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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 19 December 2016 at 8:00 GMT

Morning Markets: Trump 'spells' it out to China

Former managing editor, TradingFloor.com / Saxo Bank
Denmark

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Watchlist

  • Germany: Ifo Business Climate Index (0900 GMT)
  • US: Services PMI (1445 GMT)

The sticky turn in US-Chinese relations sparked by the president-elect Donald Trump's phone call with the Taiwanese president and his questioning of the one-China policy has taken some of the momentum out of the reflation trade after China seized a US drone in its territorial waters late last week.

Dollar was subdued overnight turning tail for a slight slide in the Dollar Index. USDJPY was back towards the 117.0 handle, the greenback reversed direction in the bid for EURUSD parity, retreated from those USDCNH highs close to 6.97 and was once again testing the 1.25 zone in GBPUSD. Treasuries on the other hand continue to look perky with the US 10-year yield retreating only slightly from Thursday's 27-month high.

The risk-off mood fed through to stocks where Nikkei was marginally weaker overnight on the back of the yen strengthening, Hang Seng took fright at the Chinese-US standoff, and the Shanghai Composite was also on the backfoot. Shares in Japanese gamemaker Nintendo also took a 5.7% tumble as reaction to its Super Mario game adapted for smartphones was mixed, a far cry from the heady heights of the summer Pokemon Go madness.

Elsewhere, oil was on the rise and gold seems to have found a bottom for now after coming off the $1,130/oz base as the dollar hesitation reverberates through the precious-metal space.

A Bank of Japan meeting Tuesday marks perhaps the last big central-bank meeting before year end but with the bank expected to keep a lid on further monetary stimulus, there is no major expectation for this to move the needle dramatically, leaving geopolitical concerns as the troubling backdrop.

That drone, since returned, was taken in the South China Sea where China is battling with a number of its neighbours, some of whose claims are supported by the US, over territory and resources. Trump, in a mispelt tweet, then stoked the fire by accusing China of an "unpresidented [sic] act." The act was certainly unpresidented as no such post exists in China, but who authorised the move remains unclear.

What is clearly being authorised is the deliberate escalation of tensions between the US and China. The drone seizure may have been incidental, but the latter has demonstrated it will not be cowed. It is a dangerous turn of events.

Market signals

Asian session

  • News that China had taken a US naval drone sparked risk-off selling of stocks
  • China later agreed to return the US drone, steadying Asian share markets
  • The weak yuan and inflationary pressure may prompt China to hike interest rates
  • Highways are closed and flights grounded by heavy smog in the port city of Tianjin
  • The smog over China's 4th largest city is just part of a national coal-fired energy hazard
  • The Bank of Japan monetary policy meeting on Tuesday could  impact USDJPY, bonds
  • Australia's AAA rating is intact, despite downgrade fears following mid-year budget update
  • Gold rose 0.3% to $1,137.82/oz, a second day of gains
  • At 0552 GMT, the Nikkeui was steady, down a mere 0.03%
  • The Hang Seng was down 0.76% and the Shanghai Composite fell 0.12% at 0556 GMT
  • Mumbai's Sensex was down 0.21% at 0552 GMT
  • The ASX/S&P 200 ended the day up 0.53% at 5562 points

Forex ahead

  • The soaring US dollar traded close to ¥118; it was worth ¥117.27 in afternoon trade
  • The greenback retreated 0.1% to $1.0465 per euro
  • China's yuan continued to lose ground against the US dollar
  • The US dollar was worth 6.9502 yuan at 0124 GMT
  • The Australian dollar edged lower, buying 72.97 US cents in later trade

From the Floor

De-escalation. “China’s returning of US drones has eased tensions, slightly boosting sentiment,” says Liu


A yen for change? "Feasible entries could be found on JPY crosses quite soon," says Hardy 


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In opinion

1...2...3
The top EU economy appears to be in the sweet spot as 2016 comes to a close and today’s Ifo business sentiment update should reaffirm the upbeat outlook, says James Picerno

Trigger happy
As the drone crisis escalates the divide between China and Russia, we revisit the disastrous Trump-led escalation that is widening the chasm between Washington and Beijing.

Gold returning
Gold looks like it may have met its current bottom and there were good reasons for the downside move looking stretched, says Ole Hansen.

Looking forward
There's much to look forward to this week in the run up to Christmas, but will the dollar rally continue, asks John J Hardy.

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 Naval tensions with Washington over the South China Sea could prove a distraction from domestic economic, smog hazard and currency problems for Beijing. Photo: iStock

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