Risk Aversion Drives Dollar lower

Syrian Escalation sounds alarm bells

Just when we thought that an end to the Syrian Civil war was in sight, it flares up again significantly pitting the United States and Russia against each other.

In a similar fashion to Iran and Saudi Arabia fighting a proxy war in Yemen a comparable situation is developing in Syria!

It was never likely to take President Trump long to flex his military muscles. Despite denials from the Assad regime backed by Russia, President Trump sent in his planes to destroy the base from which a chemical assault was launched against rebels earlier in the week.

The financial market reacted in time honoured fashion. The dollar index fell to 100.66 having made a high close to 101 earlier in the week. A wave of risk aversion led the Yen higher. The Japanese currency which had fallen as low as 112.00 against the dollar earlier in the week, rose to a high of 110.10. Given the “noise” that had surrounded the Dollar Yen pair earlier in the week, there was finally general agreement regarding the causes of the price action.

It is perhaps distasteful, that conflict, death and destruction are used as catalysts for currency markets but this is a perfect illustration of foreign exchange as the asset class that most immediately reflects global economic, political and military events. There has been no reaction, yet, from Russia to American actions but given their support for the Assad regime this situation has the potential to bring turmoil.

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U.S. Political concerns return

The Speaker of the U.S. Senate Paul Ryan a senior Republican politician said yesterday that the President’s tax reform proposals will take longer than had been anticipated to be passed. While this is merely a delay, the market had expected Trump to be a President who “got things done” so his becoming mired in red tape is likely to be a further negative factor for the greenback.

It a classic piece of backtracking cloaked in a new form of words, an administration spokesman commented yesterday that currencies are suffering from “misalignment” rather than “manipulation”.

“Currency misalignment is different from currency manipulation and currency undervaluation,” the official said. “So, we want to see a process of analysing currency situations that includes whether it’s misaligned, not just whether it’s devalued or manipulated.”

This looks a lot like the first steps in a policy shift that heralds intervention in currency markets. This isn’t a new phenomenon. The last time a Central Bank intervened to affect the value of its currency was the Bank of Japan in 2012.

It is entirely feasible that an advisor has mentioned intervention to Trump and as a person who “paints with a broad brush”, the president sees this as a tool that can be used to bring currencies into line with his vision.

There are a number of important takeaways to be had from this statement; The administration is smoothing the path of the President’s meeting with his Chinese counterpart this weekend, Intervention would inject a level of volatility into markets not seen in ten years and no matter the reason, currency markets do actually reflect a mixture of every influence in the global economy.

Therefore, misalignment is almost as absurd a notion as manipulation.

It’s non-farm day!

The importance to Central Banks and administrations of single pieces of data has waned considerably in the recent past. It is entirely correct that trends in economic activity have a much greater bearing on monetary policy than the markets current “en vogue” indicator.

Today sees the release of the U.S. employment report for March.

Knee jerk reactions abound relating to this event but it needs to be borne in mind that any volatility caused is often quickly reversed. To see volatility however, the data must be out of line.

The expectation for today is a headline of 180k new jobs compared to 235k in February. There is no efficient way to come to such conclusions but it gives traders something to consider at the end of a long week!

Revisions to previous months’ data are often ignored but that is where the real story lies. This is not an exact science and the more accurate reads take time to prepare. Therefore, the revision better reflects economic activity and since there is no “expectation” traders must make snap decisions over what it means for the market.

The other part of the report is the growth (or otherwise) of hourly earnings. This is Fed Chair, Janet Yellen’s favourite part of the report since it gives a more accurate outlook for the trend in wage inflation.

Despite the Fed’s desire to hike rates back to more “normal” conditions there has been little or no inflation to be seen in this data.

Both the Euro and pound have been mired in well-defined ranges over this week with little to drive activity.

Brexit and political issues are the main catalysts and while both the negotiations to leave the E.U. and the French Presidential Election are proceeding serenely, there is little for traders to get excited about.