OANDA Trading Podcast : BFM 89.9 Kuala Lumpur

 

Stephen Innes, Head of Trading in Asia-Pacific at Singapore-based OANDA, discusses the escalation in the trade dispute between China and the US, examining the economic and fiscal permutations of deteriorating global conditions, as well as the policy and non-policy weapons at China’s disposal.

Innes also discusses China manufacturing data and the upcoming FOMC meeting and America’s rate policy going into 2019 and beyond.

Stephen Innes Head of Trading Asia @steveinnes123

 

BFM Radio 89.9 Kuala Lumpur

Bring on the FOMC !

FOMC 

The FOMC meeting next week has a hike fully priced in so the focus will be on the dot plots and the follow-up presser which has dollar bulls questioning their near-term positions.

The meeting will be overly scrutinised to see if there are any changes in the projections, with new Vice-chair Clarida voting for the first time. Also, Chair Powell will likely be quizzed on Fed Governor Lael Brainard view that US interest will probably need to be made more restrictive in the sense that at some point in the future if the unemployment rate remains low, policy rates should move above neutral and into the restrictive territory.

Dovish tail risk

And herein lies the dovish tail risk which has  USD Bulls erring on the side of caution. With 2 US rates hikes priced into  the rest of 2018 and in the absence of inflation, it’s almost impossible for the  Feds to bump up the 2019 curve. So, the markets will end up focusing on shifts in the longball forecast into 2020 which is not the best or brightest of signals for currency traders who tend to view markets in much nearer time horizons. Even if the Feds prod 2020 curve higher, its unclear how much of a USD fillip that shift could deliver given that Chair Jay Powell has contiued to de-emphasise 2020 dots. Unless we get an unexpected shift in the Feds terminal policy range of 2.75-3.00%, not sure the dollar ( X -JPY) goes anywhere but trades within well-worn ranges.

What else in G-10?

AS for the rest of G10, there will be no shift from RBNZ, but in the wake of the surprisingly strong data of late especially the monster GDP beat, we could see a subtle less dovish change in guidance.

It’s not a busy calendar next week per say but dotted by US PCE and EUR sentiment surveys. Canada delivers a GDP report, but NAFTA talks will continue to overshadow data as yet another NAFTA month-end deadline looms.

Brexit Blues 

It’s back to the Brexit drawing board after EU leaders “Chequers mated “and utterly humiliated May at the Salzburg meeting which sent the Pound tumbling below the 1.3100 before finding some composure. Of course, most believe a deal in some form or another will eventually happen. But in the nub of all this Brexit bluster, UK data has been surging with both CPI and Retail Sales beating expectations, but indeed  Brexit uncertainty has overshadowed.  Next week’s UK GDP data could be another strong point, however, with little to no breakthrough on Brexit likely to happen any time soon, The Bank of England will remain unwavering until clarity on Brexit it offered up so the market will likely look past next weeks UK data.

Great insights from our Senior Markets Analyst in London, Craig Erlam  

Sterling Down on May Brexit Warnings

OANDA Market Insights podcast (episode 32)

Craig reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Sterling wobbles on Brexit fears, US/China tariffs tit for tat, Inflation hike against expectations.

China 

China PMI which will be closely monitored. Also, we should expect more trade headlines to come into play as both US and China tease with the idea of resurrecting trade talks.

USD Price Action 

Gauging this weeks price action in the wake of Trump tariff announcement, the markets overwhelming viewed the 10 % on 200 billion tariff levy and the measured responses from China as a smoke signal for further negotiation shortly. So the unwind of global USD hedges ensued as the market just found themselves far too long USD at not such grand levels. But the robust fundamental storyline in the US economy coupled with weak PMI data in Eurozone this week, I don’t think we’ve heard the last from the dollar bulls just yet.

Currencies in focus next week

EUR: a huge disappointment to the bulls with a close below 1.1750. While Fed forward guidance will drive the bus next week, the negative  EU PMI lean could hang like an anvil around the EURO neck.

