Monday, July 1, 2019

The Dollar is king at the start of the week after Trump and Xi agreed on a trade truce

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

The Dollar kicks off the week on positive footing as US and China agreed to restart negotiations after the G-20 meeting over the weekend. Safe havens are under pressure as the two superpowers declared a trade truce and an indefinite postponement of fresh tariffs on each other’s exports. The Yen and Gold are driving lower and a risk-on bias is developing as investors are growing more optimistic after Presidents Trump and Xi stroke a conciliatory tone. Equity futures are pointing higher as well while Oil pushes to the upside.

As it seems, China and the US both had a lot to lose from an escalation of their trade dispute at this stage and the outcome of the Osaka meeting was a positive one. The two sides decided to restart talking to each other in an attempt to find some common ground and, despite this looking like a far-fetched proposition right now, the positive takeaway was that they would not proceed with fresh levies in the foreseeable future. Of course, this allows for market participants to grow a bit more risk-prone at the start of the week, even though the financial toll exerted by the tariffs already in place will continue to weigh on the global trade landscape.

So where does this leave us? The Dollar is gaining this morning tracking Treasury yields to the upside, with the likes of the Japanese Yen, Swiss Franc and Gold losing ground. Obviously, the G-20 outcome could have been a lot worse - with Trump and Xi walking away with no truce agreed for example - and this is the reason why safe havens are losing their appeal at the start of the week. This would suggest that the Dollar would see some interim strength but as we start drawing closer to the Fed meeting later this month, could speculation surrounding their intention to cut rates again put the US currency under stress?

It remains to be seen but in the meantime , the Dollar is king and one could even suppose that the easing of tensions between US and China might lead the Fed to think twice about pulling the trigger in July, which could further enhance the developing bullish bias for the US currency. Fresh US data between now and the next FOMC meeting will be key in shaping expectations over what the US central bank will decide at the end of the month and the ISM Non-manufacturing report on Wednesday will help in shedding more light on the domestic economy’s performance. Dollar/Yen is trending higher and the next areas of interest are found around the 108.70 and 109 marks.

Elsewhere, the Euro is pointing lower as discussions over who will take over the top jobs in Europe seem to be going nowhere. Traders realize that there’s a lot of internal struggle among the European leaders and this does not bode well for the Single currency that is already trading below 1.1350 on the back of the Dollar’s advance. A positive German retail sales reading tomorrow and steady PMI reports from the Euro area on Wednesday may not be enough to keep the Euro supported and a revisit of the 1.13 and 1.1250 levels may be in the cards soon.

Gold is proceeding lower since the open of the Asian markets in response to the trace truce between the US and China. This comes on the back of increased demand for the Dollar as Treasury yields are proceeding higher but, as we mentioned above, traders now need to assess whether this turn of events will keep the Fed at bay for now. The US central bank has noted the slowdown in the domestic economy but have also cited global trade uncertainty among the reasons why a rate cut may be appropriate soon. But as the mood lightens in regards to the latter front, the US policymakers may prefer to delay any moves, which explains why Gold is pushing lower right now. Further extension to the downside points towards the $1,365 area, which will be a crucial test for the yellow metal for the medium term.

Finally, equities are driving higher in Asia this morning with investors breathing a sigh of relief as a breakdown in trade relations at the highest level would have been a disaster. Nevertheless, the fact that Trump and Xi agreed on a truce for now allows for optimism to grow and explains why equity futures on either side of the Atlantic are also suggesting a strongly positive opening bell. As the week progresses we will have the opportunity to receive fresh data from Europe and the US and this will further allow traders to assess the way forward for equities.

MARKET EVENTS TO WATCH

  • German Unemployment Change - 11.55am
  • UK Mortgage Approvals - 12.30pm
  • US ISM Manufacturing - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research