Markets underpricing China risk( OANDA Trading Podcast BFM Kuala Lumpur 89.9)

Stephen Innes, Head of Trading in Asia-Pacific, OANDA, Singapore
Stephen reckons markets are “seriously underpricing economic risk in China”.

Economists suspect the direct impact from the two sets of US tariffs aimed at Beijing could drag China’s GDP down by 0.3 percentage points in the longer run.

Stephen also shares some insights on how China can contain the adverse impact from its ongoing trade war with the US.

We also discuss the market expectation on China’s 2Q GDP that is scheduled to be out today.

BFM Radio Kuala Lumpur 89.9

What sparked the dollar rally ? ( OANDA Trading Podcast on Money FM 89.3)

Stephen Innes Head of Trading Asia tells Michael Switow why the yen is weak, and stocks are rallying.

Money FM Singapore 89.3

 

 

The sky hasn’t fallen just yet

Trade War Escalates, but the sky hasn’t fallen just yet as optimism crept back into the market on reports of fresh bilateral trade negotiations between China and the US coupled with a slightly firmer RMB scrim. “Where there is a will, there is a way”. But when it comes to backroom negotiations, one can only imagine that talk is not going to come cheap.

The broader market continues to remain in wait and see mode for further details on how China might retaliate on trade, while equity markets continue to press higher under the guise that “no escalating news is good news”. Indeed equity markets continued to retrace the sharp mid-week sell-off. But again, the US technology sector comes shining through as US internet and technology stalwarts are leading markets to a solid finish in Thursday’s New York session.

While investors could be breathing a sigh of relief, they’re probably just happy their investment portfolios are breathing and alive and kicking after the latest trade war episode. But even the most pessimistic investors must take note of just how enduringly bullish these markets are, after having everything thrown at them including the kitchen sink (Trade, Italy Germany, Long Bond Rates). It’s incredible what global bourses have withstood all this harmful noise and continue to march higher. But indeed, the solid foundation of a bull market is that it ignores the bad news and keep on grinding higher. And one can only imagine what levels the S&P would be trading if trade war fizzled out.

Equities shrug off trade tariff tensions

Speaking of bull markets, USDJPY continues to grind higher and perhaps a bit of the above is starting to factor in (i.e. ignore the bad news and keeps moving higher). The break above 111.75 was one of the most unambiguous signals in some time, and a move into the 113’s could trigger an unwind in longer-term structural risk-off (long JPY) positions which could see this current rally extend much higher.

There was little movement on Powell interview on Marketplace but here are the full transcripts.

Chairperson Powell’s Marketplace interview

And the NATO summit ended on a more cheerful note, with President Trump reaffirming his commitment to the alliance while focusing more closely on the financial obligations of the other countries. So, the market is happy to hear the NATO band marching on.

Oil market

The oil markets are trying to make some inroads after Wednesday’s spill, but are having trouble holding both tops and momentum. I think this is a one-part trade war and one-part supply coming back online. But Wednesday was one of those steep selloffs on record volumes that will give even the bravest of bull’s cause /pause for thought about holding long positions, especially into the weekend. On the supply front, the latest news from Libya is short-term bearish with the El Feel or Elephant field restarting for the first time since February, and there is some discussion suggesting the supply rebound could increase and more than offset the impacts from the Eastern port closures.

Gold market

The precious space continues to hold critical support at $1,240, but the Gold complex is still hovering in the mixed territory zone. The global equity market is bouncing higher overnight, and there are very few defensive allocations into Gold. However, with Fed Chair Powell not ringing any alarm bells for more aggressive fed tightening, gold picked up a bit of goodwill. But ultimately, the USD looks to be on solid footing while preparing to take the driver seat once again, especially on USDJPY, which should hold the gold bulls at bay.

Currency Markets

The USD is looking to get back in in the driving seat once again.

JPY: USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine where spot will trade if an intense wave of risk on kicks in or trade war fizzles out.

