USD steadies, challenges remain - Scotiabank

Markets are ending the week on a steadier note. The USD is a little stronger, US equity futures slipping back after yesterday's pop higher and US Treasurys are a little firmer. The market mood has improved around hopes for progress on US/ China trade, Scotiabank's Chief FX Strategist Shaun Osborne notes.

USD steadies as markets hope for trade progress

"The US administration continues to indicate that the two countries are talking on trade but China flatly denies this. Beijing is considering exempting some US goods from tariffs in similar fashion to the recent US decision to wave tariffs on some electronics goods but that reflects practicalities--rising costs at home--rather than a move to de-escalate the trade war. Speculation about a summer Fed rate cut also helped lift equity market sentiment after Cleveland Fed President Hammack suggested the Fed could cut in June if there was 'clear and convincing' data."

"The lags that are likely before the stall in US/China trade become more apparent in the real economy may mean June is still too early for the Fed to move, however. President Trump is reported today as saying that he expects trade deals in the next '3-4 weeks'. Trade hopes spring eternal for markets but it is far from clear that there are grounds for any real optimism at this point. China is playing the long game and the position the US has left itself in suggests few will be rushing to make any concrete trade deals any time soon. On the plus side for the US, data do reflect a pickup in receipts from tariffs in the Treasury's daily statement. Daily receipts hit USD11.7bn at the start of the week."

"The USD remains at risk of further weakening we think; slower growth and recession worries are a concern, which may eventually play out through lower US interest rates, pulling the USD lower. International investors are still likely to reduce exposure to the USD as "US exceptionalism" fades and portfolios are rebalanced away from US capital markets. A correction in a still overvalued USD is a likely longer run outcome of the US administration's desire to rebalance global trade. Nearterm, DXY gains remain capped around 99.85 resistance."