Battered and bruised

Battered and bruised

It was a tough week for the markets leaving many participants battered and bruised, but the great thing about this industry, is we get to do it all over again next week.

US 10y yields went on to test 3.0% Friday after a string of constructive  US data, and Fed speaks supported the market’s base case for the Fed to continue with gradual hikes through year-end. Beyond there, the Fed’s outlook remains in wait and see mode, but with US 10’s yields making a run higher, the pragmatic view supports the long USD with the AUD offering is the path of least resistance.

No surprise Trump reportedly wants to proceed with the pending tariff list of USD200bn against China amid resuming negotiations.

The never-ending ping-pong match around BREXIT continues, and the levels of market frustration are loud.

Welcome new Fed member. Mary Daly, who has been named the head of the San Fran Fed, effective October 1, meaning that Esther George will still cast a vote for the regional Fed in September. Daly was the market’s choice so no risk on the appointment.

ARS continued to struggle, despite the central bank’s non-stop attempts to support it after  “The expected disbursement of USD3bn from the International Monetary Fund to Argentina will be delayed until renewed negotiations conclude, according to an Economy Ministry spokesperson.”  Could this be a foreshadowing of a negative emerging market lean next week? So, with TRY way to expensive to short, traders could start to look at the weakest links in the chain with IDR and INR the leading candidates to express a bearish EM view.

CNH fell against USD on Trumps China tariff noise despite treasury secretary Mnuchin’s attempts to broker a trade deal with China. But USDCNH, even in the absence of trade war rhetoric, should move higher near term from the most fundamental of views.

USDCNH  remains at the epicentre of my USD views, but ECB President Draghi is playing down the risks posed by Italy’s fiscal situation, there is a definite tail risk for the EURO to crater on any Italy escalation. While Italian risk remains at the cappuccino in a coffee cup level, the EURO bears will be ready to seize the opportunity on any EU political wobbles.

But it would be sheer folly not keep an eye on the 1.1730 level which is the August high, and, on a break, we can move much higher. Draghi was much less dovish than most projected, so there is cause for the EURUSD to grind higher.

With USDJPY waking up from what feels like a 2-month slumber the BoJ meeting does take on a higher level of importance than many had expected. Its great having USDJPY back in the fold.

Oil Markets

Brent crude oil tested decent support level on Friday following up on Thursdays bearish shift in near-term sentiment driven primarily on the build in US oil products but trimmed losses into the close. While WTI dips remained supported by the larger-than-expected 5.3 million barrels decline in US inventories. But perhaps short covering as options on October WTI crude oil will expire on Monday probably influence given the markets lean. But with the risk-reward calculus not signalling a bullish setup for energy in general, in the absence of any supply disruption, the markets could struggle ahead of the OPEC meeting as oil producers were making a convincing argument that a likely downturn in the Global economy could hurt oil demand. Of course, this is from a soothsayer’s perspective. And while impossible to quantify these unknowns, what we do know it that the weaker EM currency profile would most certainly hurt consumers appetite at the tertiary level of the demand curve. But Chinese commodity demand has appeared not to be destroyed by the 25% US tariffs on $34bn as China continues to offset trade headwinds by upping fiscal spend.

In the wake of depleting oil inventories Baker Hughes US Crude Oil Drilling Rig Count hit +7 last week.

Gold Markets 

The string of positive US economic data on Friday supporting the markets base case Fed outlook, dented Golds appeal into the close. With US 10’s hitting the psychologically significant 3 % level on Friday, we could see more traders feasting with the Gold bears on Monday.

OANDA Market Insights podcast (episode 31)

OANDA Senior Market Analysts Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Turkey rates rocket, Sterling up on Brexit hopes, Carney house price warning, Beijing welcomes trade talks offer.

Draghi remains confident about eurozone economy

The first signs of an impending global financial crisis were clear long before Lehamn Brothers collapsed, European Central Bank (ECB) President Mario Draghi said on Thursday.

