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Market Briefing: Tensions in Taiwan Strait Trigger Market Turmoil

A worsening in relations between the US and China is driving an exodus from risk-sensitive assets this morning. Military forces on both sides of the Strait are on high alert as House Speaker Nancy Pelosi – the third highest-ranking official in the US government – is expected to visit Taiwan in a few hours, defying increasingly-strident Chinese threats.

The Swiss franc and dollar are well-bid, and long-term debt instruments are in high demand as investors buy insurance against a mishap and raise odds on further escalation in the “war by other means” between China and the United States.

Japan’s yen is soaring, up almost 6.5 percent from its Mid-July lows as the flight to safety exacerbates an already-violent short squeeze. The dollar-yen pair is now flirting with an important psychological barrier at 130 – and a breakthrough could generate further gains.

Commodities are tumbling, with raw materials prices under pressure and both crude benchmarks trading well below the $100-per-barrel mark. Equity indices from Asia to the United States are in the red. The Canadian dollar is slipping, giving up yesterday’s gains.

The Australian dollar is on the defensive after the central bank raised rates by 50 basis points and signalled it might slow tightening in the months ahead. New language in last night’s statement from the Reserve Bank said, “Inflation is expected to peak later this year and then decline back towards the 2–3 percent range. The expected moderation in inflation reflects the ongoing resolution of global supply-side problems, the stabilisation of commodity prices and the impact of rising interest rates”. Putting the foundation in place for a smaller move at the September or October meetings, Governor Philip Lowe said, “The board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path.”

Evidence of an easing in labour market pressures could come when the latest US Job Openings and Labor Turnover Survey is released at 10:00 am. The number of open positions is expected to fall to 11.1 million in June, down from 11.3 million a month earlier.

Fed officials could push back against dovish interpretations of last week’s decision today. Charles Evans, Loretta Mester, and James Bullard are all scheduled to speak, and – if history is any guide – could attempt to correct market views on some of Jerome Powell’s comments last week.

Friday’s non-farm payrolls report looms as the next obvious volatility catalyst. Consensus estimates suggest the US added another 250,000 jobs in July – a number that is far above recessionary norms, and something that could force a repricing in yield expectations in the middle of the curve. A brightening in sentiment that generates a reversal in currency markets cannot be ruled out.

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