Not another headline
Markets have either grown complacent or are reading beyond Trump’s headline statements. Over the past week markets have been presented with the challenge of fresh tariffs on China with retaliatory tariffs on the US also due to come into force in just under a week. In addition to that they have the geopolitical risk of Trump’s off the shelf solution for Palestine. It is easy to see how if believed in or acted upon the latter risk alone would cause a significant flight to safety. So, have markets grown bored of headlines from the White House or are they simply making big bets about Trump’s longer term plans?
The FX market is certainly reflecting very little concern with the prospect of a Sino-US trade war. AUD/USD is the key barometer of risk in the absence of an open market in USD/CNY. Looking at the Aussie Dollar in addition to other key regional currencies including NZD reveals little to no residual concern for a trade war as had begun to be priced in on Monday. Despite talks being called off between Presidents Trump and Xi Jinping, the Dollar was still seen to be offered today in a decisively risk on move. The avoidance of a trade war with Mexico and Canada for now does go a long way to reduce the risk to global growth but to write off the risk of Chinese tariffs altogether may be premature.
It is not yet clear what Trump’s true intention with respect to Israel and Palestine is. Based upon today’s market reaction we can only conclude traders believe Trump’s off the cuff solution for a one state solution is little more than thinking out loud. If the US was to make moves to act upon such comments such as introducing a military presence to the area the FX story would be likely far bleaker. It is therefore likely not complacency. However, such pricing could exacerbate the reversion risks of a stronger Dollar in coming sessions.
Discussion and Analysis by Charles Porter
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