CNH: The Yuan remains at the centre of all the action, but with further signs of policy easing on the cards given the economic slowdown has been much deeper rooted than feared, markets will continue to buy dips until a definitively positive shift in trade war sentiment.

USDAsia
Strong demand on the platform for long USDAsia is consistent with the general market views.

Trade war escalation is a definite plus for the dollar and coupled with robust US economic data; it does support this view.

MYR: Despite some optimism creeping back in on reports of bilateral trade negotiations between China and the US, while most of $Asia pulled back from yesterday morning highs, the Ringgit continued to lag the moves.

The Ringgit continues to suffer from political risk and fiscal uncertainty. If the USD does start to reassert itself and coupled with short-term bearish signals on oil prices,  the USDMYR will likely slice through the 4.05 level like a hot knife through butter in this environment.

INR The Ruppe hit and all-time interday  low and has now plummeted over 7.6 % versus the USD will wiping out a significant portion of carry-trades in its wake. But the Rupee will continue to trade at the mercy of oil prices

KRW.After testing 1130.00, the dissenting policy vote injected some life into the Won and coupled with the firmer RMB backdrop saw the USDKRW fall below the 1124 level. The won will be the go-to trade on the escalation of trade war tensions, but in the meantime, the RMB complex will continue to dictate the pace of play

A tenuous and unstable state of affairs

A tenuous and unstable state of affairs

The prospects of another round of US tariffs directed at China have resurrected fears that the trade skirmish between Washington and Beijing could escalate with some investors now fearing a full-blown global trade war could be a reality. But the most damning signal is that dialogue between the two superpowers is pretty much non-existent, and with a diplomatic solution appearing more unlikely as the days go by, markets will remain on the defensive.

But with about seven weeks before the new tariffs kick in, if there is a will there could be a way. However, with no senior-level discussion scheduled on the near-term horizon, markets will likely remain in a very tenuous and unstable state of affairs until officials get back at the negotiating tables.

As for woeful Wednesday, Trade war headlines continued to exact a full court press on stocks, oil and EM FX. But the day also provided an unexpected turn of events on USDJPY which bucked conventional risk off wisdom and surged higher as US Treasury yields moved north, but with USDCNH adjusting convincingly higher, the USDJPY now appears trending in sympathy with the broader $/ASIA basket. Indeed, Japanese investors are not in the repatriating haven mood but may be increasingly looking toward the US markets as their essential investment vehicle which could support USDJPY even in a risk-off environment.

Oil markets
An extremely active session in commodities overnight with Crude prices spilling lower across the board as USD200bn of additional tariffs on Chinese goods took its toll.  While Oil prices are following the risk-off move but adding more fuel to the fire was Presidents Trump’s comments on Germany’s energy policy which he is suggesting is being ” held captive by Russia”. Also weighing on prices was the lifting of the force majeure at Ras Lanuf, Es Sider, Hariga and Zueitina suggesting that Libyan exports from its eastern ports will quickly resume to previous levels and this report has exerted pressure on bullish sentiment overnight. But the .6% rally in the USD is also weighing on commodity sectors

West Texas Intermediate crude oil moved lower in sympathy with a weaker Brent market on  even after the DOE reported a much larger-than-expected draw , but with imports falling by 1.6 million barrels per day but the decline in imports could be writing off due to July 4th holiday hangover and the deluge in the Texas coast due to heavy rains. But still not a particularly bullish signal.

Metals Markets
The metals complex is getting hammered with copper plummeting to one-year lows. Of course, trade tensions are harmful to the base metal complex, but the fear that an escalating trade war will severely dent global growth assumptions is inflating the sell-off. Predictably the Aussie dollar is taking it on the chin given it precarious position in the base metal supply chain into China.

Gold Markets

In the Gold sector, there has been nary a haven bid to be found as the surging USD has driven gold lower and within an eyeshot of the critical 1240 level. But with a broader equity sell-off failing to materialise in US markets, there has been a real scarcity of defensive allocations into Gold overnight.

