Asia Wrap : decidedly risk off

Oil
After registering a four year high on the back of a slow down in U.S. drilling that compounded supply losses from Iran and Venezuela. Oil prices consolidated gains throughout most the Asia session, but with the USD looking poised to move through Asia currencies like a wrecking ball, oil prices have come off the boil on waning risk sentiment.

Rupee and Oil
There is some concern a weaker INR could weigh on India’s oil demand. But as we move towards the USDINR 74, it could be catastrophically destabilising for India capital markets as India would have increased problems servicing their US dollar-denominated debt. While the direct currency impact of a weaker INR to Oil demand remains debatable, what’s not, is a possible capital market meltdown in India that will undoubtedly hurt oil demand.

Gold
After trading a bit higher on waning risk sentiment, with the dollar reasserting itself as king of the hill, gold ran into a wave of sellers at $1194, and the yellow metal is heading south again

Asia equities

A word of caution as liquidity, due to Golden Week is running extremely thin which could be contributing to some outsized moves

Wow, that was a quick turnaround as Asia equities bled a sea of red (HSI -1.850%, TWSE -1.25%, KOSPI -1.10%) as a toxic elixir of weaker China PMI, stronger USD and escalating geopolitical tension in the South China Sea when a Chinese destroyer came within meters of ramming USS Decatur. So much for the USMCA euphoria, indeed that fizzled quickly.

EM Asia currencies in focus 

Indonesian Rupiah

USD Asia traded higher across the board, but there was an outsized focus on the IDR which breached the psychological USDIDR 15,000 level, and now vols are getting paid aggressively across the weaker links of the ASEAN currency chain. (IDR-PHP-INR) Those  that  fell for the intervention and higher interest rate “dangling the carrot” are running for the exits en masse

Korean Won 

Korean won weakened as the services and investments sectors data remained tepid and triggered a reported 200 million in equity outflows

Singapore Dollar 

The SGD weekend following its Asian peers and we could expect more weakness as short dollar positions get pared ahead of MAS

G-10 currencies in focus

Euro

The USD the dollar is back in the driver’s seat after eurosceptic Claudio Borghi suggested: “Italy would have solved fiscal problems with its currency.” The market was not short near enough Euro, and traders have relentlessly hammered the single unit to the psychologically significant 1.1500 level

Australian Dollar
RBA seemed to be a non-event in the first, but the AUD has traded lower as ASEAN risk has evaporated. But perhaps there were more misguided positions heading into today’s rate announcement possibly hoping for a hawkish flash in the statement, that may be unwinding and contributing to a more significant sell-off than one would have expected.

Media

Join me live from the studio on 938Now at 6:50 AM SGT  Oct 3, discussing overnight price action 938 Now Singapore

Join me live in studio on Channel News Asia at 7:30 AM SGT Oct 3 discussing  ASEAN currencies and oil prices Channel News Asia

Join me via remote a camera on ON Sky Biz Australia  at 2:30 PM SGT Oct 3  discussing currencies and commodites  Sky Biz your money

Risk sentiment is shifting and headline-driven

Tuesday Oct 2: Five things the markets are talking about

Capital markets are in a sombre mood as a number of reasons for caution come to the fore.

Brexit rhetoric and the Italian government’s fiscal plans top the agenda, followed closely by trade deals and tariffs and political drama in Washington.

Amid the risk-off mood the ‘big’ dollar again has found support against G10 pairs. Euro stocks and U.S futures are currently following Asian declines, as Treasuries and bund prices advance.

The EUR (€1.1517) remains under pressure for a fifth consecutive day, pressured by remarks from Italy’s Deputy PM Luigi Di Maio that they will not change its budget deficit targets despite pressure from Brussels and its E.U partners.

Elsewhere, the pound (£1.2960) succumbs to Brexit rhetoric at the Conservative Party annual conference.

On tap: Fed Chair Powell is due to speak (12:45 pm EDT) about the outlook for employment and inflation at the National Association for Business Economics Annual Meeting, in Boston. Audience questions expected.

1. Stocks mostly see ‘red’

Asian equity markets traded generally lower as China remains on holiday, with Japan being the exception.

In Japan, the Nikkei edged up to a fresh 27-year high overnight, building on recent strength thanks to upbeat earnings hopes, mostly on the back of a weaker yen. The Nikkei share average ended +0.1% higher, while the broader Topix was up +0.3%.

Down-under, Aussie shares closed at their lowest in more than three-months overnight as financial stocks extended losses following a Royal Commission interim report on the sector. The S&P/ASX 200 index fell -0.8%, after dropping -0.6% on Monday. In S. Korea, stocks saw their worst day in nearly two-months on heightened U.S-China tensions. The Kospi fell -1.25%, marking its biggest percentage loss since August 13.

In Hong Kong, stocks also fell overnight on signs of weakness in China’s manufacturing sector. Resuming trade after a public holiday yesterday, the benchmark Hang Seng Index was down -1.64%.

