Dollar trading mixed as global uncertainty mounts
|Worries on US/global growth dominated FX trading yesterday, even as there was little concrete news to ‘explain' growing investor uncertainty. Investors also weren't convinced that the truce in the US-China trade dispute will yield a positive outcome. The fattening US yield curve was seen as a harbinger of more difficult economic times ahead. Initially, USD weakness prevailed. Later an acceleration of US equity selling triggered a classic FX risk-off trade, with USD/JPY, EUR/USD and EUR/JPY all trending south. There were no (US) eco data to ‘support' this risk-off trade. EUR/USD closed the session at 1.1343. USD/JPY finished the day at 112.77 (from 113.66). Overnight, sentiment in Asia remains risk-off, but losses are more modest compared to the 3%+ sell-off in the US. The China Caixin PMI's unexpectedly rebounded, but it is far from sure they will be able to remove uncertainty in a sustainable way. Chinese officials held a constructive tone on US-trade relations after last weekend's meeting. Australia Q3 growth unexpectedly eased to 0.3% Q/Q and 2.8% Y/Y (0.6% Q/Q expected). The release, in combination with the risk-off trade, broke recent AUD-constructive momentum, pushing AUD/USD below the 0.73 handle. EUR/USD is holding a cautious negative bias (1.1320 area). USD/JPY regains a few ticks (113.05 area). US markets are closed today to honor President Bush. In EMU, the final PMI's will be published. Global sentiment will remain the main driver. At least today, the flattening US yield curve won't stoke further unrest. Still, the context of at the same time global uncertainty and declining US yields (and a flattening yield curve) is ambiguous for EUR/USD. The jury is still out, but it is not evident to see a sustained EUR/USD rebound in case of a profound global risk-off context. In a daily perspective we change our ST bias to neutral. We still assume the 1.12/1.15 trading range to hold. The day-to-day momentum looks slightly more USD constructive.
Sterling gained temporary ground yesterday on headlines that the UK could unilaterally revoke the exit of the EU. Later in the session, the government lost votes in Parliament forcing the government to publish a legal advice on Brexit. Parliament will also get more initiative in case of May's deal being rejected next week. Chance of the Brexit dealing being approved are low, but at the same time, the Parliament's actions might mitigate chance of a hard brexit. However, for now, political visibility remains too low to expect a positive/orderly outcome. We remain cautious on sterling long exposure.
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