8th August 2019 - The lower interest rate odds sustain the risk appetite recovery

Walid Salah Eldin

Active member
192 1
The markets are looking in change these days seeking to ways to live next with lower interest rate levels, lower Yuan exchange rate can threat not only US but also its counterparts exporters in Asia and Europe and also sharper trade war consequences can hurt the global economic expansion and its demand for commodities and energy.



Stop that talking



The US equities are still boosted by rising hopes for further Fed's cuts to stimulate the economy which became more threatened by the Trade war negative consequences.

While the markets are tingling waiting for further talks between the US and China to outcome next month, following more back steps with each talk between the 2 sides this year!

The recent US-China trade talk ended to Trump's announcement to impose 10% tariff on the remaining $300b of Chinese exports to US starting next September and the Chinese quick response by allowing USDCNY to open this week above 7 on upside gap.

Amid these odds for lower rates to come in US, The US equities could sustain its recovery closing again in the green territory yesterday and also UST 10 year yield could rebound looking forward for stabilizing above 1.70%, after its short-lived slide yesterday to 1.6064% which is the lowest since October 2016.



RBNZ's worries



The fear of global economic deterioration could contain the market sentiment yesterday following The Reserve Bank of New Zealand (RBNZ) decision to lower the Official Cash Rate by 0.5% to 1%.

RBNZ Chief Governor Adrian Orr indicated during the press conference following the decision that it has been taken to underpin "the fiscal spending" against "capacity constraints" and it is not ruled out to take further easing actions, if needed.

RBNZ raised the odds of further RBA cuts to come following last July and June cuts by 0.25% which drove the interest rate lower in Australian to 1% too to face the global economic slowdown which erodes the demand for commodities and energy.



Lower interest rate Odds



This tendency to easier monetary policy which sent Gold above 1500$ per ounce level can be easily detected, when the monetary policies makers and also fiscal policies makers to meet as usual each year in the Jackson Hole symposium from 22 to 24 this month.

While the Fed seems to most of the market participants having longer path of tightening ahead than what it was expected by the end of last July, when Federal Reserve Chairman Jerome Powell warned against expecting a lengthy U.S. monetary easing cycle following the FOMC decision to lower rate by 0.25% in what he named “mid-term policy adjustment” by the end of July.

From another side, Trump who nominated recently Christopher Waller and Judy Shelton to join the committee as a push toward easier monetary policy resumed his pressure on the Fed to lower the interest rate further to counter China currency manipulation.



Yuan devaluation



Yuan devaluation is good for the Chinese manufacturing sector exports, but it dampens the foreigner's trust in direct capital investment, raise the cost of Chinese imports of energy and commodities and hurts in the same time the interior domestic purchasing power in China which rose significantly in the recent years.

PBoC Governor Yi Gang indicated last Monday following this Yuan depreciation that China will not use exchange rates as a tool in the escalating trade dispute between the world’s two-largest economies.

The Chinese Trade data of July could add strength to the risk appetite recovery by showing today $45.06b surplus, while the consensus was referring to only $40b following $50.89b in June unfazed yet by the Trade War negative implication which can be always offset by lower Yuan rates till the end of this war.



Have a good day


Kind Regards

Global Market Strategist of FX-Recommends

Walid Salah El Din
 

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