Speaking at a post-policy meeting press conference in Frankfurt, Draghi told reporters: “For us, the crisis actually started before Lehman. The first serious signs of an impending crisis actually date back to September 2007.”

“What I remember of that incident was the extraordinary effort of international cooperation at world level. In other words, even before Lehman it was quite clear that the financial crisis was coming. And it would have unprecedented proportions and was worldwide,” he added.

CNBC

CBRT takes the focus off BoE and ECB meetings

Turkish central bank needs aggressive hike to settle investors

Markets are trading relatively flat ahead of a slew of central bank meetings on Thursday, with the BoE, ECB and CBRT all scheduled to make interest rate decisions.

While the Bank of England and European Central Bank would typically steal the spotlight, it’s actually the Central Bank of the Republic of Turkey that will likely steal the headlines today. With inflation in Turkey close to 18% and the currency having repeatedly fallen to all-time lows against the dollar, it’s become quite clear to all that the central bank needs to step in with a substantial hike and its unexpected pledge last week that its monetary stance will be adjusted, suggests it will do just that.

This would be quite controversial though with President Recep Tayyip Erdogan having been very clear about his opposition to higher rates. Having made his desire for control clear, investors will be monitoring today’s decision very closely to see just how independent the central bank really is. A rate hike looks obvious but how aggressive they’ll be will give a strong indication of how much influence Erdogan has over them.

USDTRY Daily Chart

OANDA fxTrade Advanced Charting Platform

Traders will be very quick to express their disapproval if the central bank is seen to be not responding aggressively enough which could result in a substantial decline in the Turkish lira. There is currently an expectation of a more than 4% increase in interest rates and it may take more to satisfy investors and avoid such a depreciation. Anything short of this could be bad news for the lira both in the near and long-term.

BoE unlikely to change message as Brexit negotiations enter crucial stage

The ECB and BoE decisions will likely be relative non-events compared to the CBRT. Both central banks have recently announced some monetary tightening – BoE raising interest rates and ECB tapering QE and announcing its end date – and are in no rush to speed the process up.

With Brexit negotiations heating up, the BoE will more than happy to drift into the background having come under fire for its views in the past. With the outlook so uncertain and hanging on the outcome of these negotiations, there’s little upside to the central bank making any changes to its policy message between now and the end of the year and I expect that to come across over the next few meetings.

ECB expected to maintain slight tightening plans

While the ECB may be less affected by the Brexit negotiations, it has set out a path for the next year that will see it slowly exit its easing program and with the economy experiencing a slight slowdown, it’s going to be in no rush to change course in the near-term. The first rate hike may be a little more delayed than it previously alluded to but I don’t expect it to hint at that until QE has ended.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Will we get fireworks from BoE and ECB?

What to expect from a not-so-super Thursday

Thursday has the potential to be another interesting day in the markets, with interest rate decisions due from both the Bank of England and the European Central Bank.

It’s not often that we hear from two major central banks on the same day, let alone around the same time, but when we do there’s always the potential for some turbulence.

Both central banks are in the early days of their respective tightening cycles, with the BoE having recently raised interest rates above 0.5% for the first time since the financial crisis and the ECB drawing its quantitative easing program to a close at the end of this year.

While there’ll still be plenty of cash sloshing around the financial system until they start the process of reducing their balance sheets – as the Federal Reserve is currently experimenting with – the moves being undertaken represent a very cautious and gradual tightening that traders are monitoring very closely for any signs that they may lose their nerve.

This is particularly true in the current environment with the UK and EU locked in Brexit negotiations as the 31 March deadline draws ever near. Protectionism is another key risk factor with US President Donald Trump threatening tariffs on the block. Add to that the struggles being experienced in emerging markets at the moment – a major trade partner of Europe – and the jobs of the central banks become that much harder.

We already appear to be seeing a slowdown in numerous economies across Europe due to a combination of these factors, something the central banks don’t appear to concerned about just yet but may do should they persist.

USD/JPY – Japanese yen gains ground

What should I be looking at?

