Skip to content

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

Trader thoughts - the long and short of it

Markets have remained unsettled by President Trump-related drama over the weekend after the US President turned his infamous ire towards the US Federal Reserve.

ig_trading_floor_2
Source: Bloomberg

In yet another public institution that has had its supposed independence violated by the President, Trump expressed his vexation about the Fed’s rate hiking policy, particularly as it relates to a strongly appreciating USD. Rising rates threatens to increase the US economy’s debt burden, and a stronger greenback is forcing the US to give up a competitive edge, according to President Trump, who stated his administration’s policy objectives could be undermined by the Fed’s actions.

Reactions in financial markets were widespread, as US Dollar related assets pinballed in line with the greenback. The US Dollar Index tumbled on the back of the news, reversing what was a short-term uptrend, to post a 0.7 per cent loss. Gold bounced consequent to this, managing to climb back above $US1230 an ounce, and saving itself from a close below the bottom of its downward trend channel. The yield on 10 Year US Treasuries spiked, as traders began to price in a risk premium on US debt thanks to the greater volatility. In some relevant currency pairs, the Japanese Yen returned to vogue as traders sought safe havens, falling from above 1.13 all the way back to 111.40 against the USD at time of writing; and the AUD/USD rebounded 0.7 per cent following two days of being trounced to currently trading back over the 0.7400 handle.

Some perspective on how this story may play-out – given how the USD and other related assets reacted to the news –  beyond the short term is required. The US President has no policy levers to directly influence the strength or weakness of the currency. Hence, when looked at on balance and stripping away the shock experienced by currency traders of another Presidential convention – that is, not commenting on Fed policy – has been thrown to the wind, there is little to suggest that the market will not continue to have its way with the greenback. Like many of the Trump-related bluster and volatility, expect markets to experience a degree of exposure therapy to future Fed and currency comments, stripping them of much of their impact.

Another point must be made regarding supposed competitive devaluations by central bankers and policymakers: an institution need not attempt outright currency depreciation as an end in and of itself to manipulate a currency. Instead, by sticking to proposed mandates – whatever they may uniquely be – central bankers and other boffins can target other failing metrics (inflation, most pertinently, but many others too) to adjust policy settings, with the knock-on being a weaker currency. Utilizing this approach, policymakers can achieve a more competitive currency without having to directly state its intentions of doing so, thus avoiding inflaming the hostilities associated with currency manipulation.

How the USD/CNY will trade with this as context becomes of heightened interest to market participants. Since the US-Sino trade war came into full effect, the CNY has experienced a massive fall, as traders exit Chinese financial markets amidst fears of financial stability and weaker Chinese growth. Policymakers have seemingly responded to these threats by progressively lowering the Chinese peg against the USD. As it stands, the USD/CNY is trading around the 6.75 mark, seemingly on its way to the 7.00 handle last seen in January 2017. Almost undoubtedly, if this were to occur, another barb may be forthcoming from President Trump, likely increasing Chinese financial volatility.

Turning attention away from currencies, geopolitics and President Trump, equity markets posted a lacklustre performance to close last week. Wall Street was effectively flat for the day, in what perhaps reflects the thus far lukewarm reporting season, with all three major indices trading less than 0.1 per cent lower. The FTSE 100 spent the European session trading very much in the same vein, while the DAX was thumped, falling just shy of 1 per cent, primarily due that index’s high weighting of trade-war exposed industries. Having experienced a respectable end to the week, owing in large part to the fact they were closed by the time US President Trump made his currency remarks, Asian markets look in a weak position to begin the week.

SPI futures are indicating a fall for the ASX200 at the open, currently trading -0.3% lower. This masked what was a very nice little run for the ASX to end last week, following a couple of days of mixed trading. The strength in the index doesn’t appear to be supported by a remarkably strong macro-environment anymore, nor a great deal of fundamental strength in corporate activity in the Australian economy. Perhaps we can point instead to the depreciation of the Australian Dollar and a fall in local discount rates as being the major contributors to the solid performance of the Australian share-market recently, which have increased the attractiveness of local equities and improved valuations overall. Considering these factors seem unlikely to abate, for now, maybe a bullish case for the ASX can be made on this basis, as the market eyes off new and very attainable 10-year highs.

This information has been prepared by IG, a trading name of IG Australia Pty Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

Find articles by writer