- Forex today was a platform for the safe havens to take up a bid and potentially in a lasting theme as emerging market and trade war risks look set to escalate into the medium term.
- The greenback was taking up its safe haven role again but was considerably weaker this time to the yen and CHF which is a concerning sign that things are considered more serious than at previous first glances.
“There is a remarkable dichotomy between chaos in EM markets and relative stability in the US and some other developed market assets and currencies,” as Greg Gibbs, Founder, Analyst, & PM at Amplifying Global FX Capital Pty Ltd an Australian financial services company explained, noting too that emerging market chaos has resumed and is spreading to some USD strength against majors.
The risk-off play started on the back of news yesterday that the IMF fund has agreed to revise the terms of its $50bn Argentina bailout package after the peso faced its biggest tumble in more than three years.
Investors are concerned over contagion. Emerging market countries with the highest levels of foreign cash flows are most likely to be hit by the contagion that has already spread to Lebanon, Columbia and South Africa, according to an Institute of Financial Research (IIF) report:
“The EM selloff has been large for Argentina and Turkey, which raises the risk of contagion to the broader EM complex”¦ Concentration risk exists in Lebanon, Colombia and South Africa, and could be a channel for contagion to the broader EM complex,”
the report said.
Elsewhere, just as the trade war dust was looking it might settle down a bit after progress with NAFTA this week, it was kicked up again on a headline that Trump plans to move on $200 billion in Chinese imports, Bloomberg reported, citing six people familiar with the matter. Tit-for-tat retaliation from the Chinese who had already threatened in July to impose duties on U.S. products worth more than $60 billion if the Trump administration followed through on threats to impose harsher tariffs, could stir up concerns for risks of higher inflation and a tighter Fed policy in 2019. Surprisingly, the dollar failed to pick up a bid on such implications though, and instead, investors bought into gold that was recovering towards the close of lay and such safe havens as the CHF and Yen – a tell-tail sign that markets are changing course.
Currency action
The greenback traded between 94.4690-94.9000, settling in the middle of the range. Treasury rates a shade lower amid flight-to-quality and after this week’s auctions were taken down. The euro was heavy but holding above the European session lows in New York despite positive data in the PCE, (the Fed’s preferred measure of underlying inflation trends, rose 0.2% (0.156%) m-o-m in July (Consensus:+0.2%,). The euro picked up from the lows at 1.1641, (lows reaction to weak EZ and Germa data weighed ), and made an NY session high of 1.1679 before settling back into a sideways drift and closing at 1.1670. EM concerns will likely keep a wider DE-US spread in play that favours the downside in EUR/USD. Sterling was ending the NY session at 1.3000 and down by 0.22%, well below the early European high of 1.3043 as investors deal with the ever-changing Brexit tides. Fowling Thursday more optimistic rhetoric, it appears that Barnier got an ear full from his pro-EU project colleagues as on Thursday, he changed his tune and said to prepare for a no-deal Brexit. There was a tug of war over the 1.30 handle in North America as a result. 1.2985 was the session and day’s low. However, the cross was ending the NY session at 0.8968, -0.25%, having traded within an NY range of between 0.8987-54; still feeling the brunt of at least some optimism left in the saga while bleeding on the blows taken from EUR/USD’s sell-off – the weak EZ and German data weighed as well. The yen was picking up a bid on the reports that Trump will back $200 bln China tariffs next week and Wall Street risk appetite sound assisting risk-off asset classes. USD/JPY traded between 111.40 and dropped to 110.87 by early Tokyo, having dipped below 111 the figure in late NY. As for the Aussie, it trades as a proxy for anything Chinese related, trade and has positively correlated connections to emerging market sentiment. AUD/USD dropped when AUD/JPY fell off a cliff, already weighed by the weakness in the ARS, ZAR and TRY. AUD/USD made a low of 0.7249 in NY losing the 0.73 handle in late London – a heavy looking copper price leaves a bearish tint of the commodity currency as well.
Key notes from US session:
Emerging Market Chaos returns – AmpGFX
Key events ahead:
Key risk evets ahead, Chinese manufacturing PMI / EZ CPI – TDS
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