Uncommon Truths: Fed surprises are not enough to save the dollar
Key takeaways
US-China trade talks
Recent meetings between China and the US have eased trade tensions, potentially leading to a deal that could improve global economic outlook and risk sentiment.
Dutch election outcome.
The surprising lead of center-left D66 over the populist PVV suggests that the rise of European populism may be slowing, which we view as a positive for EU solidarity despite possible lengthy coalition talks.
Central bank actions
While the ECB and BOJ held rates steady – with the ECB likely ending easing and the BOJ expected to tighten – both the BOC and Fed cut rates by 25 basis points, though hawkish Fed signals lifted yields and the dollar.
A busy week included a Fed meeting that delivered several surprises. Markets have downgraded the likelihood of a December Fed rate cut but I think the broad path of rates over the next year is unlikely to change. I still expect the dollar to weaken but the arguments are more balanced.
A week dominated by “Andrew, formerly known as Prince” memes, and that did not see a change of prime minister in France, may be considered uneventful. However, there was plenty of action on the politics and policy fronts, with potential implications for global financial markets and currencies.
First, the meeting between Presidents Trump and Xi Jinping seemed to go well. It appears the US will cut the “fentanyl tariff” on Chinese goods from 20% to 10%, that China will start buying large quantities of US soybeans, that China will make it easier for the US to buy rare earth minerals and that the US will suspend an expansion of “Entity List” export controls (firms on this list face restrictions on receiving US exports). President Trump also suggested that a trade deal is close to being finalised. At the very least, the meeting seemed to improve US-China relations and the risk of a deepening trade war seems to have been averted. If that turns out to be the case, the world economy may have dodged a bullet, which I think is good news for cyclical assets (though markets didn’t reflect that).
