Mardi Gras Isn't Enough to Stoke Market Risk-On Moods Today

02/13/2018 3:36 am EST

Focus: CURRENCIES

Robert Savage

Partner & CEO, CCTrack Solutions

The Japanese yen is the barometer for risk again today amid worries about Trump’s trade tax, BOE rate hike talks and the British Navy’s mission in the South China Sea, writes Bob Savage, CEO of Track Research Tuesday.

Lucky 13 and the Mardi Gras celebrations may not be enough to stoke the market risk-on moods again today.

There is plenty of hype about this week being different than last if only because there is less panic trading and some better preparedness to trade a market full of larger volatility – i.e. order books are in play as many leave for a break from the madness.

The problem is that safe-havens aren’t yet responding. The Japanese yen (JPY/USD) gain to near a 2-year high today makes this point. Safe-havens should not be in demand and yet they are – witness also the bond buying in Europe and the bid to gold.

This makes the overnight rally extension in equities suspect and so the turn in U.S. futures follows. The drivers of the U.S. dollar (USD/EUR) weakness may not be just about equities – as two stories overnight stand out:

1. Trump suggesting a "reciprocal tax" on some U.S. trading partners surprised the markets and some of his team. “We are going to charge countries outside of our country—countries that take advantage of the United States,” Trump said. “Some of them are so-called allies, but they’re not allies on trade.”

2. The UK CPI was sufficient to make the risk of a May rate hike higher and that supports the British pound (GBP/EUR). Odds went from 72% to 75% today. The BOE warned it plans to be faster in its rate hike path and this added to it. Of course, rate hikes and forex haven’t been a good guide for trading – as the USD hasn’t been responding to the FOMC actions, begging the question about causality.

Perhaps the other the UK news about the UK sending its navy mission through the South China Sea sets up for a larger geopolitical clash with China and that has some role – currency strength isn’t going to help the UK with its trade deficits.

This all leaves markets a bit wary and nervous with the JPY as the barometer for risk again with 107.31 the Sept. 2017 lows back in play and then 106.50 the downtrend bear channel.

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