Resumption of Trade Talks Causes Safe-Haven LiquidationPosted 09/05/2019 11:01AM CT |
U.S. dollar futures moved lower on Thursday morning for a third day in a row, down about 100 points off the weekly high. Tuesday’s “evening star” pattern is a reversal signal that indicates the top in the dollar may be in place. Remember, the USD is currently the reserve currency of the world, so when market tensions are high, money typically flows in to the dollar. With news of a resumption of U.S./China trade talks, we are seeing money flow out of the cash market and back into equities. Safe-haven currencies, like the yen and the Swiss franc, are selling off today as renewed optimism takes hold of economic sentiment. The British pound, and to a lesser degree, the euro, have caught a bid this week and moved to the upside from oversold levels.
Fundamentally speaking, pound bulls are optimistic about a “just get it done” attitude regarding the Brexit situation. The falling dollar and risk-off sentiment is aiding commodity currencies as well. It appears a bottom may be set in the pound. However, there is political uncertainty, and therefore trade risk, with the possibility of Boris Johnson being ousted as prime minister in the case of mid-October elections. But, the big topic in the global economy is clearly the trade war. President Xi is in no hurry to make a deal. He is hoping Trump will not win next year’s vote, allowing Xi to most likely close a better trade deal with a more docile US president. Furthermore, Xi has been rolling out punches of his own, as his patience with Trump’s stubbornness is dwindling. In short, I would not hold my breath on a deal coming out of this supposed meeting next month. In the case of another negotiation failure, safe-haven markets are likely to rally once more after selling off and finding support at current levels.