CNH: It has to be on everyone’s radar especially after this weeks exodus of long USD hedge position on a combination of Trade war de-escalation, comments that mainland will not weaponise the Yuan as a tool in the trade war and offshore funding squeeze on the back Pboc to sell bills in Hong Kong. Despite the correction lower in USDCNH, given that China’s current account surplus is expected to shrink as a result of US tariffs and if the Feds signal clear dot plot sailing or even shift slight higher, CNH could sell off again.

Oil markets

Traders will pay close attention to Sunday headlines from Algiers as OPEC, and cooperating non-OPEC producers will meet on Sunday in Algeria

Likely seeking to appease President Trump, unnamed members of OPEC suggested they would discuss adding 500 K barrels per day, and while it gave cause to book some profit and reduce risk, its highly unlikely anything dealing with supplies will happen before the December 3 OPEC summit.

Despite wire reports suggestions otherwise, most of the oil traders in my circle, and despite the usual OPEC headline noise, think the meeting will be little more than the steering committee review of production and market data.

Please join me on Live on Monday discussing cross-asset markets 

BFM Radio Kuala Lumpur  7:35 AM SGT  on the Market Watch

938Now 9:00 AM SGT for an extended view  on global markets

France 24 TV at 12:15 SGT for the European Open coverage

Jazz FM London 1:00 PM SGT discussing the Asia markets today

 

 

 

 

US Dollar Recovers Ground Ahead of Fed Meeting

The US dollar bounced back on Friday, but could not offset the losses suffered during the week. The greenback was lower against most major pairs at the end of five days. Traders adjusted their positions before the weekend giving some breathing room to the USD.

The U.S. Federal Reserve will host its two-day meeting on Tuesday and Wednesday. The Federal Open Market Committee (FOMC) statement will be published at 2:00 pm EDT followed by a press conference by Fed Chair Jerome Powell at 2:30 pm EDT.

A rate lift by the US central bank is highly anticipated and has been priced in to the dollar putting more focus on the words of the Fed chief.

Euro Appreciates as US Trade War Fears Soften

The EUR/USD surged 1.05 percent this week. The single currency is trading at 1.1743 after a late recovery attempt by the USD on Friday.



The Trump administration unveiled the second round of tariffs against Chinese goods on Monday but as more details came out an all out trade war can still be averted.

Despite the rhetoric market participants are optimistic about a resolution that will not have a negative impact on global growth.

German data and EU inflation will be released this week. German confidence has improved of late and forecasts show that trend will continue but European inflation early results are not expected to have gained traction. The EUR has recovered from political uncertainty earlier in the year, but investors will look at fundamentals for guidance.

Canadian Inflation Lifts Probabilities of an October Rate Hike

The USD/CAD fell 0.92 percent in the last five days. The currency pair is trading at 1.2921 after various phases of NAFTA jitters have helped and pressured the loonie. The Canadian currency gained on a weekly basis against a softening greenback.

US-China trade rhetoric hast lost some traction, and as JP Morgan CEO Jamie Dimon put it, it’s more like a skirmish than a war.


Canadian dollar weekly graph September 17, 2018

NAFTA optimism remains high, but officials from both sides have begun to trade sound bites as frustrations mount.

US White House Chief Economic Advisor Kevin Hasset said in a TV interview that the US could forge ahead with the Mexico only trade deal. The US has been trying to get Canada to join the quick agreement made with Mexico, but so far the negotiations have not been as smooth.

Canadian Foreign Minister wrapped up her Washington visit on Thursday with the Quebec elections on October 1 an important day if dairy concessions are given as part of the NAFTA renegotiation.

Canadian monthly GDP data will be released on Friday September 28, with a forecast of 0.1 percent. The stronger pace earlier in the year and with inflation above target will pressure the Bank of Canada (BoC) to lift rates in October. Probabilities of a 25 basis points hike are at 88.74 percent.

Oil Ends Week Higher with OPEC Meeting to Provide Guidance

Oil prices rose ahead of the Organization of the Petroleum Exporting Countries (OPEC) meeting in Algiers in a week that included supply concerns and pressure from US President Trump to keep prices low.


