Dollar Driven Lower As Trade Rout With China Heats Up

Even when the FX market is low on scheduled event risk, the responsibility for price action can easily be picked up by unplanned incidents like verbal geopolitical sparring. Shortly after the US announced yesterday that it was filing a complaint with the WTO against China, members of the Chinese government returned the symbolic blow with harsh language that sent the dollar plummeting.

Marking one of the most impressive anti-dollar rallies, EURUSD marked a new two-year high after a 105-point move pulled the pair to 1.3455. Against the Swiss franc, the greenback’s drop measured nearly 130 points when the pair stalled just below 1.2150. Reversing its own dollar advances, GBPUSD extended its modest rebound yesterday with an eventual 165 point move 1.9750. Finally, USDJPY contained its downside action to a 70-point swing down to 118.75 after the BoJ’s pass on interest rates evened sentiment out.
Though there were a few third-tier indicators on the US event calendar, the market was fully preoccupied before the data even hit the wires. On Monday, US trade representatives formally filed a complaint with the World Trade Organization alleging China was not doing enough to police intellectual property right violations. While this was not as aggressive a move as the US Commerce Department’s decision to impose tariffs on coated-paper products imported from China, it was perceived as being more official. When Chinese officials caught wind of the filings, they quickly responded with public statements that unnerved currency traders. An official from the Ministry of Commerce said that they were “strongly dissatisfied” over the complaints. Far more pressing, and perhaps prophetic; the same person said the filing would “seriously undermine the cooperative relations the two nations have established?and will adversely affect bilateral economic and trade ties.” Whether this was a passive aggressive warning or genuine disappointment is not clear; but dollar traders took it to mean the former. In the past, protectionist moves like this have hammered the dollar lower; and this time around it seems to be no different. Depending on how intense the row becomes, China may respond by throttling back on its treasury purchases or even by imposing trade restrictions of their own. The investment community now awaits the G7 meeting to see if the issue may be addressed.
Back to domestic issues, greenback traders had an unofficial preview of Friday’s University of Michigan sentiment survey. The IBD/TIPP Economic Optimism gauge dropped more than expected to a 45.5 print in April from 50.8 the month before. From the few components, the outlook was clearly the most detrimental factor for the overall number, though the personal financial outlook and federal policy sub-gauges didn’t help any. However, market participants were hesitant in treating the IBD indicator as a clear sign that the more respectable University of Michigan report was doomed. Another concern for economists and fundamental traders was the impending start of earnings season. Though most analysts have drawn conclusions of slightly lower earnings numbers, the outlook for the housing sector drew a disproportionate amount of concern. Since the sub-prime default shake up last month, market participants have looked for signs that the woes in this specific group are spreading to other related sectors. The first indication would likely come from home builders and lenders, many of which have already downgraded their revenue and profit forecasts for the year.
The benchmark US stock indices were trudging through their second session of relative inactivity Tuesday morning as investors awaited the start of unofficial start of earnings season at the market close. By 15:20 GMT, the tech-heavy NASDAQ Composite was producing the most volatility in a 0.17 percent advance to 2,473.50. The S&P 500 followed with a 0.12 percent rise to 1,446.40 while the Dow was marginally lower at 12,568.00. Given the relatively intense moves in the NASDAQ Composite, it wasn’t surprising to see tech shares topping the market movers list. Shares of Seagate Technology sank 8.9 percent to $21.37 after issuing revising its outlook for fiscal third quarter revenues to $2.8 billion from an initial $2.9 billion to $3.0 billion range before. From the blue chips, Citigroup stock rose 1.0 percent or $0.51 to $52.09 after laying out its plans to cut or reassign 26,000 jobs.
Treasuries were bid higher through the morning session, despite worries that China would cut back on purchases of US government debt. The ten-year note was trading 8/32nds above the open at 99-11 by 15:20 GMT as yields slipped 3 basis points to 4.708. At the same time T-bonds were 13/32nds higher at 97-25 while their yields fell an equivalent 3 basis points to 4.892.