Dollar Thumped on Confirmation of Tariff Delay while Stocks Advance

Singapore (Feb 25)  The extension of the US-China tariff freeze had been telegraphed, but the confirmation is the single biggest driver of the day. Equities, led by a 5%+ advance in China, have rallied in Asia and Europe. Benchmark 10-year bond yields are mostly 1-2 basis points higher. Peripheral yields are lower. Fitch's decision before the weekend, affirming Italy's rating, help ease fears ahead of Moody's (March 15) and S&P (April 26) reviews. The dollar is softer against nearly all the major and emerging market currencies. Oil and gold are firmed, while the threat of expanding strike activity in South Africa is lifting the platinum group metals, with palladium at new record highs.

Asia Pacific

An extension of the tariff freeze that was supposed to end on March 1 was widely expected but the confirmation late yesterday one of the most important developments. It is not clear how long the extension will be, though it will obviously be sufficient to cover the Trump-Xi meeting, which could be a month away. Before the weekend, many got excited with Mnuchin's claim that a currency agreement was struck, though no details were available and the weekend press suggested that the enforcement mechanism had yet to be agreed. Among other things, the tension between the US Trade Representative and the President seemed to reveal that Trump's desire for an agreement is palpable. Ironically, former economic adviser, Cohn seemed to have resigned over Trump's commitment to the tariff strategy, but now appears to be antagonizing his trading representative by being too willing to cut a deal.

With today's gains, Chinese shares are now 20% above last month's lows. Recall that the Shanghai Composite posted a bullish outside up day before the weekend to close above the 200-day moving average. The Composite gapped higher and closed on its highs. While trade was a major consideration, there is another force at work. There is a key Politburo meeting at the end of the week. The focus is expected to be capital market reforms. Securities firms were among the best performers today.

The Nikkei is testing the 21500 level. This level has seen as key to the near and medium-term outlook. Reports indicate that the calls struck there have been a popular vehicle to hedge against losses and if stocks continue to rally, the short call positions will have to be bought back. That said, the Nikkei is about 2.5% below its 200-day moving average. Meanwhile, the 10-year generic JGB yield of nearly minus 4 bp is holding just above a two-year low.

Even without the tariff freeze extension, the Australian dollar looked set to recoup some of the ground lost last week on the reports of disruptions in coal shipments to China. The Australian dollar hit a low last week near $0.7070 and finished the week near $0.7130. Today it reached $0.7165. There is scope for it to recover a little more before it runs into technical resistance and is once again an attractive sale. The dollar remains stuck in a narrow trading range against the yen. Last week, it did not move off the JPY110-handle and three-month implied volatility fell to its lowest level in five years (almost 6%). The intraday technicals hint that if the day's range is to be extended, the downside may be favored, though there is a $430 mln option struck at JPY110.50 that rolls off today. Note the chunky expiration tomorrow for $1.4 bln at JPY109.70.

Europe

Ahead of the eurozone inflation and employment reports later this week and the ECB meeting next week, there is little to distract attention from Brexit. Here is where it sits: May has pushed back the "meaningful vote" in Parliament until March 12. The argument is that the negotiations with the EC are continuing and there has been some suggestion (Gove) that a new concession from Brussels over the backstop may be close (color us skeptical or any substantive change). Meanwhile, Parliament is still moving toward a vote in the middle of the week that could limit the government's options. In particular, at least three cabinet officials (Rudd, Clark, and Gauke) have threatened to vote against the government to remove the risk of no-deal exit, which is part of May's brinkmanship tactics.

FXstreet

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