West Texas Intermediate graph

The production cut agreement by the OPEC and other major producers has been the most important factor in the stabilization of crude prices since the 2014 drop.

Supply disruptions have kept prices in current ranges even as the OPEC and partners such as Russia will be discussing ramping up production.

The biggest disruption to supply this year has come from the reapplication of US sanctions against Iranian exports. Global producers that are part of the supply curb have telegraphed their intentions but weather and geopolitical factors have been offset with global growth and energy demand forecast downgrades.

Weekly US inventories threw another drawdown data point on Wednesday and have kept the black stuff bid. President Trump has used twitter as a macro policy tool and this time his aim fell on the OPEC.

The organization has limited options and will look to Saudi Arabia for leadership as some members have pressured internally to increase production for their own national interests.

This time the US is mixing political and economic factors to force an increase in supply, even though the White House is the one who triggered the latest disruption.

Yellow Metal Loses Shine on Friday Looks Ahead to Fed Rate Hike

Gold was lower on Friday by 0.65 percent, but gains earlier in the week still managed to put it in the black with a 0.19 percent gain.

The safe haven appeal of the yellow metal was lower as US stock markets continued their rally stoked by improving economic data in America.



The Fed’s imminent rate hike is keeping gold close to the $1,200 price level and the Swiss franc is now the de facto refuge for investors.

With a 25 basis points fully priced in from the Fed metal investors will be focusing on the economic projections and any changes in the wording of the statement looking for clues on the rate hike path of the central bank.

Market events to watch this week:

Monday, September 24
4:00am EUR German Ifo Business Climate
Tuesday, September 25
10:00am USD CB Consumer Confidence
9:00pm NZD ANZ Business Confidence
Wednesday, September 26
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pmUSD Federal Funds Rate
2:30pm USD FOMC Press Conference
5:00pm NZD Official Cash Rate
6:00pm NZD RBNZ Press Conference
Thursday, September 27
8:30am USD Core Durable Goods Orders m/m
8:30amUSD Final GDP q/q
Friday, September 28
4:30am GBP Current Account
8:30am CAD GDP m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Sterling Down on May Brexit Warnings

May resorts to rehashing old threats after failed Salzburg meeting

Theresa May took to the podium on Friday in an attempt to hit back at the EU after she was humiliated in Salzburg in what was meant to be a positive meeting ahead of the Tory Party Conference.

While May will be desperate for the takeaway from the speech to be that the UK is serious in its no deal threats and the EU should take their proposal seriously and resume dialogue based on the government’s Chequers plan or risk such an outcome, the speech itself was nothing but a stern rehash of what has been said in the past. As ever, these talks are showing themselves to be a frustrating and soul destroying game of chicken among a group of officials that agree that no deal is a bad outcome but are determined to drag them out in the hope of slightly better terms.

The pound came under pressure in the lead up to May’s speech and that continued during and in the aftermath, with traders potentially seeing this as a sign that no deal is a real and increasingly likely outcome. That may be exactly the message May wanted to send to the media, her party – particularly the Brexiteers – and the EU but I do not believe it changes anything. A fudged 11th hour deal that kicks the can down the road on the toughest decisions still remains the most likely outcome and I do not believe the appetite exists on either side for no deal that makes it as likely as we’re being led to believe.

GBPUSD Daily Chart

EURGBP Daily Chart

GBPJPY Daily Chart

GBPCAD Daily Chart

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

Canada retail sales climb, inflation falls, CAD rallies

Canadian retail sales climbed in July following a decline in June, led by demand for food and higher gas prices.

Stats Canada said retail sales rose +0.3% in July to a seasonally adjusted C$50.9B.

Note: In June, retail sales fell by a revised -0.1%.

Ex-autos, July sales rose by a robust +0.9%, despite a decline of -2.2% at new car dealerships weighing on the overall results. However, on a price-adjusted basis, sales fell -0.1%. On a year-over-year basis, retail sales in July rose +3.7%.

