Central banks to take centre stage
It was a busy week on the geopolitical side as the G-7 meeting didn’t have a very happy ending, while the world eyed the upcoming meeting between Donald Trump and Kim Jung-Un, which will take place on Tuesday morning in Singapore. Market participants do not seem concerned about these two subjects. On Monday morning, the greenback eased slightly against most of its peers as the dollar index returned to 93.42, down 0.12%. After tumbling on the 1.1854 resistance on Friday, the single currency erased Friday’s losses partially and tested 1.1821. Safe haven currencies lost ground as buyers didn’t show up despite unstable geopolitical situation, which suggests that the investors are definitely not too worried about it.
Nevertheless, developments in the option market suggests that there is certain nervousness out there. This just a nothing to do with Trump. Indeed, it is going to be a busy week for central banks as the ECB, the Fed and the BoJ are holding their rate decision meeting. The 1-week implied volatility in EUR/USD jumped to 9.95%, from 7.57% last Wednesday. The downward move in the 1-week risk reversal measure – from to 0.21% to -0.16% – shows that investors are rather buying protection against a weaker currency pair. On the contrary, both the implied volatility and risk reversal measure in USD/JPY were little changed, suggesting that the market will focus its attention on the ECB and FOMC meeting. We expect that investors will pay less attention to the Trump/Kim Jong-Un meeting, and developments related to trade tariffs, and will focus on Powell and Draghi speeches.
Trump pounds MXN and CAD
US President Donald Trump’s verbal bombardment of Canadian Premier Justin Trudeau after the weekend’s G7 summit threatens the ongoing renegotiation of the North American Free Trade Agreement (NAFTA) considerably. We would remain short on MXN and CAD, as Trump’s blasts are unlikely to promote a deal.
Meanwhile, Trump is working on an de-nuclearisation deal for North Korea, which is a pawn in US-China relations. North Korea, as a puppet of China, will signal what its master wants and will do. Failure to deliver a positive result will likely trigger a Trump backlash of tariffs against China. A positive result could see Trump deescalated his China bashing (already he has waived restrictions on ZTE, a Chinese telecommunications equipment firm). Next week the US will likely release the final list of $50 billion in Chinese import tariffs – their shape and extent will depend on how the Trump-Kim summit goes.
As widely reported, Trump blew up the G7 by disavowing the communique after it was released. In a tweet Saturday Trump referred to Trudeau as “very dishonest and weak.” Trump advisor Peter Navarro piled on the Canadian PM, telling Fox news “there is a special place in hell for any leader that engages in bad faith diplomacy with Trump.”