Currency Markets
What’s hot what’s not? Well, I’m glad I reminded myself that trade wars are good for the USD while holding an unwavering conviction that USDCNH has no place to run but higher on any escalation.

CNH: Yes, this 200 billion is a significant escalation in the trade war between China and the US, and yes, the RMB complex should remain to be the epicentre of currency trade where the visible big-picture developments should see a bullish skew for the USD. And while it’s entirely possible the Feds may enter the equation at some point denting the $’s appeal, we’re nowhere near meltdown level just yet, suggesting there is more juice to be squeezed on the long USD RMB complex.

JPY: it will be tough for traders to change gears from depending on the risk aversion signals to the reality of shifting Japanese inventor behaviour which may be looking outbound for yield. It might be time to start viewing USDJPY strategy through a different lens.

MYR: The BNM held a very even tone at yesterday’s MPC favouring policy continuity. A very sharp move by a Central Bank veteran knowing full well that keeping policy measures at hand for possible darker days ahead makes perfect sense especially with no real reason to signal a dovish shift at this stage.

But more aggressive trade war fears are coming home to haunt as the fear that an escalating trade war will severely dent global growth assumptions and trigger a commodity market rout. Oil markets are not immune to this calculus, and the sudden drop in oil prices overnight is weighing on the MYR sentiment.

But equally concerning, is the lunge higher in USDCNH which should continue to exert pressure across regional currencies.

I’m always looking for a silver lining in the Ringgit cloud, but everything is looking ever so tarnished today suggesting we could press higher as regional sentiment wanes.

When the going gets tough, the tough get going

When the going gets tough, the tough get going

U.S. stocks are trading off their intraday highs late in the NY session weighed down by financials profit-taking ahead of the deluge of bank earnings reports on Friday, robust US economic data had temporarily overshadowed fears over global trade disputes. That was until a late NY session headline suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter. But a list is a list and not an actual tariff, so lots to be ironed on this one. But regardless, it will put the  markets back on the defensive for the time being

Until that point, the market was indeed embracing the raft of outstanding US economic data, and despite the apparent downside risks from an escalating trade war the fact investors continue to plough cash into equities, that was a central dictating market theme. And given the likelihood of a strong earnings season, and at one point investors were heard yelling down Wall Street “what trade war”?? Indeed, when the going gets tough, the tough get going. That was until the latest headline when much of the tough slogging was quickly unwound in minutes as the SPX shed 100 points in the flash of an eye reminding investors we are in tricky markets, and nothing can be taken for granted.

The currency markets, however, are a different kettle of fish where the market risk is relatively light with Forex traders doing little more than rotating from what currency pair is hot from what is not. In other words, chasing the fear of missing out seems to be a common theme among G-10 trades after a considerable volume of USD long positions have been culled over the past few weeks, especially against the EUR and AUD. There is a reason why risk is so low in currency land; it’s the real fear of getting sideswiped by trade war headline risk.

Oil Markets

Oil prices continue to gain on yet more production outages with Brent briefly breaching the $ 80 per barrel high water mark as strikes by workers in Norway and Gabon added to global production outages.

Without question, supply risk continues to dominate trader psyche and after the API reported another massive draw traders are now positioning for another sizeable drop in today’s EIA weekly report.

ON the bigger picture, the markets continue to access the intermediate-term supply impact as the Nov. 4 US-imposed deadline for allies to halt Iranian imports moves nearer. All the while the Libyan disruptions continue to run on.

At the end of the day, supply concerns and more disruptions  continue to skew bullish for oil prices

Gold Markets

After a brief peak above 1265 Gold prices resumed its downward path as global stock markets trade well. However Gold prices pulled came off session lows on NATO concerns as the EU countries are worried about possible side agreement between Putin and Trump which could profoundly weaken the alliance. Also, the latest tariff headlines suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter should keep a bid under the market. Gold dips remain attractive especially for investors knowing that gold should be an essential part of any diversified portfolio, especially in these highly charged political times.