In Europe, regional bourses open down across the board with Italy at the fore, as concerns over Italian finances keeps risk sentiment depressed. Four year high Brent prices are supporting energy stocks. The financial sector remains the worst performer.

U.S stocks are set to open in the ‘red’ (-0.4%).

Indices: Stoxx50 -1.2% at 3,374, FTSE -1.1% at 7,447, DAX -1.0% at 12,220, CAC-40 -1.1% at 5,449, IBEX-35 -1.2% at 9,297, FTSE MIB -1.4% at 20,324, SMI -0.7% at 9,060, S&P 500 Futures -0.4%

2. U.S oil hits four-year peak ahead of sanctions on Iran, gold higher

Earlier this morning, U.S oil prices hit their highest level since November 2014, while Brent crude trades atop of yesterday’s four-year high print, as markets prepare for tighter supply once U.S sanctions against Iran begin to hit in November.

U.S West Texas Intermediate (WTI) crude futures are at +$75.90 a barrel – WTI has rallied +18% since mid-August, while Brent crude oil futures are at +$85.28 per barrel, up +30c, or +0.4%, from Monday’s close. Brent has risen by more than +20% from its lows in August.

Market sentiment also got a boost from yesterday’s announcement of a “new” trilateral pact between the U.S, Mexico and Canada (USMCA), saving a +$1.2T a year open-trade zone that had been on the verge of collapse.

Iran’s oil industry, which at its most recent peak this year, supplied +3% of the world’s almost +100M barrels of daily consumption. U.S sanctions are set to start on Nov. 4.

Ahead of the U.S open, gold prices have found some support as risk appetite wanes, one day after getting a boost from the USMCA deal. Spot gold is up +0.5% at +$1,193.80, after declining about -0.3% in yesterday’s session. U.S gold futures are +0.5% higher at +$1,197.60 an ounce.

3. BTP/Bund yield gap at its widest in five-years

The Italian/German 10-year bond yield spread trades atop of its five-year highs as eurozone officials warned of a return to crisis days and an Italian lawmaker said most of Italy’s problems would be solved if it returned to its own currency.

As Italian bond yields surged +11-20 bps, the yield premium investors demand to hold Italian paper over German debt shot higher. The BTP/Bund 10-year bond yield gap has widened out to +302 bps.

Note: Bunds remain exposed to opposing forces, with safe-haven runs triggered by Italy jitters pushing German yields lower, but expectations of rate raises by the ECB next year is pointing to higher Bund yields.

The yield on U.S 10’s has decreased -2 bps to +3.06%. In Germany, the 10-year Bund yield has decreased -3 bps to +0.44%, the lowest in almost three weeks, while Italy’s 10-year yield has gained +12 bps to +3.421%, the highest in more than four-years.

4. Pound under pressure

As the market waits for PM May’s new Brexit draft proposal on the Irish border, uncertainties continue to threaten sterling (£1.2966) and this morning’s weaker construction PMI survey has caused it to fall further. Sterling fell to a three-week low of £1.2957, from 1.2987 beforehand, after data showed construction PMI fell to 52.1 in September from 52.9 in August, signalling “the weakest upturn in output for six-months.”

The EUR (€1.1517) continues to decline falling over -0.4% against the U.S dollar and -0.6% against the Yen (€130.98) on Italian Budget uncertainty.

Down-under, AUD/USD (A$0.7173 down -0.77%) has retraced earlier gains after the Reserve Bank of Australia (RBA) left rates on hold (see below), while the NZD/USD has declined after yesterday’s NZIER Business Confidence (-30 vs. -20) fell to the lowest level in nine-years.

5. RBA rate statement

It was as expected from the Reserve Bank of Australia (RBA), leaving the key policy rate at record lows (+1.5%) and traders with the impression that the RBA plans to remain sidelined for some time.

Nevertheless, Governor Lowes’s big concerns remain low wage growth and higher debt levels – a potential combo that could dissuade consumer spending and in turn ‘slows’ the country’s economy.

However, global expansion and recent domestic growth are positives and the RBA continues to expect GDP growth of more than +3% through 2019 and for the unemployment to drift down towards +5% over time.

Forex heatmap

OANDA Trading Asia market update : HSI,OIL ,XAU,JPY,EUR,CAD,GBP

Hong Kong

HSI is trading with a negative bias playing catch up from yesterday holiday in reaction to the weaker China PMI data. But at least for today, it’s more than apparent HK investors are in no mood to join the revamped NAFTA festivities.

Oil

Oil markets are holding onto the astonishing overnight gains ahead tomorrows API inventory data. But, oil traders are biding time and waiting for another cause and effect to buy more barrels.

Gold

Gold has been nudging higher as risk has been trading a bit unsettled in Asia as expressed by the HSI mini melt, and Italian EU risk. The  USD is consolidating recent gains vs the Yen but looking to bully the EURO lower on early London flow.

G-10 currencies

Japanese Yen 

While the USDJPY is following the more hawkish FOMC playbook, but the lack of follow-through above 114.00 suggesting positions are getting a bit crowded  and  USD bulls are  in need of some absolute “risk on” to breakout topside

The Euro.

