By Michael O’Neill

It’s a Turkey weekend. Turkey is in the news due to its military offensive in Syria. Turkey is also a feature item on supermarket flyers as it is a popular entrée for many families celebrating Canadian Thanksgiving Day. 

Turkey (the country) was named for its inhabitants in the early 1300’s. Turkey, the fowl, got that handle after the Pilgrims arrived in America. According to a Columbia University professor, when Europeans first encountered turkeys in America, they incorrectly identified. They were thought to be a type of guineafowl which were already being imported into Europe by Turkish merchants and nicknamed Turkey coqs

Turkeys are renowned for being one of the dumbest animals on the planet, and the term is applied to any person making bad choices. Many FX traders may be slapped with that label depending upon the outcome of the ongoing US/China trade talks, Brexit and Fed developments.

Traders have been selling US dollars since Tuesday in anticipation of a break-through in the US/China trade negotiations. President Trump tweeted that he would meet with Chinese Vice Premier Liu He on Friday. He said that China wanted to make a deal and then asked, “but do I?” The tweet came after a flurry of conflicting reports, including one that said the Chinese delegation would leave the discussions early. Another rumour suggested the two sides would agree to a less comprehensive pact which would include increased purchases of US agricultural products and a currency pact.

In May, President Trump lobbed a “tariff “grenade” into trade discussions even as the market was led to believe the sides were nearing an accord. Those talks didn’t end well. It could happen again and another Game of Thrones, “red-wedding” style conclusion, cannot be ruled out. However, at this banquet, the turkey on the menu will be the ones who sold US dollars, anticipating a deal.

The current round of negotiations is being conducted under a cloud of tariffs, sanctions and blunt comments. The US Commerce Department added 28 Chinese governmental and commercial organisations to the Entity List. (a black-list) They are accused of engaging in or enabling, activities contrary to US foreign policy. That is not good faith bargaining but bully-boy bargaining.

Commerce Secretary Wilbur Ross told reporters on October 10, “If we can get China to abide by the global rules of trade, every nation in the world will benefit” claiming “China has refused to change its behaviour.” 

China isn’t the only one not changing its behaviour. FX traders are guilty of jumping on and off the “risk” bandwagon at the first whiff of positive or negative trade talk sentiment. The Japanese yen is a major risk barometer, rising and falling as risk views shift. The Australian dollar is notorious for making like a kangaroo following a Trump tweet, or news on the trade war front while leaving a sea of red ink in its wake. 

Recently, the ebb and flow of risk sentiment has put the shine on Sterling. GBPUSD bounced erratically since June, due to British politics and Brexit. The volatility accelerated in the past three week’s as the clock ticks down to October 31, the day the UK is supposed to leave the European Union. UK Prime Minister Boris Johnson and Irish Prime Minister Leo Varadkar claimed there was a “pathway to a possible deal” after an October 10 meeting. GBPUSD soared from 1.2205 to 1.2455 as short positions got squeezed. Eureka! They solved the Irish border issue. Or did they?

Chart: Hourly price action since August 7, 2019

One needs to be the epitome of an optimist to believe that a smarmy phrase “pathway to a possible deal” is the foundation for a solution to avoiding a hard border in Ireland. Many parties have a vested interest in a solution, and Johnson and Varadkar are just two of them. The EU was spurned at the trade deal altar once and may be skeptical with a second attempt. Mr Johnson’s ability to craft a Brexit agreement acceptable to UK politicians, Ireland, and the EU, before October 31 seems to be a leap of faith.

Optimism isn’t just confined to FX traders. The esteemed members of the Federal Open Market Committee are drinking the Kool-Aid as well. Five of the past six FOMC statements said, “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”

The September statement was tweaked to say that the latest rate cut supported the Committee’s view but leaving the rest of the phrase intact albeit with a qualifier about “uncertainties.” The optimism remained even after they had been forced to cut US interest rates twice. 

When it comes to US/China trade sentiment, Brexit or the Fed, it may be wise to remember not to count one’s egg-rolls before they are deep fried, or in this case, don’t carve your turkey until its roasted.