US-China Spat Makes the Front Page Again, BoC Decides on Rates

Risk appetite eased yesterday, and the driver may have once again been concerns over the US-China trade spat. This also prompted investors to add to their bets with regards to lower rates by the Fed. That said, the dollar gained, as it put its safe-haven suit on. As for today, CAD traders will lock their gaze on the BoC rate decision. No change in interest rates is expected, so all the attention is likely to fall on the accompanying statement.

Risk Appetite Eases Again on US-China Worries

The dollar traded higher against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most against CAD, EUR and CHF in that order, while it underperformed against JPY, and fractionally against AUD.

Although not so clear by the performance in the FX sphere, risk appetite eased yesterday. Major EU indices slid, while after a long weekend, Wall Street traded in the red. As for today’s Asian trading, even though China’s Shanghai Composite rose somewhat (+0.16%), Japan’s Nikkei 225 closed 1.22% down.

It appears that the driver was once again concerns over the US-China trade sequel. On Monday, US President Trump said that the US isn’t ready to make a trade deal with China, although this could happen sometime in the future. On Tuesday, a report citing two separate sources noted that trade talks between the world’s two largest economies broke down due additional demands by the US in the latest stages of the negotiations, while later in the day, a Chinese newspaper warned that China is ready to curb rare-earth exports to the US. The newspaper article also included a phrase meaning “don’t say we didn’t warn you”, which was used in 1962 before China went to war with India.

All this suggests that the chances for the two nations returning back to the negotiating table in the months to come, let alone reaching a deal, are minimal. In our view, fears of further escalation in the dispute could keep investors on the defensive. We repeat for the umpteenth time that unless we see concrete and convincing “truce” signs, we expect any recoveries in risk appetite to be limited and short-lived. In other words, the path for least resistance for equities and risk-linked currencies may…