I do not think the market is in any panic or rush to even modestly de-risk at the current level of discord. But regardless of the low probabilities around a re-escalation of the US-China trade war during a recession, the geopolitical disquiet is poking the hornet's nest and the currency market is taking notice, suggesting that further provocations will force traders exposed to trade-war risk assets like stocks and local Asia currency proxies to pare some exposure.
Unlike recent US-China spats, FX traders are taking less sanguine views than might have been expected, thinking the Houston news represents a significant escalation. Even although we are off the worst levels of the day, investors are hedging trade war bets through the yuan, and so far, they are putting up stiff resistance at USD/CNH 7. Hedging via the CNH is the easiest way to hedge trade war risk as well. It provides the most apparent trade war risk barometer for participants to gauge the market's trade war propensity.
- 7.10 Fear
- 7.00 Unsure
- 6.90 Who cares
But it sounds as though the US administration has supplicated an intellectual property-related issue to force China out of Houston. Indeed, we are moving from the battle of supply chain dominance to a confrontation for technological supremacy. And given the ascendency of technology, which has accelerated in a compressed format due to COVID-19 necessity.
As the next battle lines form and the main front is tech and IP, it could make tariff war look like a board game of "Axis and Allies." Remember, it's not about trade anymore, but perhaps it never was.
Adding to all this jumble is summertime trading, when the lack of liquidity can grossly exaggerate market moves. I am not suggesting this is happening, far from it, as the trade-war seas are relatively calm today. But if someone gets a bee under the bonnet, or hits the panic button, things can go sideways pretty quickly. If you are in at the right level, there should be no reason to cut, but it seems like a weaker "risk-on" positions continue to cut at the first unpleasant headline risk
Oil Traders, Like E-mini Traders, Are Relatively Complacent, So Far
Oil markets appear to be setting the stage for a push higher to test the current end of the near-term bookends. Not only are the Saudis confident that resuscitating oil supply will not hurt prices, traders are warming up to the same idea, supported by the incredulous amounts of stimulus that will send the oil market flying, once the epi curve flattens, or a vaccine is in hand, and it is all-systems-go.
Traders do not seem to care about the inventory build, or the lag in driving season demand. After all, why should they, with mobility-only tracking at 60 % in the US. It is well in the prices.
Given the market nonplussed reaction to this week's inventory build, I am thinking of flipping from the dark side (short) back to the sunny side (long) of things. Since early June, oil has been little more than a grid trade (buy the bottom sell the top of the range), but something positive will inevitably come along and shake crude oil trading out of its lethargy; my money is on the vaccine.
Forex
Some pretty upbeat commentary on the EU's coronavirus recovery fund, written by rating agency Standard & Poor's, came out earlier. Its release, around 11:00 London yesterday coincided with a rally in EUR/USD.
"We believe the political consensus in establishing the Fund, and endowing it with debt-raising capacity, is a major step forward for the euro area in particular and will support Europe's long-term economic and financial stability. In that respect, the EU Recovery Fund is positive for European sovereign credit quality and all member states' institutional effectiveness, especially those in the euro area," S&P said.
The euro is a more attractive reserve currency than it was just a few months ago, and the US COVID-19 story refuses to improve, suggesting growth divergence could come into play. Narrowing BTP spreads and some news commentary indicating the eurozone breakup risk could be a thing of the past and flat-out bullish for the euro.
Precious metals are ripping, and the Fed will be on hold until well past its average shelf life while engaging in unprecedented deficit financing and debt monetization. Stocks only go up in this environment, so it is hard not to be excited about short dollar trade.
But It takes Two To Tango (EUR And CNH)
But of course, traders are looking for cracks in the bearish USD narrative constantly looking to fade moves when the commentary gets too one-sided mind.
In order to complete the dollar lower thesis, USD/CNH needs to play ball, but it is not. It is much easier for the USD to fall when USD/Asia is joining the selling frenzy. CNH has been notably absent from the USD sell-off of late, and given the shifting tide on the currency narrative, I would have expected USD/CNH to be dipping below 6.95.
CNH traders are worried the China hawks have the president's ear or might even be in charge, indeed its a factor that will weigh on currency sentiment in the run-up to the US election.
There are several things to point toward a weaker US dollar deficits, interest rate differentials, and Federal Reserve actions are often cited. Granted, they have all seemingly mattered over time. But it is not entirely apparent what will matter and when it will matter. For me, it is all about growth. Trade and economic uncertainty surrounding China and relative growth rates with Europe are the two things to watch in the coming months.
A European deal is a significant but not the only condition for the euro to hit 1.20. For the euro to trade higher in the coming months, it is all about divergence and whether European growth outperforms the US. If a vaccine gets delivered, never underestimate the power of the US consumer.