A typical low volume Summer trading session turned vibrant after US President Trump considered the time right to lash out against China, Europe and the Fed. He labelled China and Europe FX manipulators while criticizing the Fed for hiking rates. Trump argues that he can use some accommodation during his crusade on trade. His comments dealt a significant blow to the US dollar while lifting US Treasuries. The trade-weighted greenback declined back to 95.50 neckline of a previous triple bottom. EUR/USD cruised north of 1.15, currently retaking the key 1.1510 mark which was lost on August 10. A sustained rebreak would turn the technical picture neutral again. USD/JPY trades currently near 110 for the first time since the end of June. US yields declined by 2.1 bps (2-yr) to 4.4 bps (5-yr) with the belly of the curve outperforming the wings. On other subjects, Trump expects another meeting with North Korean Leader Kim Jung-Un while downplaying current low levels talks between the US and China. Voting FOMC member Atlanta Fed Bostic hit the wires yesterday and also slightly helped the dollar and US yields lower. He argued in favour of a total of three rate hikes in 2018. He labelled the trade war as the biggest downside risk to the US economy while sending a warning about the flattening US yield curve.
All was quiet on the European front yesterday. German yield changes varied between +0.7 bps (2-yr) and -0.5 bps. 10-yr yield spread changes vs Germany were broadly unchanged with Italy (-10 bps), Spain and Portugal (-6 bps) outperforming. Moody’s extended its review for downgrade of the Italian Baa2 rating to October. A harbinger for actual action? A downgrade would bring the Italian rating only one notch above junk territory and at lowest mark of the big three rating agencies (S&P and Fitch hold BBB). EUR/GBP ended the day broadly unchanged near 0.8975.
The moves initiated by US President Trump meet with follow-up action on the FX market during Asian trading this morning. The dollar cedes somewhat more ground. The US Note future loses some of yesterday’s gains though. Asian stock markets are mixed with China outperforming (+1.5%). Today’s empty eco calendar suggests that investors will further digest Trump’s comments. They’ll probably contrast with the outcome of tomorrow’s FOMC Minutes and Friday’s speech by Fed Chair Powell who will both probably pave the way for a September rate hike. From a technical point of view, we look out whether the trade-weighted dollar loses 95.50 again and whether EUR/USD confirms the rebreak of 1.1510. The German and US 10-yr yields are close to 0.3% and 2.8% support levels, which we expect to hold. Sterling will probably remain in the defensive, awaiting the outcome of talks between Brexit minister Raab and EU chief negotiator Barnier. EUR/GBP 0.9031 is key resistance.
US President Trump said in an interview yesterday he still believes China and the EU are manipulating their currency to make up for having to pay tariffs on imports imposed by the US. In addition, he is not “thrilled” with the Fed for raising interest rates, saying the US central bank should do more to help him to boost the economy.
After French oil major Total announced it would halt imports of Iranian oil to safeguard its operations in the US, China said it opposes unilateral sanctions and defended its commercial ties with Iran. China, who has cut imports of US crude due to the trade war, will continue its purchases in Iran and thus bypassing US sanctions.
Jens Weidman, Bundesbank president and frontrunner to succeed Mario Draghi as ECB president next year, said despite central banks having price stability as single objective, they must be willing to act if needed to prevent financial imbalances. “In the long term, price stability and financial stability can complement each other”.