Canada inflation slows in August

On the inflation front, it decelerated in Canada last month, but remained close to its seven-year high print from July. This headline print very much keeps the Bank of Canada (BoC) in play for another +25 bps hike in October.

Stats Canada said that CPI rose +2.8% y/y in August, following a +3.0% increase in July.

Digging deeper, core-inflation prices rose in a range from +2.0% to +2.2%, based on the three preferred gauges used by the BoC.

CAD initial reaction saw the loonie catch a bid, to deal at C$1.28864 a new weekly high.

Sterling lower as EU rejects May Brexit proposal

Investors in buoyant mood despite trade tariffs

Investors continue to brush off the ongoing trade dispute between the US and China, along with negative Brexit developments in Salzburg, with stocks in Europe trading higher to end the week.

Another winning day would cap a very good week for stock markets, with the Dow and S&P 500 both trading in record territory – the first time for the former since January – and those in Europe and Asia very much taking new US and Chinese tariffs in their stride. This may be a case of the tariffs already being priced in or being a little softer than was expected, but the important thing is it’s far from the end and investors may not be so buoyant if Donald Trump responds quickly and aggressively as he’s suggested he will.

Sterling slips as May is humiliated in Salzburg

The pound is paring its gains on Friday after the EU rejected Theresa May’s Chequers proposal, casting doubt on a compromise being found despite the UK being only months from leaving the block. Clearly traders don’t view this as too significant a setback or I would expect the drop off in the currency to be much larger and the rejection hardly comes as a surprise given that officials have publicly criticised the proposal in the past.

GBPUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

That said, reports do suggest that EU officials have taken a harder line against May following her insistence that it’s Chequers or no deal. Clearly they believe this is a bluff and haven’t taken to kindly to such a stance so late in the day. May now faces a tough challenge in returning to the UK ahead of the Conservative party conference no closer to a deal than she was before, leaving her with a massive target on her back as certain colleagues look to position themselves as a better alternative.

Euro edges lower on weaker PMIs

The euro is also paring earlier gains after PMIs for September painted a slightly gloomier picture, particularly for the manufacturing sector where trade conflicts, Brexit and falling global demand contributed to a decline in optimism. Manufacturers are clearly a little nervous about the number of risks for the sector and the volatility and difficulties in emerging markets right now will not be giving them much reason for optimism.

EURUSD Daily Chart

The euro area has been experiencing something of a slowdown for much of the year but this hasn’t deterred the ECB which still plans to end its bond buying program in December and consider a rate hike in the second half of next year. The latter plans may be shelved though if the economic situation doesn’t improve, something policy makers hope will naturally follow an easing of trade tensions and resolution on Brexit. Right now though this feels a long way away.

Economic Calendar

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

Central Banks up the ante to normalize interest rates

Friday September 21: Five things the markets are talking about

Aside from trade, tariff and retaliation, central banks are upping the ante to “normalize” interest rates.

This week, Norway’s Norges Bank has joined the BoE, and the central banks of the Czech Republic and Romania in withdrawing some of its stimulus, while Sweden’s Riksbank has indicated that it may raise its key rate before the end of the year. The ECB plans to end QE this December, while next week the Fed is expected to hike +25 bps (Sep 26) – the market will be looking for any comments on the impact of escalating trade tensions.

Earlier this week the BoJ kept its stimulus policy unchanged, however, the move overnight to cut the purchases of super long-bonds would suggest that the period of easy-money era is ending. In Hong Kong, the HKD has surged the most in 15-years in part due to the prospect for higher interest rates there.

There are a number of EM hotspots that the market is also focusing on, in particular – Turkey & South Africa. The lack of details on how Turkey can achieve a soft landing for an economy that topped the G20 growth charts in 2017/18 continues to contribute to a volatile TRY, but a plan is forthcoming.

While in South Africa this morning, President Ramaphosa announced details of a stimulus package to take immediate effect to battle the country’s technical recession.

