The dollar’s changing reaction to trade news


This week Tim Graf, head of Macro Strategy for Europe, the Middle East and Africa,  notes that measures of dollar valuation are responding to shifts in sentiment around the US-China trade stand-off.

“With the apparent agreement of a phase one trade deal between the US and China, the dollar’s response to changes in trade sentiment will be a gripping watch in the coming year. Our measure of media sentiment*, suggests that for the first half of 2019, changes in sentiment on the US-China trade war were consistently and negatively correlated to changes in widely-watched measures of dollar valuation. In other words, good news on trade was bad news for the dollar, and vice versa.

“However, since May, when tariffs on $200 billion of imports from China were raised from 10 percent to 25 percent, the relationships have begun to shift. The correlation of sentiment to the US Dollar Index (DXY), in which Euro-Dollar dominates, has reversed and now shows no clear bias. The trade-weighted dollar, in which China, Mexico and Canada make up nearly half the basket, has also been slightly less correlated but still exhibits an inverse relationship with changes in media sentiment. The current good (or, less bad) news on trade should keep the dollar under pressure, but we wonder whether any breakdown in the current détente might change the dollar narrative more forcefully.”

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The shifting nature of the dollar’s relationship to trade

Source: State Street Global Markets, Bloomberg



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