The obvious chart is EURGBP given that these are the two currencies most sensitive to what the BoE and ECB do. The closely linked nature of the two economies can mean we see less powerful swings in this pair though than we do certain others which can make it more or less appealing, depending on preferences.

EURGBP Daily Chart

OANDA fxTrade Advanced Charting Platform

The euro has definitely had the better of things throughout the summer, with no deal Brexit being viewed as a far greater risk for the UK than the eurozone, which is understandable. What this means though is that if the two sides do start to find common ground, we may see this trend reverse course, as we have over the last couple of weeks when we’ve had some more positive news flow.

That trend may already have changed, with last week’s sell-off taking us below the rising trend line and potentially signalling a shift in sentiment in the market. Obviously that won’t change the outcome of the meetings, or press conference in the case of the ECB, but it does give a sense of bias heading into it.

Sterling Pauses on Reports of Leadership Challenge

Both currencies have found some form against the US dollar over the last month following a rough summer but are yet to see the spark that gives some confidence that they’ve broken into a more sustainable uptrend. They’ll definitely be ones to watch heading into the meetings.

EURUSD Daily Chart

GBPUSD Daily Chart

What can we expect from the meetings?

My expectations are actually quite low for the meetings. The reason why is that it seems to suit both central banks to stay under the radar for now. Both have made important first steps towards normalization and are in no rush and with Brexit on the horizon, now is not a good time to be changing course, especially as they don’t have to.

Both have laid out quite clear plans for the next year and even if they don’t stick to them – which there’s a good chance they don’t given the amount of unknowns and risks – the important thing is that investors are largely on board and the economies are doing ok. I don’t think they’ll want to mess with that.

So I don’t expect any changes in interest rates or QE this month and we can probably expect ECB President Mario Draghi’s press conference to be a rather dull affair.

Famous last words eh….

BoJ’s new script supports the carry-trade

Tuesday July 31: Five things the markets are talking about

Sovereign government bonds prices have rallied overnight as the Bank of Japan (BoJ) again committed to keep its “ultra-loose” monetary policy intact.

As expected, Japanese policy makers tweaked some policies, but signalled rates to stay low for an “extended period of time.”

In respect to the long-term rates, the BoJ reiterated that it would continue to buy JGB’s to keep their 10-year yield at about +0%, but added that “while doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.”

Elsewhere, global equities have been trading somewhat mixed as corporate earnings reporting continues – all market eyes will be on Apple’s Q2 results today after the close.

From a central bank monetary policy perspective, next up will be the Fed (Aug 1) and the Bank of England (Aug 2). Capital markets will be looking for confirmation that U.S policy makers plan two more interest-rate hikes before year-end, while in the U.K, Governor Carney is expected to hike interest rates by +25 bps despite ongoing Brexit worries.

Commodity prices are under pressure after China’s manufacturing PMI’s fell this month (51.2 vs. 51.5 m/m) as the first-round of U.S tariffs begin to have an impact.

On tap: U.S personal spending and income data for June will be released. On Friday, it’s U.S non-farm payrolls (NFP), which is expected to show a healthy labor market with +193K new jobs, and an unemployment rate slipping back to +3.9%.

1. Stocks mixed results

Global stocks are broadly steady, but mixed overnight, after U.S tech share losses yesterday.

In Japan, the Nikkei share average ended flat, rebounding from a one-week low after the BoJ tweaked its monetary policy settings, but refrained from making any radical moves. The benchmark Nikkei inched up +0.04%, while the broader Topix fell -0.84% as bank shares fell on profit-taking after the rate decision.

Down-under, Aussie shares found support Tuesday, mostly supported by BHP. The S&P/ASX 200 rallied +0.03%, holding atop of its multi-year highs, to close out for a fourth consecutive month of gains. In S. Korea, the Kospi inched higher, closing out the month +0.08% in the ‘black.”

In Hong Kong, the Hang Seng index ended down overnight, following the U.S tech sector lower. At the close of trade, the index was down -0.52%, while the Hang Seng China Enterprises index closed -0.2% lower.