The EURUSD is getting squashed by a toxic combination of higher US interest rates and Italy risk, look  for more downside momentum on this trade

The Canadian Dollar

The USDCAD is merely biding time, but eventually, 1.2800 give way. Perhaps Asia  CAD traders are waiting for Bay Street to run with the baton given RM chatter around 1.2800. Short EURCAD continues to be the favourable  expression on a bullish CAD view

The Pound

The Pound, on the other hand, should continue trading like an old beach roller coaster, getting moved by the latest BREXIT iteration

RBA
In the battle for the most dovish G-10 central banker award, as expected the RBA held rates in check. With nothing explicitly standing out in the statement, I think the Aussie trade is on hold till Fridays NFP

OANDA Trading Podcast: MONEYFM 89.3 OIL markets and China risk

OANDA Commodities Weekly: Short gold positions increase as prices drop 

OANDA Trading : Bloomberg TV Interview : Bumpy ride for Q4 but some pockets of value ( NKY)

Bloomberg TV

USD is still very data-dependent , so it will be tricky to trade

For any follow-up, I’m contactable  on Reuters Messenger, via the BBG terminal or my mobile numbers

USD is still very data-dependent, so it will be tricky to trade

US Rates 

The markets are pricing in a higher probability of the terminal rate over 3.5%, signalling a convincingly hawkish view from last week FOMC. Chair Powell’s language around a healthy economy while emphasising data dependency suggests the Fed will continue to hike well into the restrictive territory or at least until the data weakens. It appears Powell is not a big fan of FOMC  forward guidance and sees interest rate condition too loose. But when considering labour market tightness, which should eventually drive inflation higher, the markets are far too sceptical and now reversing out some of that pessimism as the Fed’s appear on course to raise quarterly interest rates for the foreseeable future.

Currency Markets
G-10 focus on CAD, EUR and JPY  

The USD is still very data-dependent so even with a hawkish nod from the Fed the US  Dollar will be tricky to trade.

NAFTA 
Bloomberg is reporting U.S. and Canadian negotiators are close to a deal on NAFTA and there’s optimism it will be reached by the Sunday deadline — an outcome that would avoid an impasse that imperils $500 billion in annual trade, people familiar with the talks said.

There’s renewed urgency to nail down a new North American Free Trade Agreement that could be published by Sunday, so Mexican President Enrique Pena Nieto can sign it before he leaves office, the people said. The U.S. and Mexico reached their agreement in August, triggering talks between the U.S. and Canada, which are being held around the clock this weekend. (Bloomberg)

Bloomberg

My View: steveinnes123

What’s interesting about this latest twist, is that The U.S. trade representative was expected to post text online this weekend that will lay out more of what Mexico has agreed to so far in NAFTA2. But the text was supposed to exclude details about Canada. Since the version was never posted online, could US trade representatives be holding it back, so they can post one for a trilateral agreement which includes a Canada provision? A lot of smoke signals on this call, and where there’s smoke there’s usually fire.

The Canadian Dollar

The implication for the Canadian dollar is enormous. Given the stellar GDP print last week, a data-dependent BoC governor Poloz, and skyrocketing oil prices, 1.28’s would seem like a lock. But with commodity Bloc of currencies expected to receive a fillip from rising hard and soft commodity prices, perhaps there is even more juice to be squeezed out if the Canadian dollar.

Mind you. I still find any deal on the eve of the Quebec, October 1, a bit of a stretch given the Liberal political fallout ( provincial and federal)from any concessions around the dairy industry, as the bulk of Canada’s Milk industry is based in Quebec. The most recent IPSOS poll shows the provincial Liberals and Coalition Avenir Quebec in a dead heat. Quebec produces about 50 per cent of Canada’s dairy, and its agricultural sector is roughly the size of Ontario’s automotive industry. None the less the market remains on  NAFTA watch.

The Euro

The Italian budget aside, since EU inspired political wobbles do tend to have a very short half-life effect on Euro sentiment,  higher US interest rate expectation amidst the backdrop of divergence between the Fed and the ECB, even more so after the tepid Eurozone inflation print on Friday, will underpin US dollar sentiment. The eurozone economic recovery is so uneven that the EURUSD could move lower for no other reason that the robust US economic story. Traders will probably look to re-engage EURUSD shorts on upticks.

The Japanese Yen

If the NKY and US 10 y yields continue to track higher, there is no reason the markets shouldn’t take out 114 this week. However, counter to my original thoughts that the USDJPY was an under-owned position, the latest CFTC data is painting a decidedly different picture as Yen shorts are at the highest level since early March. However, these derivative positions could have different paths of dependency than strictly the USD. So with US interest rates set to rise for the foreseeable future albeit with caveats that the US economy doesn’t go into the tank,  Regardless, with US interest rates set to rise for the foreseeable future albeit with caveats that the US economy doesn’t go into the tank, USDJPY should move higher.

