Safe haven assets benefit amid the global uncertainty

While the US dollar and bonds gain from trade war and US shutdown developments, interest rate hikes are on pause across the globe

FILE- In this Feb. 5, 2019, file photo trader John Panin works on the floor of the New York Stock Exchange. The U.S. stock market opens at 9:30 a.m. EST on Monday, Feb. 11. (AP Photo/Richard Drew, File)
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Financial markets were treading water this week as they sought more direction from the ongoing US-China trade war story and developments from Washington with the government potentially set to shutdown again this Friday.

While there have been some positive murmurs on both issues, markets are clearly awaiting more concrete developments before adopting a trade view. In Washington, top Democrats and Republicans are meeting to address border funding issues and attempt to agree to a deal by this Friday - the deadline before the US government lapses into another shutdown.

Developments from the trade war story have been seemingly more positive. A senior White House counsellor this week expressed optimism of a deal amidst upbeat comments from China, which have been filtering through before March 1 - the deadline day when US tariffs on $200 billion worth of Chinese goods will be increased from 10 per cent to 25 per cent.

Safe haven assets such as the US dollar and bonds have benefited amid the uncertainty, with the former testing multi-week highs on the back of eight consecutive days of gains. Expect this current trend to continue through this risk-off environment with higher yielding assets such as the Australian, New Zealand and Canadian Dollar all remaining under pressure. There would be reversals in the US dollar's fortunes if it came under pressure from any major positive outcomes from the two aforementioned themes.

There may be further bouts of weakness in the performance of the Kiwi Dollar this week. By the time this article is printed, the Reserve Bank of New Zealand will have announced rates, expected to be unchanged at 1.75 per cent; however it is their attached statement and the press conference where I expect the central bank to come out with a more dovish outlook to rates.

Earlier this month the Reserve Bank of Australia toned down its forecasts and I think the RBNZ will follow its Australian counterparts in noting that ongoing trade uncertainty will weigh down future rate hike expectations. The Kiwi Dollar has already given up all of last month's gains to trade 2.6 per cent lower on the month and I expect to see the a successful test and break of 0.6710 before we see stronger buying support coming in at 0.6650 levels before the end of this month.

The Dubai Gold & Commodities Exchange (DGCX) British pound contract sunk below 1.29 on the back of three consecutive weeks of lower closings. The British pound has depreciated 1.9 per cent against the Greenback and we can expect to see further downsides in the cross as a weakening UK data docket and the ongoing Brexit uncertainty continues to drag on.

Data from earlier this week showed a treble of weaker UK output data; fourth quarter year-on-year UK gross domestic product grew 1.3 per cent (below expectations of 1.4 per cent) while quarter-on-quarter GDP also came in slower than expected at 0.2 per cent versus an expected 0.3 per cent. Month-on-month GDP shrunk 0.4 per cent in December flanked by negative prints to both the industrial and manufacturing production figures. Also releasing this week is the UK inflation print, due out today. The data points will be in the background of developments in Brexit discussions.

While there have been “constructive talks”, UK Prime Minister Theresa May’s team will head back to Brussels to negotiate this week in the lead up to another planned Brexit vote in the House of Parliament on February 27. As a result, expect pound weakness to continue through February; with a move towards 1.2730 in the weeks ahead.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti