A mild risk-off tone dominated equity trade in Asian and early European sessions but the buck did not get much love from traders as it lost ground across the board and was half a percent lower against the euro.

In equity-land traders are wary of the brewing US-China tensions with markets awaiting a response from the Trump administration regarding the Hong Kong issue. If Trump decides to enact a broad range of sanctions against China in response to CCPs moves to limit political autonomy in Hong Kong equities could see a much steeper selloff as the day proceeds.

As many analysts have pointed out the only thing that seems to derail this relentlessly bullish tape is the threat of further trade tensions between the world's two biggest economies and if the Hong Kong dispute serves as the trigger point for much more confrontational relations the markets are likely to retreat as a result.

One interesting point of today's price action is the clear divergence in risk between equities and FX. While indices trade lower, the greenback is seeing no evidence of safe harbor bid. In fact, EURUSD is at fresh multi-week highs as it runs through the 1.1100 figure in today's trade and looks challenge the top of the recent range at 1.1200.

One of the key reasons for the euro's better performance is the growing evidence that the region will now move towards debt mutualization which will allow for much greater fiscal flexibility for the region's southern block economies. Assuming the Franco-German proposal of a 750B euro fund for pandemic relief is approved, it should have a positive impact on compressing bond yields in the region. That, in turn, should create a better risk appetite environment for EU equities.

To be sure, many risks for the region remain and EU policymakers are notorious for snatching defeat from the jaws of victory, but if the current level of coordination could persist, one of the more surprising aspects of such a scenario could be the fact that EU recovery could be better than the US recovery – although that is certainly not the conventional view at the moment. Still, EURUSD recent outperformance could be a sign that the currency market is pricing in a different outcome than equities and the divergence is certainly worth watching.

Author

Boris Schlossberg

BKTraders and Prop Traders Edge

Boris Schlossberg was key speaker at the FXstreet.com International Traders Conferences 2010. Mr. Boris Schlossberg is a leading foreign exchange expert with more than 20 years of financial market experience.

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