The Australian Dollar
Much more focus on the US rates outlook in the wake of the FOMC, and this plays into the USD ‘s hand short term. I think the markets are tricky as USD moves are entirely data dependent.  While the RBA rate decision is on tap, there will be an outsized focus on next weeks NFP but more toward wage growth component as by all account the US job growth is rocking, but the Feds are looking for that elusive inflation spark. But this is where I temper my bearish Aussie expectations. With commodity prices going higher, this will undoubtedly be a boon for commodity-linked currencies so against a lot of forecasts I see the Aussie moving higher on that narrative alone.

Asia EM 

Malaysian Ringgit

The two primary competing narratives, surging Oil Prices vs higher US interest rates should see the MYR trading with a neutral to negative bias this week. The fact that there has been limited positive follow through from skyrocketing oil prices suggests investors remain incredibly nervous about the rising US dollar and higher US interest rates. Mind you my views up until last weeks FOMC was swinging like a pendulum on the Ringgit, but with Chair Powell making headway for Fed hawkishness, in contrast with a neutral to dovish BNM bias, my MYR  lean is shifting negative over the short term.

Non-Farm Payroll already in focus

Little more than a week after the FOMC, Friday’s US Non-Farm Payrolls take on the tremendous importance for near-term USD momentum as a critical focus will fall on US wages, and how quickly they expanded in September could have a significant impact on the projected course of US interest rates. Indeed, this week will probably go out with another sonic boom!

US Equity Markets: higher US interest rates should eventually factor.

US equity markets remain on solid footing supported by the impervious tech sector. For the time being US stock markets are showing incredible reliance in the face of higher interest rates and a possible escalation in the US-China trade war, as markets remain buoyed by the robust domestic economy. But at some point, the disconnect between the US and the rest of the world economies will flow through the asynchronous global growth feedback loop. But when you start factoring in higher US interest rates and the Feds dogged determination to drain the punch bowl, we could be nearing that turning point as the markets have been living on cheap borrowed money for some time. Eventually, higher US interest rates will become a significant negative factor.

China Markets: Manufacturing PMI wobbles 

Not surprisingly China’s official factory barometer decelerated more than expected in September, while the index for services and construction unexpectedly picked up.

The manufacturing PMI registered a disappointing 50.8 in September versus 51.3 in August, lower than Bloomberg survey median estimate of 51.2, but remains marginally above contraction. But the non-manufacturing PMI picked up to 54.9, versus 54.2 in August, so a bit of saw off, even more so when you factor that China is de-emphasising exports in favour of domestic demand.

While tariffs are causing some fraying at the brick and mortar level, China continues to support the demand side of the equation so while the manufacturing PMI is weak, the decline is not entirely uncontrollable.

Oil Markets

Brent crude finished the quarter most spectacularly as the potential impact of US sanctions on Iranian exports continued to mount on a report that at least one Chinese refinery was cutting back on purchases.

As reported by Reuters Singapore on Friday:

“China’s Sinopec Corp is halving loadings of crude oil from Iran this month, as the state refiner comes under intense pressure from Washington to comply with a U.S. ban on Iranian oil from November, said people with knowledge of the matter.”

Reuters

Show me the barrels 

So, given the  evolving China refinery narrative, until sizable supply is offered up by OPEC, ultimately traders will continue to push the envelope even more so with rampant speculation running amok  that US$ 100 per barrel  Brent is not just an oil pipe dream

So, what’s the next bullish catalyst?

Over the weekend U.S. President Donald Trump called Saudi Arabia’s King Salman, and they discussed efforts being made to maintain supplies for the market, stability and global economic growth, state news agency SPA reported late on Saturday.

But let’s make no mistake, higher oil prices bring tears of joy to oil producer including those in Texas and Oklahoma. And while Saudi Arabia continues to make concessionary overtones, but the real question is even if they wanted to bend to President Trumps wishes, how much spare capacity does the Kingdom have?   We’re going to find that out very soon as approximately 1.5 million barrels of Iranian oil is effectively going offline on November 4. If the market senses that Saudi Arabia capacity is tapped out at 10.5 million barrels per day, despite their fabled bottomless well, oil prices will rocket higher with the flashy $ 100 per barrel price tag indeed a reasonable sounding target.

The Middle East powder keg 

The Middle East  smouldering embers are set to ignite again as the New York Times reported that the US is evacuating its consulate in Southern Iraq because of attacks in recent weeks by militias supported by the Iranian government.“Iran should understand that the United States will respond promptly and appropriately to any such attacks,” Mr Pompeo said in the statement

The New York Times

At a minimum, this could derail any of those thoughts Tehran had of circumventing US sanctions by making side deals to supply oil to Europe. At maximum, further escalations by Iranian backed militias could see the US administration foreign policy hawks take flight. And don’t take John Bolton’s comments at the UN general assembly as an idle threat, ”  If you cross us, our allies, or our partners; if you harm our citizens; if you continue to lie, cheat, and deceive, yes, there will indeed be hell to pay.” Bolton is foreign policy hawk #1 and is all business when to comes to beating war drums,  even more so when  Any signs of growing unrest Iran is the target. Political noise in the middle east is usually positive for oil prices.

