Fading Dollar weakness
The market is beginning to take risk in its stride once again. We can see that from benchmark equity indices retracing all time highs, particularly cross border asset baskets. Realised volatility within FX and fixed income is coming in below implied volatility and in turn reducing the cost of optionality. There remains significant tariff risk due to the expiry of key temporary trade war truces drawing ever nearer. The market was very welcoming therefore of news that talks between the US and China would commence in London yesterday.
The logic in markets is that there must be scope for a deal if both nations are willing to sit at the negotiating table. Meeting in St James’ Lancaster House, there was no information published yesterday regarding the progress (or lack thereof) made during the talks. The market would most likely be content with an outcome that sees the temporary Geneva trade war truce made permanent. Any improvement from this base case would see equities outperform and allow the Dollar to normalise.
With the Fed now in a blackout period prior to its next monetary policy meeting next week, markets will continue to be sensitive to any trade related headlines. Wednesday’s CPI publication will be the data highlight this week following a strong US non-farm payrolls report last week. Against this background, baring a weak CPI report or abandoned US/China trade talks, traders are likely to fade Dollar weakness and buy on dips so long as sanguine expectations continue to dominate flows.
Discussion and Analysis by Charles Porter
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