Currency Markets

With this morning’s tariff headline risk, I need to remind myself that the trade war is good for the dollar, as the US has the upper hand in negotiations and whichever way this issue gets resolved it’s likely to be positive for the US current account.

GBP: Cable remains the land of the brave requiring a sharp eye and quick trigger given the plethora of Brexit headline risk. But indeed, in this muddied UK political landscape it does suggest the endgame will be the UK  never leaves the EU, and in this scenario, the Pound is ” cheap as chips”. When the UK political malaise subsides, Sterling  will be the shining star of the market

JPY: The USD did look poised to break out topside given the fading of trade rhetoric and a real risk-on environment developing. US equities have held up remarkably well as the bull market keeps marching her despite the reams of negative news thrown at the benchmarks. Long USDJPY is entirely under-owned as risk-off trades are still prevalent vs the JPY, and on a break of 111.50-75 levels, dealers will be forced into a risk on trade. But as usual, nothing ever works out as planned so we may have to re-explore this scenario later once we iron our fact from fiction over the latest US trade escalation headline.

MYR: It was an up and down day for the Ringgit which was in high demand and dare I say outperformed early on Bond related inflows as investors position for dovish pause for the BNM. The MGS curve was in firm demand particularly the attractive long end yields which are usually the domain for real money investors and pension funds. Indeed, last weeks Bond market awakening was the real deal!!

As for the BNM policy decision, we anticipate no actual shift in rates, Nor Shamsiah is a BNM veteran, and it would suggest policy continuity, but the markets will be more focused on forwarding guidance. Given the political and fiscal struggles ahead, I think it’s easy to assume this will not be a hawkish pause.

Oil prices continue to flourish and should push higher given the bullish supply skews which should go a long way in supporting the government coffers.

Live FX Market Analysis – 10 July 2018 (Video)

In this week’s webinar, Senior Market Analyst Craig Erlam discussed the latest Brexit developments as two members of her team resign after an apparently united and productive meeting on Friday. He also talks Trump, after the latest imposition of trade tariffs and ahead of his trip to the UK and the NATO summit, and previews the week ahead.

Craig also gives his live analysis on EURUSD (12:20), GBPUSD (15:03), EURGBP (17:50), AUDUSD (19:35), USDCAD (24:12), GBPCAD (26:19), NZDUSD (28:31), USDJPY (30:22), GBPJPY (32:25) and EURJPY (34:52).

GBP/USD – British pound steady on modest GDP growth

USD/JPY – Japanese yen dips to 7-week low, inflation reports next

Commodities Weekly: Gold saved by dollar’s retracement

All is quiet on the western trade war front

All is quiet on the western trade war front

For a change,  all is quiet on the western trade war front as the drop in aggressive US tariff posturing and the nonfarm payroll after effects have propelled US equity market to the third consecutive day of substantial gains. While traders sit tight awaiting the next US trade salvo, but for the time being robust US economic data is offsetting concerns about rising trade tensions. In addition to the strong payrolls report, Federal Reserve Board data showed that consumer borrowing picked up in May with total consumer credit increasing $24.6 billion to a seasonally adjusted $3.9 trillion, up 7.6%. Indeed, this incredibly strong pace of credit growth points to a resilient US consumer while continuing to highlight an extremely robust US economy despite growing trade concerns.

But markets remain deceptively tricky and could be even more so as we enter the US dog days of summer.

In Asia markets, all eyes were on Xiaomi Corp IPO but the coming out party was less than a hit and didn’t exactly attract the feeding frenzy expected from high tech investors. Indeed, global high-tech investors continue to feel more comfortable investing in global stalwarts like apple as opposed to debutantes like Xiaomi who have more of an Asia centric presence. Of course, escalating trade war concerns weighed on sentiment but being the first of many prominent Chinese tech names coming to market seeking IPO in coming months, investors may have thought Xiaomi valuation a tad “toppish” in current market conditions. And are perhaps looking for more significant fire sales as more of China’s glittering tech giants swamp the IPO markets in the months ahead.

