Yen breaking a long-term $ downtrend is the story for many today. It’s at odds with other mixed signals like copper down 15% in 3 days or oil dropping 5%. The commodity collapse and JPY weakness don’t mix logically, yet they taste good for those looking for risk today.
Some argue how you mix a drink makes all the difference to its taste. Just ask James Bond, “shaken but not stirred” about it. Others will say that if the ingredients are all there, the palate will sense it and connect.
This matters for markets today as we may all be driven to drink given the hot-then-cold fears over trade, China, geopolitics and such. Equity markets bounced in Asia and followed in Europe.
The fear yesterday was replaced by greed today, but we sip from the same drink. The mix tastes different. Chinese yuan (USD/CNY) weakness has been connected to Japanese yen (USD/JPY) weakness but here is the rub – that drives risk-on signals – as JPY is the carry trade anchor.
Some of this is just about ZTE (ZTCOF) and the deal and U.S./China talks being on and off. The geopolitical stories beyond China/U.S. trade revolved around NATO squabbles and Trump along with the more details UK PM Theresa May real Brexit plans with less financial links.
Also, in play is the central bank responses to trade war fears.
The Bank of Canada hiked 25bps to 1.5% Wednesday and didn’t sound dovish despite the trade fear while the Bank of Korea today was on hold at 1.5% but with a hawkish dissenter.
The reaction function of central bankers to the present mix of inflation risks, geopolitical headwinds and better growth all matter – leaving last night’s data interesting but not sufficient to break the mold of risk-on and risk-off trading. The mix is the same, the bartender different.
This puts U.S. rates back into the driver’s seat with CPI the focus and a 30-year Treasury sale thrown in for fun.
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