Dollar after months of inactivity will be waking up soon. It is almost certain now that Trump has made up his mind to dismantle the EU economy starting with the auto tariff. Months of negotiation have yielded nothing for US. France and Germany refuse to cooperate on the Russian gas pipeline. US wants Germany to buy expensive gas from Exxon rather than Russia. US has given alternative in buying more US arms which too has been rejected. US is not interested in EU removing car tariff as its clear that EU customers favor EU cars over US autos.
EU has also rejected proposals to open up its agro economy to US agri producers.
With months of negotiations comes to an end, we are now possibly hours or days away from a 25% tariff on EU cars which crack the world equity markets by 20% minimum and will further escalate over next year.
There is also a political storm brewing as Canada arrested a key chinese national. The Huawei chief financial officer arrested in Canada at the behest of American authorities isn’t an ordinary senior executive. Sabrina Meng, 46 years old, is the daughter of the Chinese telecommunications giant’s founder and recently emerged as his potential successor. Ms. Meng’s high profile raises the stakes not only for her company, but also for the U.S. and China, which are embarking on a fresh effort to resolve tensions around trade and technology. China’s embassy to Canada has already complained bitterly about the arrest and other Chinese tech companies have been punished this year for sanctions violations and allegedly stealing chip-design secrets.
Yield curve is flatter: Things looking bad again
Treasury market moves are sending a menacing signal about the economic outlook. U.S. government bonds are on the edge of a yield-curve inversion, where shorter-dated bonds yield more than longer-dated ones—and recent moves carry a particularly bearish tone. This quarter, yields on longer-dated bonds have dropped and those on two-year Treasurys are flat. The gap between two and 10-year Treasury yields is now around 0.11 percentage point, compared with around 0.55 percentage point at the beginning of the year.
Other signs of trouble can be seen in currencies as we highlight below.
USDCAD is zipping away above 1.34. This is often a precursor to ensuing dollar strength.
EURUSD: Ready to dive
EURUSD has held well till now but has shown no recovery. As we noted above the US-EU negotiations have failed. Paris started to burn over a trivial issue which was a message to French that things are about to get bad for EU. A sign of the failed negotiations.
GBPUSD: In brexit quagmire
GBPUSD is suffering from anxiety attacks. Even if parliament gives a goahead with the deal, we dont see upside above 1.32. In the case the vote rejects the deal, GBPUSD will break 1.22 and possibly will hit 1.15. BoE has suggested that GBPUSD will fall under parity in the event of a no deal brexit. The reason why these forecasts are correct is that overnight, UK will not be allowed to export to a 20 trillion market. Its absolute mayhem if the scenario does materialize.
Equities are topping
Our view remains, Equities are topping out. Barring a year-end rally, it's all over. We are now entering into an era of protracted winter of recession of the likes we have not seen. We have never been so pessimistic. FED has raised rates as much as they could but any further will mean they need to unwind those hikes as soon as next yea. Auto tariff and developing US-China tensions and approaching brexit will hit equities around the world.
Dollar Index: Next move is 98.9
Dollar indx looking increasingly ready to break in the next 48 hours to 98.9.
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