Fundamental FX Factors To Watch Focus:
- Geopolitical risk is the key factor adding volatility through supply shock fears
- The Fed's March Minutes shows that inflation is becoming an upside risk, yikes
- Caution remains the order of that day, not panic as EM risks escalate
Tensions in the Middle East has become a buzz phrase that has the market’s attention once again. On the one hand, concerns about an escalating ‘trade war’ have died down after Chinese President Xi Jinping gave the Keynote Address at the Boao Forum for Asia.
Unfortunately, a parting of geopolitical storm clouds that is supporting the US Dollar[1] and risk assets and seeing havens like Gold[2] sell-off is often the wrong kind of calm in markets. In other words, the short-term lack of bad is not an absolute good.
At the same time, the flattening US Yield Curve where the yields between the US Treasury 2-year and the 10-year yield is back in the limelight suggesting the Federal Reserve may be further along in their rate hiking cycle than markets are anticipating.
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Trade War Fears Give Way to War War Likely Leading to Commodity Supply Shocks
The ‘trade war’ fear was often seen as a move likely to be given a chapter in US President Trumps presumed post-Oval Office book, The Art of the Deal, Executive Branch Edition. On the one hand, without retaliation, “winning” a trade war can lead to reducing the deficit and boosting short-run growth. However, a