Oil Markets
Indeed, there’s a bullish undertone in the markets with the Iranian supply question expected to support and eventually push prices higher. The Brent market climbed amid ongoing concerns regarding Libyan supplies while treader weighed the bullish medium-term impact of Iran sanctions.

While WTI was under some early pressure after Syncrude Canada announced it would be restarting production from its Fort McMurray oil sands upgrader earlier than expected, but prices remained firm and started to rally after API showed another major draw of 4.50 million barrels.

Looking to Libya, the head of their state energy producer warned that output would keep falling day by day if significant ports remained closed because of clashes last month that lead to a standoff. Mustafa Sanalla, chairman of the Tripoli-based National Oil Corp, stated that “Today, production is 527,000 barrels a day, tomorrow it will be lower, and after tomorrow it will be even lower, and every day it will keep falling.” But keep in mind, current levels are less than half what the country was producing in February pre-political deadlock levels.

Even under the supposition that production from Saudi Arabia and Russia is sufficient to offset declining output from Venezuela, Libya and Iran, keeping the market in an approximate physical equilibrium, the stream of supply disruptions will continue to upset those dynamics.

Gold markets

The weaker dollar had gold bulls charging but the run of stop losses above $ 1261 cleared a path for Gold to touch $ 1265 overnight after political turmoil reared its ugly head in the UK when Boris Johnson resigned. But technically, gold has a long road to travel before breaching the more relevant technical levels around $1300 suggesting it remains ever so prone to the stronger USD. But the robust US economic data, fading of trade war rhetoric and extremely buoyant US equity markets turned golds tide overnight as “risk on ” saw gold prices fall from interday peaks and retreat before eventually finding support at around $1258 levels.

Currency Markets

In the currency market, Political unravelling in the UK has provided the best trading opportunities.

GBP: Another roller coaster ride on GBP overnight as Brexit markets got very uneasy after Boris Johnson resignation and the thought he could force a party coup which all but unwound the positively from Friday Brexit Chequers meeting. Long Sterling is arguably the G-10 most crowded trade so any Brexit hic up will likely trigger an outsized move as weaker near-term stops get triggered. But overall the long Sterling trade remains bruised but not broken.

AUD: The lack of trade drama is underpinning the AUDUSD. But the Aussie was arguably the most subscribed USD dollar long play in G-10, so players were mercilessly squeezed as ongoing China/US trade skirmishes are showing nascent signs of easing.

JPY: US yields and equities were soundlessly trended higher which have propelled USDPY to within striking distance of the 111 level. With investors running very neutral USD dollar exposure vs the JPY, short-term traders are boarding the risk- on wagon and buying USDJPY. If US equities continue to stabilise let alone move higher and US 10-year yields continue dribble north, we could eventually test the key 111.40 support line that has proved to be an impenetrable force for months.

MYR: The relief rally on the toned-down trade rhetoric continues to take hold of ASEAN markets. Risk on sentiment in US equity markets should play out positively for local bourses. Asian currencies are trading stronger aided by a sharp move lower in $RMB, robust equity performance and improved risk sentiment which is in complete contrast to last week’s markets tumult.

However, Malaysia registered another 1.65 billion in June outflow all but wiping all the reported 8 billion in fixed income flow from March 2017-2018 which tells the real tale of the election’s impact.

The next crucial focus will be the MPC on the July 11th This will be the first policy meeting chaired by the new BNM governor and with no real drive for BNM to adjust interest rate policy at this stage, however, given all the political uncertainty their remains a chance the BNM could offer up a dovish pause.

In the meantime, the MYR is benefiting from positive regional risk sentiment and rising oil prices all the while the Chinese RMB continues to unwinds last weeks trade induced tantrum.

CNH: For me its a case of know when to hold them and know when to fold them. While I think the RMB will eventually come under renewed pressure as China risk continues to wobble,  markets have read far too much into the China economic slowdown which will likely be modest at best. Still this week tier one China economic data will continue to supply food for thought.

