US-China Truce & Portfolio Adjustments

Indices rally aggressively after the US delayed the $300 bln in tarrifs on China, while USD shorts were partly unwound with the help of quarter-end portfolio rebalancing, extending into metals and energy. Leaks last week spoiled the surprise of a US-China trade truce and that stunted the early market move. The Canadian dollar was the top performer in June while the US dollar lagged. CFTC positioning data showed a rush out of CAD shorts. Canada is on holiday today. A new Premium trade will be issued later in the day (after the NY open) and could be from the mysterious chart below. Can you guess it? The June manufacturing ISM is next.

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Thursday's South China Morning Post report on the Trump-Xi meeting proved to be entirely accurate. It included the two important parts of the deal: 1) That Trump won't hit China with any additional tariffs while they negotiate and, 2) That a blockade on sending US technology to Huawei will be lifted.

At the market open risk trades popped but they quickly faded afterwards, leaving yen weakness as the only notable change. It's obviously good news for the global economy that the meeting didn't end in a blowup but there was some hope for a firm timeline for no new tariffs. The fuzzy extension means markets will remain one tweet away from a trade war flare up.

Perhaps more importantly, the Fed is back in play. The FOMC is already committed to the July cut but it could quickly be re-framed as an insurance cut and that cause a re-think on the three additional cuts that are priced in over the coming year.

What could put the Fed back on the path to deeper cuts would be more weakness in economic data. The June US regional manufacturing surveys have been dismal so far and on Monday the ISM reports on its national manufacturing survey. The economist consensus is 51.0 but after the Chicago PMI tumbled to 49.7 from 54.2 on Friday, the market will be braced for a sub-50 reading.

Also note that Canada is on holiday Monday and that could leave the suddenly-sizzling CAD vulnerable to illiquidity.

CFTC Commitments of Traders

EUR -56K vs -52K prior GBP -59K vs -53K prior JPY -10K vs -17K prior CHF -16K vs -15K prior CAD -15K vs -38K prior AUD -66K vs -65K prior NZD -24K vs -24K prior

The relentless march of upbeat Canadian economic news finally forced shorts out as USD/CAD hit a seven-month low. The momentum continued on Friday after a strong GDP print and an upbeat BoC business survey. Also note that Canada is on holiday Monday and that could leave the suddenly-sizzling CAD vulnerable to illiquidity.