In China, stocks closed higher, aided by gains in real estate and energy firms, while the market response to the country’s manufacturing data has been relatively muted – the data clearly reports a slowdown in economic momentum. The blue-chip CSI300 index ended +0.1% higher, while the Shanghai Composite Index closed +0.3% firmer.

In Europe, regional bourses are trading mixed in a range bound trade, while in the U.S stocks are set to open in the ‘black” (+0.2%).

Indices: Stoxx600 +0.1% at 391.2, FTSE +0.1% at 7711 DAX +0.1% at 12811, CAC-40 flat at 5492, IBEX-35 +0.5% at 9905, FTSE MIB +0.6% at 22080, SMI +0.2% at 9183, S&P 500 Futures +0.2%

2. Oil prices drop on oversupply worries, gold unchanged

Oil prices fell overnight, with Brent futures set for their biggest monthly loss in two-years, as oversupply concerns rose on reports that OPEC’s output rose in July to its highest for 2018.

September Brent crude futures fell -25c, or -0.3% to +$74.72 a barrel after rising nearly +1% yesterday. U.S West Texas Intermediate crude futures (WTI) are down -24c, or -0.3% at +$69.88 a barrel, after rising more than +2% on Monday.

Note: For the month, Brent futures are set to drop -6%, while WTI futures are set to decline -5.8%.

A Thomson Reuters survey showed that OPEC increased production by +70K bpd to +32.64M bpd in July, the most this year – to offset the loss of Iranian supply as U.S sanctions have already started to cut exports from the world’s third-largest producer.

Ahead of the U.S open, gold prices are steady, trading within a tight range as the market adopts a “wait-and-see” approach ahead of the Fed’s two-day monetary policy meeting, commencing today. Spot gold is up about +0.1% at +$1,222.15 an ounce, while U.S gold futures are -0.1% lower.

3. Euro zone bond yields edge up after inflation beats expectations

Eurozone government bond yields are edging higher this morning, after preliminary data showed that inflation was higher than expected in July.

Headline consumer inflation accelerated to +2.1% from +2.0% in June, while core-inflation rose to +1.3% from +1.2% in June.

Germany’s 10-year government Bund yield has backed up to +0.44%, while other euro zone bond yields have come off their lows, rising about +1 bps across the board.

This Thursday, the Bank of England (BoE) is expected to hike +25 bps. However, market expectations are looking for a split vote of perhaps 6-3 in favour of a rate rise – some members are likely to continue favouring waiting to see how the data develops.

Note: The market is pricing in an almost +90% odds for a hike.

Elsewhere, the yield on U.S 10-year notes has declined -2 bps to +2.95%, the lowest in a week, while in the U.K, the 10-year yield has declined -2 bps to +1.343%, the biggest fall in more than a week.

4. Dollar’s mixed results

The yen (¥111.51) is a tad weaker after the BoJ’s policy decision overnight. The bank has stressed a “prolong period of extremely low rates” or in other terms further “policy stimulus” in its first-ever forward guidance. Technically, the statement is encouraging for long-term investors to consider adding to their ‘carry-trade’ positions.

Elsewhere, a plethora of mixed European data (see below) is supporting the EUR (€1.1724). Nevertheless, the pair remains confined to its tight summer trading range. This morning’s mixed data will do little to persuade the ECB to move away from its current stimulus objectives.

5. Eurozone economy slows further

Data this morning showed the eurozone’s economy slowing further in Q2, as exports and business confidence both weakened on trade relations concerns.

Eurostat said that compared with Q1, the eurozone’s GDP was +0.3% higher, the weakest expansion in two-years, and year-over-year, it was +2.1% higher.

Note: The U.S/E.U growth differential is the widest in four-years. Stateside, economic growth was +4.1% q/q.

Consumer confidence is expected to rebound if there is progress in talks to resolve trans-Atlantic tensions.