Trade war -will cooler heads prevail ?( OANDA Trading Podcast with BFM Radio KL )

Stephen Innes, Head of Trading in Asia-Pacific, OANDA, Singapore

On July 6, the US imposed a 25% import tariff on US$34 billion worth of Chinese goods. China has since retaliated, and accused the US of igniting ‘the largest trade war in economic history’. Stephen comments on how trade tensions are affecting market sentiment, versus the economic fundamentals of the world’s two largest economies.

 

BFM Radio Kuala Lumpur

For the USD , it’s all about this week’s CPI.

For the USD, it’s all about this week’s CPI.

Markets dismissed the opening salvo of the  US -Sino trade war as dated news.

However, after another Goldilocks NFP,  US stock markets traded positively in the green while the US dollar bears begrudgingly came out of hibernation after US  bond market yields knee-jerked lower.

The NFP report showed the US economy continues to add jobs at a robust pace (+213k). There was a 0.2pp rise in the participation rate to 62.9%, with the expansion in the labour force helping lift the unemployment rate to 4.0%. AHE were softer than expected at 0.2% m/m (consensus: 0.3% m/m). An undershoot in hourly earnings with the participation rate moving higher suggests there is still more room in the labour market to go before wage pressure passes through to the data. But none the less,  it does keep the Fed on track and shouldn’t alter too much from that perspective. But the  tepid US wage growth  inflationary data does lend tentative support to the fresh recovery in EM and G10 high-beta currencies versus  the USD

However, for the USD to get back on track and reverse this negative momentum, it’s all about this week’s US CPI print. With the big dollar apparently in retreat, the Greenback will need a shot in the arm with inflationary “pick me up juice” to reverse this nascent sell-off

Trade war
The market will be incredibly focused on Fed chatter this week as downside risks from tariffs were discussed by Fed officials as indicated on the Jun  13 FOMC meeting minutes released last week. Currently, the duties on $34 billion of Chinese goods, remain primarily at the Walmart level as far as escalation runs and will have limited economic impact, However, should the Administration follow through with the threat of a $200 billion + duties on  Chinese goods,  indeed this would have some negative implication for both the US and global growth prospects.

Remember that while Powell recognised the dangers of escalating trade war in his Sintra comments last month, but he was insistent the Fed would need to assess incoming data. Early warning signs usually come from sentiment surveys and if we recall it was China and EU sentiment indexes that had led investors into the tank in those key markets. So, traders will key on this week’s University of Michigan consumer sentiment index to see if there are any signs that consumer sentiment is starting to fray from trade war fears.

Oil Market

Of course, Oil traders are wholly perplexed by President Trumps demands to cut off 2.4 million barrels of Iranian oil while admonishing OPEC to keep prices stable if not have them go down! But it’s the White House’s zero-tolerance policy to Iran which is supporting oil markets given the fragile state of global supplies as spare oil capacity hovers near zero. In this scenario, of  supply reality versus wishful thinking, there is only one direction for the oil price to move, and that is higher over time

Oil benchmarks went in opposite directions Friday afternoon, with WTI running higher and Brent trading lower as fears of the escalating U.S.-Chinese trade war and increased production by Saudi Arabia, and Russia bumped against supply disruptions from Venezuela and Libya as well as the sanctions on Iran.

There has been some interesting discussion over a note issued by Sanford C. Bernstein & Co. suggesting the lack of reinvestment in oil production could lead to a price spike.“Investors who had egged on management teams to reign in capex and returned cash will lament the underinvestment in the industry,”, And that falling behind the production curve in favour of paying out shareholder dividends runs the risk of prices spiralling much higher in the future.

Baker Hughes reported an increase of 5 in the number of active oil rigs in the United States matching the June high water mark.

Gold Market

For the better part of June and early July, US dollar strength and the dollar-bullish outlook continued to weigh on gold as stronger than expected US data and a hawkish Fed weighted gold prices down like an anchor.
Buyers of physical in Asia have been few and far between despite the pullback, as local currencies have been taking it on the chin due to the stronger USD. But the Goldilocks NFP print which could deliver a softer US dollar profile this week, suggests opportunistic investors may return which should support gold prices. After all, in this highly political and geopolitically charged environment, gold remains a very suitable component in any diversified portfolio.

