Collinson FX: Collinson FX: September 4, 2018 - A quiet weekend

Lunacy slides to leeward of the Pentecost - Hamilton Island Race Week - Day 6 © Richard Gladwell

Collinson FX: September 4, 2018 - A quiet weekend

The US markets were quiet during the long Labor Day weekend. The global trade overshadowed the risk-on, record equity levels. The US/Canada leg of the ex-NAFTA trade agreement stumbled on Friday, after an off the record statement by Trump was released. Trump was reported to have said, ” it’s going to be so insulting they’re not going to be able to make a deal”, which did not assist closure. The Canadians have little choice and will cave. The safety, that is the Big Dollar, was the beneficiary. The EUR fell to 1.1620, while the GBP slipped back to 1.2870, reversing recent gains.

The RBA will leave rates unchanged again, but may address the recent weakness in the currency, following the disruption triggered by an out of cycle rate rise by Westpac. This triggered a run on the AUD, which fell below 0.7200, as markets consider the massive debt levels and the consequences of a rate rise on debt servicing. The RBA statement may offer some reassurances, but it could possibly outline the risks, which could further destabilise the currency. The NZD looks to be testing 0.6600, on the downside, undermined by last weeks dreadful business confidence number. These commodity currencies remain extremely vulnerable to global trade wars.

The US has promised a further $200 Billion of annual tariffs on the Chinese and Trump has also suggested a US withdrawal from the WTO. These variables offer only uncertainty to trade exposed countries and currencies.

Miss Scarlett - Hamilton Island Race Week - Day 5 - photo © Richard Gladwell

Trade has been the predominant issue in global markets over the last week. The US and Mexico have reached a Bi-Lateral trade agreement, ending months of negotiations, leaving the door open for Canada. NAFTA is over and it remains to be seen if Canada can quit the political gamesmanship and succumb. China remains the only other major trading block that has not come to the party. Next week could see the imposition of US$200 Billion in tariffs levied on China, if they do not agree, but the pressure to cave is immense.

The other major threat to global markets has been the emerging markets debt and currency crises. Argentina has experienced a major currency collapse and looks to the IMF for a bailout, while Turkey and Brazil remain in dire straights. Extreme levels of debt are manifesting themselves in exotic currencies but they are impacting mainstream currencies. Most Western economies are over indebted but the capacity to service the debt is the question. Extremely loose monetary policy has allowed debt servicing through depressed interest rates. Global growth and inflationary pressures are putting pressure on rates and the Fed has been steadily raising rates and providing incentive for Dollar investment. The cost of money is rising and highly indebted nations, like Australia, are beginning to feel the effects. Local Bank, Westpac, raised rates in an ‘out of cycle’ move. This moves is the ‘canary in the mineshaft’ and resulted in the currency collapsing below 0.7200.

The RBA will hold rates but will have rhetorical warnings of the threats posed by the high level indebtedness. They will quietly welcome the lower currency as a heavily trade dependent nation. The NZ dollar was equally undesirable, but theirs is a crises in business confidence, directly emanating from anti-business policy. The NZD has fallen to 0.6600. The Big Dollar remains in the ascendency and will only benefit emerging market crises, as a safe haven destination.

Team Hollywood lines up for Mark 1 - Hamilton Island Race Week - Day 5 - photo © Richard Gladwell

Global markets are consumed with the trade narrative while local markets reflect local issues. US equity markets have surged to record levels as the international trade environment improves. The US and Mexico have joined the EU in signing trade agreements to welcome free, fair and reciprocal trade. The focus is on a reduction in reciprocal tariffs to encourage more balanced trade. Canada has until Friday to join their old NAFTA partners, although failed grandstanding by the Canadian PM and Trade Minister, have not helped. China remains the outlier, lobbying the US to drop the pending $200 Billion tariff threat, but the US will keep the pressure on. China will cave and global markets will be the major beneficiary.

Emerging markets are a global threat, with the Argentine Peso collapsing, while interest rates hit 60% and failed to contain rampant inflation. The Argentine monetary crises is a product of overwhelming foreign currency debt and financial mismanagement over many years. The present Government has worked with the IMF on solutions but panic is setting in. This comes on the back of problems in Turkey and Brazil. This lead to safety flows back to the Dollar, with the EUR slipping to 1.1650, while the GBP held 1.3000.

Another devastating NZ Business Confidence number (-50.3), puts the business confidence level back to recession levels, from the GFC in 2008. The Labour led Government anti-energy, anti-business policies are being reflected in business sentiment. This hit the currency hard, falling back to 0.6625, while the AUD has fallen to 0.7250. The AUD has suffered directly from an ‘out of cycle’ interest rate hike from the Westpac Bank. This has manifested in rising interest rates in the wholesale funding market, which implies rising risk.

Trade remains the macro narrative although local issues will impact local currencies.

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