Higher oil prices are another obstacle. The ECB confirmed last week that it would proceed with plans to end QE in December, but a “lengthening period of weaker growth may make it reluctant to hike rates next year.”

Other data this morning released showed the annual rate of inflation rose to +2.1% in July, further above the ECB’s target and that the unemployment rate across the eurozone was steady at +8.3% in June, but the number of people without work rose slightly for the first time in 12-months.

Forex heatmap

Yen buoyed as inflation tops estimates

Tokyo prices rise most in four months

This morning’s release of consumer prices in Tokyo saw the biggest rise in four months. Prices rose 0.9% y/y, beating economists’ estimates of a mere 0.5% increase by a large margin. Prices in June were 0.6% higher than a year earlier. This contrasts with the national reading for June which showed a below-forecast 0.7% gain. Excluding food and energy, the price rise was a more modest 0.5% y/y.

NOTE: Japan releases two sets of inflation data. A national one, which has a lag of one month, and one for just Tokyo, which is more current.

In the currency markets, the yen was given a little boost across the board post-data though there was perhaps more reaction in the bond markets. The 10-year JGB yield touched 0.1% for the second straight session. Last Monday, the Bank of Japan announced its first special fixed rate bond auction since February, offering to buy 10-year bonds at 0.11%. The Bank announced unchanged tenors and amounts at its last daily bond auction before the rate meeting on Monday/Tuesday next week.

USD/JPY Daily Chart

Source: Oanda fxTrade

Bank of Japan to change QQE plan?

Also fueling the rise in Japan yields is speculation that the Bank will make changes to its bond yield targets at next week’s meeting. Observers suggest that quite often when it comes to the Bank of Japan, there is no smoke without fire. Some suspect that they may be testing the waters for such a move later in the year. Analysts reckon that any shift higher in yields, or a steepening of the yield curve, would be beneficial for Japanese banks and financial institutions.

10-Year JGB Yield Chart

Source: Bloomberg.com

ECB sticks to its plans

At yesterday’s rate meeting, the ECB maintained its stance to end bond purchases by the end of the year and pledged to keep interest rates static at least through the summer of 2019 before considering a tightening bias. The EUR did slide versus the dollar after the press conference, though this could also be attributed to gains in the US dollar ahead of today’s release of US Q2 GDP data.

Dollar Rebounds in Anticipation of Q2 GDP Release

US Q2 GDP data on tap

The main event on today’s data calendar will undoubtedly be the release of US Q2 GDP data. Estimates suggest growth accelerated to 2.3% q/q from +2.2% in Q1, while the annualized figure is seen jumping to 4.0% from 2.0%. Apparently, a top Trump official has been telling Republicans to expect a “blockbuster GDP number” while Trump himself has commented he’d be happy with a number 4 in front. Other data releases include German import prices and US personal consumption expenditure prices for Q2.

You can see the full MarketPulse data calendar at: https://www.marketpulse.com/economic-events/

Risk on as US and Europe avert trade battle

Trump/Juncker meeting has results

European Commission President Jean-Claude Juncker did not come away from Washington empty-handed. The two presidents reached an accord which included expanding imports of US liquefied natural gas and soybeans while reducing industrial tariffs on each side. Previously, Trump had threatened to impose a 25% tariff on imports of European cars. If Europe can do it, how about China? That will be the next question on everyone’s lips.

The news came late in the session and helped Wall Street to a stronger close after struggling for most of the session. Boeing and AT&T were drags after disappointing earnings. The US dollar retreated across the board, losing almost 1% versus the Canadian Dollar and touching its lowest level in six weeks.

USD/CAD Daily Chart

Source: Oanda fxTrade

Oil rises on stockpiles drawdown

Data released by the Energy Information Administration showed a larger than expected drawdown on crude inventories in the week to July 20. Estimates suggested a drawdown of 2.33 million barrels however a total of 6.15 million barrels were required. This drawdown more than wiped out the 5.84 million barrels added to stockpiles the previous week.

