Trump sends markets to risk-offBy Arnaud Masset
Expectations are of a tension-filled tariff tussle at this weekend’s G7 meeting in Canada. US President Donald Trump has managed to make enemies of most of the USA’s allies by slapping duties on their American exports. This unhappy scenario sent global investors reallocating their portfolios toward less risky assets. The move was similar in the FX, with the USD extending gains against most of its peers, with the exception of the Japanese yen (up 0.25%) and the Swiss franc (range bound). The Eurostoxx 600 gave up 0.65%, the DAX slid 1.40%, while the SMI fell 0.85%. EUR/USD was unable to break the 1.1854 resistance to the upside and eased below 1.1770. After tumbling on its 200-day moving average, USD/JPY fell to 109.35. The currency pair is heading towards its 50-day moving average of 108.84. A break would open the door towards 108.11 (low from 29 May).
Emerging markets are bearing the brunt of the sell-off. The South African rand lost another 2% this morning and reached its lowest against the greenback since December 2017. The Brazilian real gave up 1.44% yesterday as USD/BRL hit 3.9657. INR, KRW, PHP and IDR fell 0.70%, 0.65%, 0.58% and 0.45% against the greenback, respectively.
Strategic long EUR/USDBy Peter Rosenstreich
The European Central Bank meeting next Thursday will indicate the end of asset purchases. Council members say that if inflation remains stable, bond buying should be taper. We think that markets are focused on the pure economic data. However, the ECB decision is more practical than fundamental, because Quantitative Easing has expanded its balance sheet to destabilizing heights. ‘Moral hazard’ has increased, as highlighted by the recent Italian political chaos. The ECB wants to avoid owning more than one-third of any nation’s sovereign debt, which after years of buying is coming dangerously close. Stealth ‘debt mutualisation’ in the Eurozone is really happening. Moreover, the ECB wants to reclaim its tools. With a bloated balance sheet and negative rates, the bank has few policy options, should Europe hit a shock. Just as the US Federal Reserve in 2013 saw normalization not just as a function of economic data, so now does the ECB.
Ending QE does not necessary mean higher interest rates, which are expected to come 6-8 months after ECB completely tapers. We remain constructive on EUR/USD as the US rate hike cycle is nearing the end while ECB is nearing the start. We see the current 1.1765 as a good position to reload strategic longs.