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Trading Currencies: Risk wants to ‘win’
Mitrade Team
2020-06-24 1042

Markets are showing us that they just want to ‘buy risk’ and anything that supports this thesis is brought up with glee. This is despite the risk of a second wave becoming ever more prevalent and the growing risk of a harder lockdown being put in place.

To highlight this thesis, have a look at the reactions to the activity surveys from Europe to the US, which showed signs of solid improvement.

Although European flash PMIs for both manufacturing and services beat estimates, both are still in contraction territory. The US Flash PMI numbers miss estimates but are now at breakeven and are continuing the acceleration trend we have been seeing in the US since the end of April.

Coupled this with further signals that Congress will approve further government stimulus for the US economy and FX, the market saw all this as a ‘buy risk’ confirmation.

This saw the USD slide against the majority of the G10 (CAD being the exception). This buying movement bucks the trend of the past 2 weeks that the second wave was going to slow risks sentiment. But with economic data improving and further stimulus coming, EUR/USD is now back above 1.13, GBP/USD is back above $1.25 (helped of course by UK PM Johnson relaxing social distancing rules) and AUD/USD is now back above $0.695 - all confirming the risk thesis.

However, a new, more traditional ‘caveat’ appeared this week and it’s one that makes you sit up and realise that the global health crisis ‘noise’ has drowned out the risks that have been pushing FX for a few years now. Trade-tensions.

A declaration by White House adviser Peter Navarro that the US-China trade deal was “over” due to a lack of transparency on the global health crisis put markets into a spin. Risk-sensitive currencies crumbled immediately, for example AUD/USD fell from $0.6920 to a low of $0.6858 while USD/CNH shifted from 7.0600 to 7.0882. The President was out very quickly quashing this idea on Twitter, declaring the trade deal was indeed intact and currencies almost just as quickly retraced the losses. But it was an event risk reminder that shows ‘trade’ not ‘health crisis’ is seen as a bigger, more tangible risk for FX markets.

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