Source: MarketPulse

ECB in focus on the data calendar

All eyes will on the ECB rate meeting and subsequent press conference today. Not that there are any expectations for any shift or tweak in policy but, as Craig points out, it can sometimes be painful to ignore any central bank meetings, particularly the ECB.

Will ECB offer any surprises on Thursday?

The rest of the calendar is populated with US goods trade balance for June, with the deficit seen widening to $67.0 billion from $64.85 billion. Recall, China’s trade surplus ballooned to a record surplus in the same month, according to data reported earlier this month. Other items include US wholesale inventories and durable goods orders.

There is also a seven-year US note auction which, if yesterday’s five-year auction was an indicator, should be well received. The five-year auction drew a bid-to-cover ratio of 2.61, up from 2.55 at the previous auction and above 2.49 over the past 12 auctions. The five-year yield edged up to 2.815% from 2.719%.

You can see the full MarketPulse data calendar at: https://www.marketpulse.com/economic-events/

Will ECB offer any surprises on Thursday?

Euro climbs ahead of ECB meeting

While we may not look back at the ECB meeting on Thursday as one of the defining moments in the eurozone’s long recovery from the global financial and debt crises, or even remember it much at all for that matter, that doesn’t mean there won’t be anything to take away from it, or that markets won’t react.

  • ECB left little to the imagination in June
  • Never a good idea to assume an uneventful meeting
  • Will Draghi succeed in talking down the euro again?

At its meeting last month, the ECB laid out plans for its bond buying program (quantitative easing) beyond the current expiry date of September, opting to extend it until the end of the year at half the pace – €15 billion – and warned that interest rates will remain at present levels “at least through the summer of 2019”.

In providing such a clear path for asset purchases and interest rates for the next year, the central bank effectively covered all bases and barring a significant shift in the data or a change in the global landscape, left few questions if any to be answered, making this meeting a potential non-event.

Juncker/Trump Meeting Eyed as Tariffs Hit Outlook

Should we ever anticipate a “non-event”?

One thing we’ve learned in the past though is not to become complacent when the central banks are involved and in the current environment of trade conflicts and Brexit, things can change very quickly. We have to remember that while the recovery is gathering momentum and making encouraging progress, it is still fragile and could be derailed by a number of events which would require the ECB to step back in and offer its support.

Only this week it has been reported that US President Donald Trump intends to slap 25% tariffs on European auto imports and significantly escalate the trade conflict between the US and EU. Jean-Claude Juncker is currently in Washington looking to calm the growing tensions between the two but it seems that unless he is offering concessions, he may not get very far.

What’s more, the UK and EU don’t appear to be getting much closer to agreeing on the divorce and with eight months to go until exit day, this is a notable downside risk for both economies, with the IMF recently warning that a no-deal Brexit that sees the two revert to WTO rules could wipe 1.5% and 4% off EU and UK output, respectively, by 2030.

In terms of the data, the ECB will likely be relatively content, with unemployment continuing to drop – now at 8.4%, the lowest since December 2008 – the economy growing well despite the dip in the first quarter and inflation gradually increasing, albeit less so on from a core perspective. Nothing has really changed on this front since the last meeting that will concern policy makers.

EURUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

While the euro has been climbing over the course of the last month, after falling following the ECB announcement and very dovish accompanying statements, it’s now only trading back where it was before the meeting which will be a relief to policy makers. It will be interesting to see if anything they say changes this or if Draghi focuses on talking it lower once again.

Live FX Market Analysis – 24 July 2018

In this week’s FX webinar, Senior Market Analyst Craig Erlam discusses the latest events that are moving financial markets – Trump attacks the Fed, Brexit plans widely criticized etc – and previews the week ahead.

Craig also gives his live analysis on EURUSD (9:22), GBPUSD (11:48), EURGBP (18:45), AUDUSD (19:34), USDCAD (21:04), GBPCAD (22:14), NZDUSD (23:31), USDJPY (24:38), GBPJPY (27:41) and EURJPY (29:09).