The uneasy truce, for lack of a better word, between Trump and Xi at the G20 summit to avoid a potential full-blown trade war, has led to the extension of the ‘risk on’ tone with the likes of the commodity currencies, as the indices performance chart illustrates, the most benefited. The interbank adjustments in forex quotes (gaps) ahead of the retail open in Asia, do feel overstretched on the preconditions of an event largely priced in since last week, with the addition that the temporary truce, at this stage, is simply an agreement of intentions. Nothing has been achieved yet on all the sensitive issues that remain on the table even if one can argue that the avoidance of further tariffs and rolling back some restrictions on Huawei are acting as a driver. So, one must question how much fuel is left until we see a meaningful reversal? Are we in a buy the rumor sell the fact? For now, there is no reason to be too defensive if looking to exploit momentum trades intraday the likes of AUD/JPY or AUD/CHF as the trend should be your friend. It is, however, when one steps back to take a bigger view off the daily, where the overcooked nature of certain currency movements start to become more obvious, which leads me to think there are no clear cut daily signals of note. That said, I do find fading strength in the USD/JPY to offer solid merit while awaiting the market to show its hand post the G20 in the conglomerate of currency crosses. While the G20 meeting outcome is positive for the AUD/USD, the RBA must decide tomorrow if it cuts the cash rate further, and with trade strifes not really part of the RBA’s justification on its current easing cycle, there is understandably cautioun that the RBA will go for another rate cut following the June one. Pricing for a cut to 1% stands around 65%, only marginally lower than the 70% on Friday. Even if an eventual comprehensive trade deal remains elusive and a far-fetched outcome given the major discrepancies still standing in the way of both superpowers, one consideration to let it sink in too is the fact that the Fed cut expectations are likely to see a sustained trimming in the immediate future (July 31st) while the dovish prospects over the next year should barely budge. This Friday’s June payrolls (Jul 5), alongside other key releases this month such as CPI (Jul 11), retail sales (Jul 16) and Q2 GDP (Jul 26) will also be key.
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