Return to Risk-Aversion as China Deal Scrutinized
NOVEMBER 08, 2019
The U.S. Dollar is in mostly favorable ranges as an overnight reaction to the China-U.S. agreement faded in excitement, which caused stock exchanges in Asia and Europe to dwindle.
Statements by different economic advisers from the White House varying in their degree of success over talks are causing confusion and investors wonder if Phase One will indeed be implemented as described. Additionally, the evidence is there that the global economy is being affected and China directly as well with imports and exports contracting for another month.
Overall, market sentiment has gone negative as there is exhaustion over the lack of clarity regarding a potential signed agreement that can ease pressures on businesses. Decision-making is blurry in the face of further uncertainty although officials say there is anxiety over getting something done. As long as this dynamic continues, expect FX flows to be range bound and dollar to recuperate strength any time news go sour economically.
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The Euro is on a decline of 1.1% since the beginning of the month based on just the uncertainty of markets, especially since it is understood now that the German economy in particular has suffered from the slowdown worldwide based on various factors. Industrial Production has been falling all year and investors wonder when there will be a fiscal commitment to alleviate the lack of productivity.
A sizable stimulus package was proposed in the German Bundestag yet failed to pass through as politicians once again stood by the idea of maintaining a surplus and a tightened purse no matter what. Even the International Monetary Fund has asked the Netherlands along with Germany to use their good situation financially and simply spend. Data is stabilizing, but the central bank is running out of tools to help, especially if these slow times turn recessionary.
The Swedish Krona had a strong move overnight as traders placed bets on the central bank, Riksbank, raising interest rates next week, which would make it an exception amongst industrialized nations who are looking for ways to decrease borrowing costs instead. Odds of a hike improved to 76.8% this week after news of a potential trade deal between China and the U.S. sparked volatility as well as risk-appetite.
The decision is coming on December 19th, but key inflation figures out next week will determine if a hike will occur. Swedish Repo Interest Rate, the overnight finance rate, is currently negative at (-0.25%). The royal Bank of Canada is in the only other advanced economy willing to not cut into interest rates to facilitate financial easing.