With Donald Trump continuing to escalate his protectionist rhetoric in the trade dispute with China, the geopolitical risks remain paramount for traders this week. How does this impact on the US dollar and emerging markets? We look at the impact on forex majors, equities and commodities markets in the coming days.
A surprise jump in US wage growth should drive a dollar positive reaction this week. Higher Treasury yields are dollar supportive, however, this becomes an interesting test. If the dollar cannot break support of an old floor just above $1.1500 on EUR/USD, or resistance around 111/112 on USD/JPY, then there will be a feeling that the dollar bull run really is coming to an end. For months, traders have waited for sustainable traction in wage growth to be the final piece in the jigsaw for the Fed’s tightening. However, time and again they have been disappointed. Inflation expectations have been subsequently anchored for much of 2018, helping to flatten the US yield curve. Will the longer end of the curve now begin to react higher? Two year Treasury yields pulled to 10 year highs on Friday above 2.70% as this wage growth improves the prospects of a fourth rate hike in December. However, will the 10 year Treasury yield similarly rise, back above 3% and help steepen the curve? Donald Trump’s penchant for picking trade disputes around the world has strengthened the dollar in recent months, as it makes the US the biggest bully in the playground, pulling capital out of emerging markets. However, longer dated yields have been stubborn with apprehension over future growth. Another failure for the longer end to take off this week would be further sign that bond markets concerns are that Trump’s trade policy will hurting US growth prospects outweigh the potential positive impacts of wage growth. This would bring the dollar bull run one step closer to its conclusion.