China Market

While China response to the US administration trade policy is keeping the headline tickers working overtime, growth remains mainland’s biggest priority hence the markets will be extremely focused on this week’s China tier one economic data dump which will provide some exacting signpost for evaluating Chinas economy. While US-Sino Trade will continue to dominate the headline ticker tape, this week’s critical set of growth data will be a massive test for local markets. Frankly, by all metrics, growth in China remains more than adequate, but a subpar reading and Main Street might eventually take notice and realise all is not well in China.

PBoC
Many confusing signals to deal with but none more so than why the PBoC waited so long on the currency front before verbal intervention which has left just enough uncertainty in the air over what their actual motivation was. With some arguing that policy choices are going to be robust and will have the effect of intentionally causing the currency to weaken.  However, authorities have made clear their intent on domestic monetary settings, and this would suggest that growth and not trade war will be the determining factor in policy decisions

Indeed, there is Big Trouble in Big China as authorities continue to grapple with pulling back stimulus created by a state-run banking machine which operated with wanton disregard for risk management. Add in the prospects of an economic slowdown, escalating trade wars all wrapped in a shrinking population, and it does suggest Main Street is missing the bigger picture. China risk continues to be underpriced from my chair indicating at a minimum; the Yuan will resume trending lower as  the mainland administrators  continue to deleverage  China, keeping in mind in a wobbly China scenario, CNH should move more than CNY (which is fixed)

Asia market 
There have been massive portfolio outflows from Asia that have resulted in markets tumbling to fire sale levels (SHCOMP -20% on the year). The big dollar – which triggered a lot of the recent round of EM troubles – seems to be consolidating but, there is a lot to be still much to be worried about as the US is not easing its aggressive trade posturing. But this extended period of capital outflows in ASEAN markets does suggest this was more than event-driven risk but more of a structural shift. Whether this shift was all about the strength of the US dollar and risk around China, or more likely a combination for both,  this week tier one China data will go along way to confirm this view.

Malaysia market 

The first round of US tariffs has come into effect with little fanfare. But this contained reaction has given a boost to local risk assets led by the SHCOMP trading 2.5 % higher w. USD ASIA along with the broader G-10 complex in general, traded lower into the weekend as the Goldilocks NFP has given a boost to the nascent EM Asia rally and the USDMYR was no exceptions piggybacking regional risk.

But MYR bonds are trading very neutral into weekend due to the NFP influence,  but activity should pick up today ahead of the MPC on on on the 11th which could read neutral to dovish and given support to local bonds. However a  more dovish MPC USDMYR trading defensively next week again, but the currency pairs will be hard pressed to take out the 4.05 level given the significant ( USD) dollar could be on the retreat after Friday tepid US wage growth-inflation .. And with OIL prices poised to move higher, the Ringgit should get some support from the commodity sector.

On the MPC front,  economic growth will slow to 5.5 per cent this year from 5.9 per cent, while inflation will cool to 2.5 per cent from 3.9 per cent, which will give new Governor Nor Shamsiah Mohd Yunus cause to pause. But for fear of triggering more outflows and denting the local capital market appeal due to to the resulting weaker Ringgit, the BNM will likely refrain from being overtly dovish. With very little priced into rate hike expectations, the market has done most the BNM repricing with Bloomberg data showing the market implied policy rate for one year’s time has declined to 3.28 per cent from 3.41 per cent in May, so why rock the boat.

Currency Market

NZD: The metals complex has recovered from the worst of the sell-off for now and has seen something of a relief rally in AUD & NZD.But given the antipodean position in the global supply chain, they will be the first pairs to buckle on a further escalation of trade war rhetoric.

