back for more
The sudden stop to global economic activity makes PMI data meaningless as a trading signal. For example, India's services PMI fell to 5.4 (the lowest reading in the world), from 49 in March. That fragile number does not tell us how quickly India's economy will recover, but if anything, it highlights diverging economic fortunes within the Asia currency block. And as we saw with today's China PMI, it falls into the who cares category.
The Pound
The BoE's monetary policy announcement could drive further GBP/USD weakness. The BoE could be forced to reduce the current pace of weekly purchases (currently ~GBP13.5 bn) if the target is not increased soon, especially relevant in the context of an imminent step-up in gilt issuance.
The Euro
Markets look primed to test the euro resolve at 1.08 again, but with 48-hour traders holding relatively big shorts and more prone to cover on dips, the EURUSD would need to make clean dive below 1.0775 to bring more sellers to the fray.