US Dollar, ECB, Trade Wars – TALKING POINTS
- Bare economic data docket leaves traders looking for external event risk
- US Dollar retreat may reverse if ECB outlook, trade war spook markets
- How long will market optimism buoy sentiment until reality kicks in?
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Asia Pacific markets had a relatively quiet day, though early price action suggests markets had a risk-off tilt with the Australian and New Zealand Dollars edging modestly lower. In response to lawmakers’ questions, the RBA said it is not likely to implement unconventional monetary policy. South Korea filed a WTO complaint against Japan for its export curbs as diplomatic relations continue to suffer amid a trade dispute.
The economic agenda brings a sparse serving for the upcoming session, leaving FX markets more exposed to external event risk. On the Sino-US trade war front, US President Donald Trump announced he plans to crack down on fentanyl shipments from China and others as part of his administration’s agenda to tackle the opioid crisis in the US.
Markets were recently injected with risk-positive news that the US and China would be holding talks in October as part of a process to cool trade tensions against the backdrop of global deceleration. This has caused capital inflows into haven-linked assets like the US Dollar and Japanese Yen to reverse, buoying risk-oriented currencies like the Australian and New Zealand Dollars.
However, the pullback USD and JPY may be due for an about-face if US-China trade talks bear little fruit or deteriorate and place a premium on anti-risk assets with a discount on their sentiment-linked counterparts. Furthermore, the upcoming ECB rate decision and commentary by President Mario Draghi may induce aversion to cycle-sensitive asset classes if the central bank fails to meet the market’s lofty expectations for aggressive easing.
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— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter