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Euro Is Risk Barometer Today for Worries on China, Japan, UK

09/14/2018 10:32 am EST

Focus: FOREX

Robert Savage

Partner & CEO, CCTrack Solutions

The risk mood and the weekend trading rules dominate Friday. The decisions made Thursday to push forward with normalization in Europe is the stand out and the euro is the new barometer to measure any changes more than rates or EM, writes Bob Savage Friday.

The trust but verify mood to markets is notable today. China U.S. trade talks restarting set the mood over the last 48 hours to embrace risk and search for value trades. The Turkish Central Bank hiking rates to 24% stabilized Turkish lira (TRY) further adding to the sense that we are in the reversion cycle over the fear one for emerging markets.

Throw in that the ECB sounded hawkish and upbeat enough to keep the U.S. dollar (USD) weaker against the euro (EUR) and you have the makings of a risk-rebound.

The decisions from Trump, Draghi and Carney Thursday make investors have to decide today whether to chase the recovery or not. There is clear evidence that some investors are buying protection here, ready to take advantage of this modest calm. Witness the 20%-26% November CBOE S&P Volatility Index (VIX) spread put on yesterday.

There are good reasons to doubt.

1) China. The biggest story overnight is about China and its slowdown with retail sales and industrial production slightly better but investment slowing despite government efforts to stimulate.

2) Japan. The second story is from Abe on the BOJ. The Japanese PM noted that “he doesn’t think that easing should go on forever,” although Abe did stress that “it is up to the BOJ to decide when to end easy policy.” Japan and the U.S. are aiming for trade talks in late September.

3) UK. BOE Carney warns that a bad Brexit will be as bad as 2008 for UK economy. On the day – these stories didn’t matter – the risk mood and the weekend trading rules dominated. The decisions made Thursday to push forward with normalization in Europe is the stand out and the EUR is the new barometer to measure any changes more than rates or EM.

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