US Dollar Up, Aussie Dollar Down with Trade Wars in the Spotlight

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TALKING POINTS – US DOLLAR, NAFTA, TRADE WAR, AUSTRALIAN DOLLAR, CHINA

US Dollar rebounds as markets digest news of NAFTA breakthrough
Risk appetite cools as Trump talks down China trade deal prospects
US trade, consumer confidence figures may reveal trade war impact

The US Dollar rebounded in Asia Pacific trade, rising against all of its major counterparts. The move follows the prior day’s downswing after signs of a breakthrough in NAFTA renegotiation efforts stocked risk appetite, sapping some of the haven-linked support buoying the greenback through preceding uncertainty.

Within that context, it might be tempting to see subsequent gains as merely corrective. That seems unlikely however. The Fed continues to be the most hawkish of the major central banks, which ought to make the greenback attractive relative to alternatives when risk appetite firms.

If the push to reform NAFTA succeeds and the accord survives, a major would-be risk to global growth will have been neutralized. All else being equal, that is likely to give the FOMC greater scope for interest rate hikes. Indeed, the priced-in 2019 tightening path implied in Fed Funds futures steepened yesterday.

With that in mind, it may well prove to be the case that the greenback’s initial weakness after the US and Mexico reportedly struck a deal that was temporary, while the follow-through will be had on the upside. Still, it is important to keep in mind that a bit of worrying news probably helped USD as well.

TRUMP TALKS DOWN CHINA TRADE TALKS

As conflict on one front in the US trade war de-escalated, tensions grew on another as President Donald Trump said now is not the right time for negotiations with China. Meanwhile, the HKMA felt compelled to step in to defend the USD/HKD peg once again, rekindling worries about its viability.

The Australian Dollar tellingly underperformed. The currency often serves as proxy for China-linked bets because the East Asian giant is its home country’s top export market. The similarly sensitive New Zealand Dollar declined in tandem.

US DATA MAY REVEAL TRADE WAR IMPACT

Looking ahead, a lackluster offering on the European calendar puts US trade balance and consumer confidence data in the spotlight. The outcomes may help illuminate the impact of the protectionist turn in US trade policy, hinting at how it might influence broader growth trends and thereby Fed policy.

See our study on the history of trade wars to learn how it might influence financial markets!