U.S. equities capped their worst week since before Christmas as investors fretted over the outlook for continued to disruption to global trade and supply chains as a result of ' President’ Trump’s threats of ever-higher tariffs
The threat of new tariffs shifted the market odds of a September Fed cut to 100% from 60% putting risk asset back in the central bank policy pressure cooker yet again.
The July U.S. employment report was roughly in line with median estimates and left monetary policy expectations mostly intact. However, given the U.S. economy where it is, and the volatility of U.S. payrolls, the most critical data point in the U.S. is Monday's non-manufacturing ISM.
After a week of central bank policy head-fake and trade war misdirection, the markets are pausing for thought this morning to plot their next course of direction.
But there no rest for the weary as markets central banks patience and fatigue will be put to the test again this week as policy markets in India, Philippines, New Zealand, Thailand and Australia get set to release their version of a policy dove.
Oil markets
Oil prices will remain a reaction function to trade war sentiment as its increasingly clear that this is the dominant factor shaping opinion on oil prices after the latest tariff escalation. Fashioning views on the outcome or duration of the U.S.-China trade dispute is more guesswork than science so that market participants will be held hostage by headline risk. If both sides are digging in things could turn negative in a hurry, and it's unlikely OPEC supply discipline will be adequate to counterbalance the trade induced risks to global demand.
The Malaysian Ringgit
Traders exited long MYR positions after the hawkish Fed cut and then outflows escalated proportionally to the threat of tariffs escalation. Near term, caution reigns supreme in Asia FX which saw an aggressive upswing in USD demand.
USD/CNH sees the most prominent move after 'Trump's tweet with aggressive buying of topside USD risk in spot and across the forward curve. The sizable right-hand side USD volumes are going through confirming that the trade escalation blindsided traders as everyone is looking to short CNH. Focus is also on China proxies and the favored short currency expression if via the JPY. (Short SGD-JPY)
The bottom line is that the market was far too complacent expecting the fragile state of trade war neutrality to extend as traders had significantly pared down long USDCNH positions and now find themselves cramming for the topside position as the markets are back knocking on "sevens" door" ( USDCNH 7.0)
Yuan
'It's up the Pboc to act as the gatekeeper on this one as the theoretical value of USD-RMB under this latest tariff escalation is around 7.50-65 if China were to allow the exchange rate along to do the heavy lifting without any other offsetting policies. But for a plethora of reason trader and analysts, I finally agree on something and that a test of USD/CNH 7.50 is unlikely to occur.
First, 'China's counter-cyclical FX policy would likely be in place to prevent messy movement and trigger capital outflows. Second, the escalation in tariffs all but assures a tremendous policy response from the Fed. Third, the Pboc 'doesn't want to escalate trade war into the realm of a full out currency war with the USD.