Gold Markets

A reality check as spot gold sold off very aggressively as the US dollar started to reassert itself on Friday. For the past three months, gold has traded more like a currency rather than a go-to safe have an asset. With the Euro tumbling head over heels, the $1190 trap door gave way and selling intensified as stop losses triggered, and short-term leveraged players raced to get downside exposure. However, the sub $1190 move was retraced heading into the weekend as the traders realised they were neck deep in oversold territory and frankly, they ( we) needed the weekend to reflect on what just happened!!

It could be a make or break week for golds near-term ambitions, and the story will likely unfold at Friday’s  US Non-Farm Payrolls release.

Gold has been a seller’s market for some time, but with $1190 level yielding, we’re now firmly in the gold bear zone and as such with the USD dollar likely to strengthen on the back of widening interest rates differentials, selling activity could intensify with speculators likely to target the August low when the yellow metal hit $1160 before rebounding.

.

Media

Please Join me on Bloomberg TV live from the Singapore Studio at 7:10 AM SGT Monday, Oct 1, discussing my views on the  RBA, Brexit and splashed with a bit of Brent and a sprinkled with  Iron Ore flakes.

  Bloomberg TV Asia

Later in the day, join  me on my weekly  France 24 TV European open spot  at 12:15 PM SGT discussing how Asia markets are faring today

 France 24 TV

An incredible end to Q3 could be an even bumpier ride   in Q4

An incredible end to Q3 could be an even bumpier ride   in Q4

Well, that was an astonishing end to  Q3 as we herald in what is certainly shaping up to be a bumpy ride in the markets for  Q4. While the eerily familiar themes will continue to dominate, US-China trade, NAFTA, Brexit and Italian budget which will confront traders at every twist and turn. But as US lawmakers rush to make final preparations ahead of what is shaping up to be a fierce midterm election run, headline risks will abound.

China markets will shutter for the Golden Week Holidays during the first week of the month. But focus is in PMI data none the less.

Not an overly busy docket next week, but on the data front, the granddaddy of them all, Non-Farm Payroll,  will be released next Friday and as usual the primary focus is on US wages, and how quickly they expanded in September could have a significant impact on the projected course of US interest rates.  Recall in August wage growth accelerated the fastest since June 2009, an if the average hourly wages prints north of .4 % expectation, and given the USD has gained the upper hand again,  it could drive a stake through dollar bears hearts. Indeed a make or break report for USD’s near-term momentum.

On the Central Bank front, the RBA will announce there interest rate decision but absent inflation suggests the RBA’s half glass full approach to monetary policy continues but as usual there will be more focus on the policy statement.

Local EM traders will focus on the RBI rate decision. Given the RBI recent defend the Rupee at all cost stance, its widely expected the RBI will match the latest Fed hike.

Local eyes are on Singapore PMI data as the market is positioned for a rebound after last month manufacturing forecast fell to the lowest level since June 2017 as exports plummeted.

Oil Markets
Everyone is telling me my views are far too unabashedly bullish, but from my seat until sizable supply is offered up by OPEC and with pandemic market chatter raging about the $100 per barrel market, its hard not to be blatantly bullish.

Brent crude oil finished the quarter in a spectacular note on Friday as concern over the potential impact of US sanctions on Iranian exports continued to mount on a report that at least one Chinese refiner was cutting back on purchases. WTI prices followed Brent higher.

Gold Markets
After falling to a fresh one-month low water mark as the USD was bullying around the Euro. Gold bounced off the intraday lows.But frankly, the Gold market is so oversold that we should expect consolidation to set in before the next leg lower. We’re in the domain of the Gold Bears who have August $1160 lows in their crosshairs.

Same view as Friday morning Singapore open note: 
A reality check as spot gold is selling off today as the USD continues to strengthen. For the past three months, gold has traded more like a currency rather than a go-to safe have an asset. With the Euro tumbling overnight, the $1190 trap door gave way as Gold has fallen to $1183 just ahead of the COMEX end of NY break. Besides with the final reading of second-quarter GDP holding at 4.2%Thursday, its reinforced the Fed rate hike outlook for 2019. Gold has been a seller’s market for some time, but with $1190 yielding, bearish activity could intensify with short-term speculators likely to target the August low when the yellow metal hit $1160 before rebounding.

Currencies to keep an eye on next week

The Euro

EUR continues to leak lower as Italy’s government has shattered the budget and challenged the EU’s mandate. BTPs have driven a good chunk of the move lower. The Euro was holding on the 1.1600 handles by a thread, but the less -than -vigorous Eurozone September Core CPI came in lower than expected at 0.9%YoY (1.1% estimated, 1.0% prior) which sprung the 1.1600 trap door triggering a wave of stop losses as that fundamental and psychological level ceded.

