Safe-haven assets better bid as tension rises
On Wednesday morning, the Swiss franc and the Japanese yen were the only currency to gain ground against the greenback as investors fled from risky assets amid heightened tensions between the US and China. USD/CHF erased partially yesterday gains as it returned towards parity, down 0.20% to 1.0060. Similarly, the Japanese yen edged higher with USD/JPY testing the 109.10 support for the second time since the beginning of the month. However, the situation seems to have calmed down following the European opening. On the equity side, investors have massively sold their long positions and taken shelter in sovereign bonds. US treasuries yields fell across the board with 10-year yields sliding to 2.2230%, the lowest since September 2017. On the front-end of the yield curve, 2-year yields fell to a 15-month as it reached 2.0705%. In addition, the 3-month and 10-year yield curve inverted as the spread fell below 10 basis yesterday.
The last time the spread fell below that threshold was in early 2006, a year later the global financial crisis started. According to the money market, investors have raise bets that Jerome Powell will trim short-term interest rate no later than this year. According to OIS prices, the probability of a cut rose to 57.7% for the September meeting, 68% for October and 84% for December. Nevertheless, investors remain doubtful that the Fed would cut rate in June (probability of only 24%). It is worth noting that a recession often occurs after the Fed initiates a new easing cycle.
Global financial markets are torn between trusting central banks in their ability to support financial markets by flooding them with free liquidity and the appeal of common sense. Economies across the global have expanding for more than 10 years, 2 key indicators have send negative signals, geopolitical tensions are emerging across the globe. It looks like it is time.
BoC to stay on hold
The trend in USD/CAD has been quite dull since last month Fed meeting. The pair has remained within the range of 1.35 – 1.34 (+0.40% month-to-date) despite acceleration in trade war headlines. Yet the trend is about to change as today’s Bank of Canada monetary policy meeting, although not showing major changes in forward guidance, should benefit the greenback. The cautious wording of the BoC’s statement regarding the trade dispute between the United States and China and the risks to economic growth are the main factors.
Since its 24 April 2019 meeting, the BoC has been following the Fed’s footsteps, removing the prospect of a potential rate hike and emphasizing a more accommodative policy stance instead while lowering its growth forecast from 1.70% to 1.20%. Furthermore, the drop in April manufacturing PMI to contraction territory at 49.7 (prior: 50.5), lowest since February 2016, due to softer client demand, does not bode well for the oil currency if the trade situation worsens. For now, it seems that inflation is maintained in the 1-3% target range, with core and headline April CPI given at 1.80% and 2% and is therefore not an issue for the BoC. In addition, considering the recent development of talks with the US, it seems that concerns over trade discords are addressed as the US is willing to lift tariffs on both Canadian and Mexican steel and aluminum exports, paving the way towards ratification of a new USMCA deal. We would however remain cautious, as downside risks on loonie are rising.
USD/CAD is trading at 1.3505, approaching 1.3521 short-term.
