Risk appetite is on at the start of the week with currencies and equities buoyed by the signs of progress in the US-China trade talks. Trump's decision to declare a state of emergency didn't seem to bother investors too much as they've grown accustomed to the US President's radical character and markets' focus lies squarely on any further progress on the trade front this week. The Dollar traded in the red over the past 2 sessions after the dismal US retail sales data on Thursday, yet another indication that the US economy is naturally slowing down. Gold and Oil are both enjoying broad gains and equity futures in Europe and the US are pointing higher this morning, with the US markets closed for Washington's birthday.
Against a bullish geopolitical backdrop, higher beta currencies are taking advantage of Dollar's weakness after the disappointing consumer spending figures last week. Regarding trade, the most recent news out of the talks between the US and China suggests that the two sides have come closer to each other and an extension to the March 1st deadline for increased tariffs appears likely. Will that help the US currency though? It depends. A trade agreement, or at least an improvement in relations, will reduce the risk-off demand for the Yen and Dollar/Yen should retest the 111 barrier again. But also be wary of the FOMC minutes, which we will discuss later in the week.
However, in regards to the European and commodity currencies, good trade news means more gains and further pressure on the Dollar. The Euro has been markedly resilient to the bearish figures coming from the Eurozone over the recent period and even though it has dipped below 1.13 a few times, the support below this area is evident. In our view, this is due to markets participants' consensus that the Dollar has little more room to grow, especially with the Fed staying put in regards to its interest rates' policy.
Even though the German 10-year yields have dropped significantly over the past period, tracking Eurozone performance and growth metrics lower, the US rates are stuck given that the Fed has no plans to raise rates any time soon. As such, the broadening of the spread between the German and US yields needs to be reversed at some point and this is why we see the Euro bouncing off its yearly lows. Will this be translated into immediate gains for the shared currency? Maybe not in the short term, as the ZEW Survey due Tuesday may signal continued weakness in the Eurozone, but in the medium term we expect the Euro to gain and the 1.13 area may be a good area to start building a bullish position.
Gold and Oil finished last week strong, supported by the decline in the Dollar and a disruption in production given the tensions in Venezuela. The yellow metal ended its consolidation between $1,305 and $1,315 last week and is now testing its yearly highs at $1,325 as the Dollar takes a backseat. However, we need to be aware that there are two conflicting catalysts in play here: the apparent easing of trade tensions threatens to push Gold lower while continued weakness from Dollar's side would provide an opposite lift. As such, caution is advised until we get a clear indication of which factor will outplay the other. Oil is making a run above the $55 resistance and as long as prices hold above this level we're looking for Oil to hit $58 in the short term.
Equities saw a strong finish to last week's action with Europe and the US closing between 1% and 2% higher. Trade-related optimism and expectations for a steady Fed policy in the foreseeable future is helping investors build a bullish case. We expect this bias to remain in place throughout the week provided that the trade talks in D.C. continue on the same amicable tone. At the same time, the release of the FOMC minutes on Wednesday should clarify that the Fed plans to keep rates unchanged over the coming months, which should be another bullish factor that will help equities proceed to new highs.
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Written by Konstantinos Anthis, Head of Research