Indeed, music to EURO bears ears as the ECB will be in no mood to signal a quicker pace of interest normalisation anytime soon. And with the Fed laying their cards on the table and guiding the markets to a December rate hike. While markets pulled off the intraday lows, the keep it simple pragmatic approach to this trade suggests the dollar remains in favour as US growth and positive USD differentials will stay supportive.

The Japanese Yen

For all the right macro reason spot USDJPY is looking to break higher, and if the NKY and US 10 y yields continue to track higher, there is no reason the markets shouldn’t take out 114 next week given the dollar is completely under-owned vs the JPY.

There are some chunky structural long EURJPY and a lot of underlying derivatives that add up to the same view but have different path dependency.
These positions are clearly at risk during this Italy induced panic as we leak near yet another psychological support level EURJPY 131. But the market pressure points are probably more towards EURJPY 130 level, so we could assume these positions will remain safe with USDJPY marching higher.

The British Pound
Its a mess and the markets are fraying beyond the fringe as signs of stress related to a potential No-Deal Brexit remains a significant possibility. Unfortunately, vols in GBP have rallied significantly of late, so buying the downside insurance to protect against a Hard Brexit fallout is rather expensive.

Cable is stuck in a broader range still getting knocked around by various Brexit headlines. It’s impossible to filter out the political nose so best to remain cautious on GBP as it’s tough to predict next rate move. There were a few hawkish tidbits from  Haldane and Ramsden this week albeit with caveats that the Brexit outcome is a smooth one.

The Australian Dollar
Much more focus on the US rates outlook in the wake of the FOMC, and this plays into the USD ‘s hand short term. I think the markets are tricky as USD moves are entirely data dependent over the next few weeks. While the RBA rate decision is on tap, there will be an outsized focus on next weeks NFP but more toward wage growth component as by all account the US job growth is rocking, but the Feds are looking for that elusive inflation spark. But this is where I temper my bearish Aussie expectations. With commodity prices going higher, this will undoubtedly be a boon for commodity-linked currencies so against a lot of forecasts I see the Aussie moving higher on that narrative alone.

The Canadian Dollar

Canadian GDP was a beat at 2.4%YoY vs 2.2% forecast, showing a healthy bounce back in July after June weakness. It suggests upside risk to Q3 growth. And with BoC Poloz sounding very neutral and data dependent, CAD was able to hold onto gains. But ultimately CAD upside will be capped until trade talks between the US and Canada progress meaningfully. But 1.2700 on a NAFTA 2 signing looks possible given surging oil prices and a higher chance for a BoC rate hike on the GDP beat.

Lessons Learned

The big lesson learned last week was analysing the knee jerk reaction to Wednesday FOMC meeting which caused a rally across the US yield curve and temporarily weakened the US only for the move to be reversed out when the Fed chair Powell explained that both policy and financial conditions are still accommodative. Mind you, given the time zone difference in Singapore, all this happened while I slept and without knowing all the facts my initial knee jerk reaction, which I incorrectly elaborated in my morning note by castigating the FOMC for verbal gymnastics, could not have been further from the truth. In reflection, Jay Powell is a breath of fresh air, and by removing accommodative, he’s signalling that forward guidance should be removed as rates move toward normal, and that dot plot projections should be taken with a grain of salt as FOMC policy will be dependant on incoming data.

Media: Please Join me on Bloomberg TV live from the Singapore Studio at 7:10 AM SGT Monday, Oct 1, discussing my views on the  RBA, Brexit and splashed with  Brent and a sprinkled with  Iron Ore flakes.   Bloomberg TV Asia

Oil prices score for a second consecutive monthly gain

Oil futures rallied Friday on signs of tightening supplies, tallying a second monthly gain in a row, with global crude prices settling at another four-year high.

“Until sizable supply is offered up by OPEC and with pandemic market chatter raging about the $100 per barrel market, it’s hard not to be blatantly bullish,” said Stephen Innes, head of trading at Oanda,

Prices saw a sudden, late-morning jump to intraday highs. Phil Flynn, a senior market analyst at Price Futures Group, attributed that climb to technical trading. He also said prices seemed to find support from reports that China is cutting back on Iranian oil purchases, as well as talk that the U.S. has no plans to tap its Strategic Petroleum Reserve to make up for Iranian oil barrels lost amid U.S. sanctions.

Overall, the market has been bolstered by declining Iranian crude exports ahead of U.S. economic sanctions against the Islamic Republic’s oil industry, set to take effect Nov. 4, analysts say.

Marketwatch

Italian ” fondere”

The Euro 

EUR continues to leak lower as Italy’s government has shattered the budget and challenged the EU’s mandate. BTPs have driven a good chunk of the move lower.  The Euro was holding on the 1.1600 handles by a thread, but the less -than -vigorous Eurozone September Core CPI came in lower than expected at 0.9%YoY (1.1% estimated, 1.0% prior) which sprung the 1.1600 trap door triggering a wave of stop losses as that fundamental and  psychological level ceded.

