The recent escalation of geopolitical risks dominating the financial market headlines has been briefly removed from investors’ radars after US President Donald Trump once again took the markets by surprise.
This time, President Trump made U-turns on several of his previous public views, making investors wonder whether he could be gradually abandoning some of his core election pledges. While it is not a surprise at all to hear the US President make downbeat comments over the Dollar, backing away from labelling China as a currency manipulator and seemingly supporting the need for lower US interest rates is a real surprise.
Trump reversing away from a previously well-documented aggressive stance on China will go a long way to improving his image in mainland China; it will also be seen by many other observers as an attempt towards improving diplomatic ties, following Chinese President Xi Jinping’s recent visit to the United States. Away from diplomacy, this shift in tone should be viewed as a positive development for the financial markets, as it reduces the risk of China abandoning its US Treasury Holdings as a result of the previous risk of President Trump beginning a trade war with China.
Most emerging market currencies across Asia have welcomed the latest comments from the US President, with the majority of currencies across the Asian Pacific moving somewhat higher against the Dollar. Emerging market currencies that are particularly sensitive to speculation around US interest rate rises, such as in Malaysia, Indonesia and perhaps the Indian Rupee, will also applaud comments around the need for lower US interest rates. It has been noted that the Bond markets have benefitted from Trump’s unexpected comment that he “likes” the Federal Reserve’s low-interest rate policy. However, the potential for further gains in the Asian emerging market currency space will be attributed to expectations of the Fed pulling the trigger on an interest rate rise once again in June drifting lower and also whether Trump next chooses to take a softer stance on protectionist policies.
While emerging market currencies across Asia have benefitted from Trump’s comments, it has not helped to find a bid for either the South African Rand or Turkish Lira. Both currencies are plagued by political risk, with the upcoming referendum in Turkey this weekend giving possible cause for a major event risk over the Easter weekend. The Turkish Lira and South African Rand are obviously not correlated in any way, but with both currencies being plagued by political issues, this is impacting investor confidence and weakening economics that includes impending inflation risks. Inflation risks are going to be a major headline attraction for the Rand over the next couple of months, following the currency being squashed to pieces in recent weeks.
Gold eyes $1300
The 2017 revival in the value of Gold is showing no signs of slipping, after the precious metal climbed to fresh levels not seen since the US Election, getting marginally close to $1290 earlier in trading on Thursday. These are still uncertain times in the financial markets and some would even add global politics, meaning investors are keeping Gold as a close ally when it comes to hedging. The combination of uncertainty when it comes to political risks, the upcoming elections in France, rising geopolitical tensions and doubts over Trump’s ability to follow through with his campaign promises presents an ongoing threat to investors entering a period of “risk-off” that is too difficult to ignore when it comes to being encouraged towards Gold.
Sterling backs away from attempt for 1.26
After benefiting from the unwinding of USD positions, it appears that the GBPUSD is at threat of shying away from an attempt to reach 1.26 before the markets close for the Easter holidays. If you ask me, the ongoing uncertainty over Brexit’s direction is still enough motivation to maintain a negative mindset towards the Pound. Investors are likely to continue utilising sell-on rally opportunities in the Cable, when the pair climbs near 1.25 with this being the mindset traders have exploited for months.