EUR: The Euro has seen a decent relief rally from the low 1.15 handle, and after last week when some ECB members advocated a sooner rather than later rate hike and a Goldilocks NFP print we could see some more EUR short covering. But it does feel like we are entering the summer doldrums on currency markets as desks are more apt to cover what orders need to be hedged and little else.

JPY: This remains a painfully dull range trades, and levels are clear with the downside at 109.90 and topside resistance in the 111.20

EUR/USD – Euro Ticks Lower as German Manufacturing PMI Softens

The euro has posted small losses in the Wednesday session. Currently, the pair is trading at 1.2317, down 0.16% on the day. On the release front, German and Eurozone Manufacturing PMIs slowed in January. The German PMI dipped to 60.3, shy of the estimate of 60.6 points. It was a similar story with the Eurozone PMI, which dropped to 58.5, shy of the estimate of 59.2 points. In the US, the key event is the Federal Reserve minutes from the January meeting. The US will release Existing Home Sales, which are expected to climb to 5.61 million.

The Federal Reserve will be in the spotlight on Wednesday, with the release of the minutes from the January meeting, the last to have been chaired by Janet Yellen. The markets will be looking for hints regarding future rate policy, and any inkling of plans to raise interest rates more than three times in 2018 could trigger volatility in the currency markets as well as stock markets. Recent US numbers have been strong, and inflation indicators have been pointing upwards. This has raised concerns that the Fed may accelerate its pace of hikes, which triggered a sharp correction in global stock markets. The new chair of the Fed, Jerome Powell has tried to reassure the markets that the Fed is monitoring the situation, but it’s doubtful that the Fed can do much to prevent volatility in the markets.

Bitcoin, the most popular virtual currency, has shown sharp volatility in the past year, fluctuating between $900 and $19,000. These wild swings have drawn the attention of policymakers and lawmakers, as there are growing concerns that virtual currencies could have a negative economic impact. France and Germany want to put virtual currencies on the agenda at the next G-20 meeting, and there is bipartisan support in Congress to adopt new rules to regulate virtual currencies. However, Draghi poured cold water on any ECB involvement, saying that it was not the ECB’s responsibility to ban or regulate Bitcoin. Draghi added that the ECB was exploring the use of blockchain, a digital technology to monitor bitcoin transactions.

EUR/USD Fundamentals

Wednesday (February 21)

  • 3:00 French Flash Manufacturing PMI. Estimate 58.1. Actual 56.1
  • 3:00 French Flash Services PMI. Estimate 59.1. Actual 57.9
  • 3:30 German Flash Manufacturing PMI. Estimate 60.6. Actual 60.3
  • 4:00 German Flash Services PMI. Estimate 56.9. Actual 55.3
  • 4:00 Eurozone Flash Manufacturing PMI. Estimate 59.2. Actual 58.5
  • 4:00 Eurozone Flash Services PMI. Estimate 57.7. Actual 56.7
  • 9:45 US Flash Manufacturing PMI. Estimate 55.4
  • 9:45 US Flash Services PMI. Estimate 53.8
  • 10:00 US Existing Home Sales. Estimate 5.61M
  • 14:00 US FOMC Meeting Minutes

*All release times are GMT

*Key events are in bold

EUR/USD for Wednesday, February 21, 2018

EUR/USD for February 21 at 7:00 EDT

Open: 1.2337 High: 1.2345 Low: 1.2308 Close: 1.2318

EUR/USD Technical

S1 S2 S1 R1 R2 R3
1.2092 1.2200 1.2286 1.2357 1.2481 1.2569

EUR/USD inched lower in the Asian session and is choppy European trade

  • 1.2286 is providing support
  • 1.2357 is the next resistance line

Further levels in both directions:

  • Below: 1.2286, 1.2200 and 1.2092
  • Above: 1.2357, 1.2481, 1.2569 and 1.2660
  • Current range: 1.2286 to 1.2357

OANDA’s Open Positions Ratio

EUR/USD ratio is almost unchanged in the Wednesday session. Currently, short positions have a majority (58%), indicative of EUR/USD continuing to move to lower ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.