Indeed music to EURO bears ears as the ECB will be in no mood to signal a quicker pace of interest normalisation anytime soon. And with the Fed laying their cards on the table and guiding the markets to a December rate hike, the keep it simple pragmatic approach to this trade suggests the dollar remains clearly in favour as US growth and positive USD differentials will stay supportive.

The Japanese Yen

For all the right macro reason spot USDJPY is looking to break higher, and if the NKY and US 10 y yields continue to track higher, there is no reason we cannot push into the 114 zones next week.

There are some chunky structural long EURJPY and a lot of underlying derivatives that add up to the same trade still sitting on traders books. These positions are clearly at risk during this Italy induced panic as we leak near yet another psychological support level EURJPY 131. However, these structures  should not come under any stress provided EURJPY  130 remain intact

Oil markets 

I’ve been told me my views are far too unabashedly bullish, but from my seat until sizable supply is offered up by OPEC and with pandemic market chatter raging about the $100 per barrel market, its hard not to be blatantly bullish.

Gold Markets

Gold has been trading in a rather begin range after dropping to fresh one-month lows on the stronger USD dollar narrative. But frankly, the market is so oversold that we should expect consolidation to set in before the next leg lower. We’re in the domain of the Gold Bears who have August $1160 lows in their crosshairs.

Still picking up the FOMC pieces and tying up a few loose ends

Still picking up the FOMC pieces and tying up a few loose ends

US markets 
Risk sentiment is buoyant this AM with US equity trading higher. The greenback advanced to a two-week high against G-10 while EM currencies are bucking that trending trading favourably despite yesterday’s Fed interest rate hike.

US Equities remain supported by Fed Chair positive view on the US economy, while the US rates underpin the dollar outlook. However, it’s the EURO which buckled when Italian budget concerns reared it’s vexed, and ugly head as political squabbling over country’s deficit targets raged while the EU budget deadline looms.

US Equities 

US equity markets were moving broadly higher through the US session with both Apple and Amazon reversing a week-long slide. Mind you; It hasn’t been a stellar week for the US markets with China pushing back trade talks, NAFTA discussion going nowhere accented with the natural paring back of risk ahead of the FOMC. But one thing that’s telling indeed is current price action, which sees investors continually coming back for more, it suggests the gushing US economy and on not trade wars, which continues to influence investor decision.

Oil Markets

While oil prices remain in bullish territory, there were a few emerging narratives that have tempered yesterdays huge Asia rally.

The DOE has pledged to deliver 11.0 million barrels  of crude oil out of the SPR during October and November to cover some operational costs.

U.S. crude production hit a record 11.1 million barrels per day in the week ending Sept. 21, according to preliminary data from the Energy Information Administration, but of course, this may be subject to revision but indeed a very chunky production number

While Libya supplies have been extremely erratic, crude oil production has reportedly reached a five-year high of 1.28 million barrels this week.

And then finally, there’s been elevated market chatter suggesting that Saudi Arabia may quietly add some supply over the next few months, While the likely loss of Iranian supply may be the dominant market theme, OPEC production may be rising.

So, it’s in this context last weeks speculative inflows have categorically focused on Saudi effective spare capacity or the lack there off and less focus on Saudis contention they will raise output, but at what point? But let’s face it there still a lot of guesswork in play, as there typically is in the boisterous oil markets.

So in the meantime,  dips remain incredibly well supported as Iran sanction continues to underpin sentiment but as we’ve seen countless times in many cross-asset markets, once investors set sights on a glitzy target like 100 dollars per barrel. More often than not, caution is thrown to the wind as the fear of missing out takes over. Indeed, there’s a tinge of FOMO, to borrow a phrase from BTC trading, seeping into oil markets. But with Oil Fund Managers and traders alike comfortably seated in the bull camp until further notice, oil prices look poised to extend on this week’s gains.

Gold Markets

A reality check as spot gold is selling off today as the USD continues to strengthen. For the past three months, gold has traded more like a currency rather than a go-to safe have an asset. With the Euro tumbling overnight, the $1190 trap door gave way as Gold has fallen to $1183 just ahead of the COMEX end of NY break. Besides with the final reading of second-quarter GDP holding at 4.2%Thursday, its reinforced the Fed rate hike outlook for 2019. Gold has been a seller’s market for some time, but with $1190 yielding, bearish activity could intensify with short-term speculators likely to target the August low when the yellow metal hit $1160 before rebounding.

Currency Markets

The Euro 

When you thought it was safe to buy the post FOMC EUR dip, Italian risk rears its ugly head making it difficult to hold an absolute bullish view at current levels G-10 traders were utterly caught out as they had virtually priced all the Italian risk out of the Euro equation.

The reason why Italy warrants so much attention is because of it big quite frankly as simple as that view is we could just as easily see a leak lower after the significant 1 1660 support level gave way. However, the markets could continue to remind itself that EU politically inspired Euro sell-offs tend not to have long legs after the considerable drop, I’m not so sure Asia G-10 traders would be keen to add downside risk at current levels as the Markets remain on Italian budget standby.

