• Joel

Forex Freakap - Risk Off Flows as Trump Forced to Hand Over Tax Records

Market Tone

Risk appetite took a decisive turn for the worse today around the time of the US equity cash open at 1430BST/0930EDT. Prior to then, crude oil markets had been selling off, triggering some selling in other risk assets, but the move really got going shortly after the US cash open on the news that the US Supreme Court had ruled that US President Trump is not immune to subpoenas of his financial records (meaning the President will now have to hand over his tax returns to a grand jury in New York).

I’ll be honest, I’m not entirely sure why this triggered such extensive risk off flows as we saw. If the ruling is seen as likely to reduce Trump’s election chances (tax avoidance/lack of charitable donations being frowned upon by the electorate or maybe Trump is lying about how rich he is) does it really matter? As, according to betting markets, he was already a massive underdog anyway – its not like this is the defining moment that will turn the odds against his favour – he is already facing a massively uphill battle.

Perhaps there are some fears it may trigger some sort of financial instability (maybe there is some tax crime that could get the President impeached).

More likely, I think this news has just been taken as an excuse by the market to find some direction. Remember, over the past few days everything has been very rangebound and boring.

Either way, I’m sure we will all be dissecting what happened here tomorrow.

As things stand on the day then, major European bourses closed the session deeply in the red while US equities and crude oil markets also trade deeply in the red. Amid demand for havens, US government debt caught a bid, as have traditional FX havens such as USD, JPY.

FX Markets

With crude oil being the biggest downside mover, CAD and NOK are underperformers in the G10 space.

Meanwhile, AUD, NZD, SEK and EUR are the next worst performers. All are suffering amid the combination of risk off/USD strength.

Despite being buffeted by fluctuations in risk appetite and USD sentiment, the most important consideration for EUR sentiment remains the state of EU Recovery Fund negotiations (current expectations are that a deal should be possible by the end of Summer). On which note; EU27 leaders met today to set the groundwork for next Friday’s EU Council Summit meeting of EU27 Leaders. According to a Bloomberg journalist, another EU leaders summit could take place on July 27-28th if member states do not reach a deal on July 17-18th.

Moving on to GBP; sterling is actually an outperformer alongside USD and JPY, despite risk off flows (which are normally GBP negative).

GBP traders appear to have been looking backwards to a few of this week’s positive events, including 1) earlier in the week we had reports that the EU are willing to offer the UK something called zonal attachments on fisheries (a key request of the British in the trade talks) and 2) Finance Minister Sunak yesterday unveiling a raft of economic support measures.

Finishing up with a few additional havens assets; true to its recent form, gold is maintaining its positive intra-day correlation with risk assets (which is more than anything driven by its negative correlation with safe haven USD). Amid a pick up in USD, the precious metal crashed back beneath the $1800 level. I continue to expect dips to be bought however, keeping a floor underneath the price action.

Finally, CHF has also outperformer in recent trade, but not to the same degree as USD and JPY. One potential reason could be due to its high correlation with gold, which has been hit in recent trade. MUFG explains “over the past month, the performance of the Swiss franc has had the highest correlation with the price of gold amongst the G10 currencies. The correlation may start to ease again though if the SNB step up intervention to dampen Swiss franc strength as EUR/CHF moves closer to the April and May lows between 1.0500 and 1.0600.”

Looking ahead to tomorrow, the main event will be Canadian Jobs Data at 1330BST/0830EDT. Otherwise, things will likely continue to be quiet on the news front. 



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