Japanese Yen

Patience is a virtue these days when trading USDJPY as there have been very few express elevators up on this trade. Besides some walking back from bad post-FOMC USD short positions, but overall risk sentiment improved, and US yields have started to pick up again.
While there likely the quarter year-end dollar demand impact, but with reports of the year-end turn interest rates already getting bid up considerably this to can affect USD demand.
But ultimately this is one of these keep it simple type trades that all currency traders like, global tensions seem to be lightening up boosting risk sentiment while all things continue to point higher US interest rates.

Turkish Lira
Well, maybe Turkey won’t be on everyone’s Thanksgiving menu come November as the Lira was pardoned again after some incredible price action this week.
TRY reacted favourably post Fed as the less hawkish tone was a real boost to well oversold weakest links in the EM chain, not to mention the 20 % yield on TRY looked gorgeously attractive But local traders were spirited on by talks of a Chinese acquisition into a sizeable Turkish company which continued to resonate overnight.

EM Asia

It’s good to be pliable trading local EM Asia currencies as the narratives are forever shifting after the intense focus on Current account deficit vs Current account surplus ASEAN currencies, were now back again to discussing regional high vs low yielders. But it all adds up the same in my book.

Asia High Yielders 

It’s debatable if we’ve seen the last major sell-off in INR-IDR or PHP, as my rational logic says we have not. But one thing that is clear RBI-BI and BSP mandate to keep on tightening while implementing various synchronous control to keep currency speculators at bay, are having a short-term positive effect on market sentiment. Despite the fact they are not the big elephants in the room, which are the deficits. AS such the tail risk remain high, but as EM traders will continuously remind themselves if there’s no risk, there’s no reward.

Asia Low Yields

On the flip side, low local yields are very prone to higher US Interest rates and are extremely sensitive to global risk, which leaves us between a rock and a hard place as US rates are moving higher, but risk is improving. Ultimately higher US interest rates will give way to a burst of risk euphoria if the US and China can come to terms on a trade deal.

Malaysian Ringgit

Unfortunately, the MYR is getting tugged in many directions resulting in little positive momentum despite improving risk sentiment and higher Oil prices. The Ringgit remains hypersensitive to higher US rates, especially considering the weak Q2 GDP and moderate inflation which will keep the BNM sidelined while the FOMC will continue to raise US interest rates. The local unit does feel trapped between a rock and a hard place. So, and until US-China trade leaves the picture, the MYR could remain weighted down.

The Chinese Yuan

Some odd uncorrelated moves in play that has many scratching their head wonder what is driving this USD demand. Suggesting this is the real corporate driven application that has traders possibly guess that Chinese corporates are increasing USD hedge as per SAFE warning back into eh summer or more simply that Chinese corporates have real US funding requirement. There seems to be no reason why there would be speculative demand but puzzling none the less. But USD trade war hedges are going to be smiling.

OANDA Trading Asia market wrap :: dazed and confused

Dazed and confused 

It was a hectic day in Asia as virtually everyone had a different read or take of yesterday’s FOMC. I guess we can assume that the extremely mixed trading session was a result of the markets extremely mixed view of yesterday FOMC

OANDA Trading Post FOMC podcast 938Now

Asia Oil

There was a complete unwinding of bearish oil sentiment after the market digested Energy Secretary Rick Perry comments suggesting there is little chance the Whitehouse will tap into SPR for the sole purpose of price intervention.

EURO
Just when you thought it was safe to buy the post FOMC EURO dip, Italian risk rears its ugly head making it difficult to hold an absolute bullish view at current levels and completely catching the market napping on this one!

The reason why Italy warrant a considerable amount of attention is that it’s big and as simple as that view is we could just as easily see a leak lower to the significant EURUSD 1.1660 support levels. But these politically inspired moves tend to have little legs so I would expect solid support on this dip.

However, the local German inflation data releases do warrant a bit of attention as this regional uptick supports the ECB view of rising inflation expectations.

Euro tumbles on talk Italy to delay budget meeting

Asia Markets

Asia market took the Fed hike in stride with equities mixed on China weakness, but Asian currencies were in demand despite the firmer G-10 backdrop

INR

The RBI remains in to defend the Rupee at all cost mode increase in SLR available to banks by 2% to 15% to ease funding pressures in the short term money market along with introducing tariffs on 19 non-essential imports to help stem the currency weakness.

KRW

$KRW dropped 6 won early in the session to 1110.00 as there was a holiday catch up in play as he Kospi reacted very favourably to the revised US-South Korea bilateral trade agreement signed Monday

Hong Kong Rate Hike

HKMA raised it’s benchmark rates by 25bp taking its lead from the Fed while local lender raised prime by 12.5 %. Keeping in mind that the Pboc announced they would tap into HK money market for funding, so this is not helping matter much. Until that point, the HSI was trading fluidly but took it on the chin after the rate hike announcement. Rising interest rate create a wall of worry for local property investors