With trade war concerns receding in the background, the U.S dollar is on track to close out the week trading atop of its seven-month lows against G10 currency pairs as stronger equity markets and rising bond yields encourage investors to purchase riskier assets.

Note: Expect today’s session to be volatile as its quadruple witching – futures and options on indexes and individual stocks expire.

On tap: Canadian CPI and retail sales at 08:30 am EDT

1. Stocks rally to records

With Wall Street indexes hitting a record high again yesterday has encouraged Asian and Euro bourses to take flight.

In Japan, equities rallied to an eight-month high, with noted gains in insurance, energy, and shipping stocks. The Nikkei did fade late, but still gained +0.8%. Financials were helped by the BoJ’s offer to buy less super-long bonds. The broader Topix gained +0.9% to hit a four-month high.

Down-under, the Aussie stock market again underperformed in the region overnight. The S&P/ASX 200 finished up +0.4%. The index ticked up +0.5% for the week, a second consecutive modest gain. Providing intraday pressure were utilities, which lost -0.5% last night, but consumer staples rallied that much while materials jumped a further +1.5% and IT climbed +2.2%. In S. Korea, the Kospi closed +0.68% higher on Friday as investors risk appetite recovered. For the week, the benchmark index climbed +0.9%.

In China, stocks surged overnight before a long holiday weekend, with investor sentiment boosted by hopes that a government effort to boost domestic demand could help offset effects of an escalating trade war. At the close, the blue-chip CSI300 index rallied +3.0%, its biggest one-day gain in four-months. The Shanghai Composite Index gained +2.5%, closing out its best week in six months.

In Hong Kong, stocks ended higher for a fourth consecutive session overnight, helped by consumer and technology shares, as sentiment improved after the Sino-U.S trade war unfolded in ways less damaging than feared. The Hang Seng index ended +1.73% higher, while the China Enterprises Index closed +2.17% firmer.

In Europe, regional bourses continue to rise despite sluggish PMI results. In the U.K, the FTSE is supported by positive Brexit comments, while in Italy; bourses are supported by budget talks.

Note: Expect stock markets to be influenced by today’s quadruple witching hour.

U.S stocks are set to open in the ‘black’ (+0.1%).

Indices: Stoxx50 +0.7% at 3,428, FTSE +0.8% at 7,429, DAX +0.7% at 12,418, CAC-40 +0.8% at 5,494, IBEX-35 +0.6% at 9,639, FTSE MIB +0.9% at 21,588, SMI

2. Oil higher on supply worries, but Trump’s call for lower prices drags

Oil prices are a tad higher this morning after falling in yesterday’s session as U.S President Donald Trump urged OPEC to lower crude prices at its meeting in Algeria this weekend (Sep 23).

Note: OPEC and its allies are scheduled to meet on Sunday to discuss how to allocate supply increases to offset a shortage of Iran supplies due to U.S sanctions.

Brent crude for November delivery is up +26c, or +0.33%, at +$78.96 a barrel, while
U.S West Texas Intermediate crude for October delivery is up +7c, or +0.10% at +$70.39 a barrel.

Trump took to twitter and called on OPEC to lower prices, saying, “they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices”.

Trump’s veiled threats are unlikely to force OPEC and its allies to agree to an official increase in crude output on Sunday.

The fact that Sino-U.S trade tensions have somewhat dissipated is helping precious metal prices. Ahead of the U.S open, gold prices remain better bid on the back of a weaker U.S dollar and are heading for its first weekly gain in a month. Spot gold is up +0.3% at +$1,210.68, after touching its highest since Sept. 13 at +$1,211.02. It has rallied +1.3% so far this week. U.S gold futures are up +0.3% at +$1,215 per ounce.

3. Italian bond yields fall as investors await budget clarity

Italian bond yields are under some pressure this morning as the market awaits clarity on the 2019 budget and after the 5-Star Movement denied a report that Deputy PM Di Maio had threatened to pull his party out of the government.

An ISTAT report shows that the budget deficit as a proportion of national output was slightly higher last year than previously estimated, but that debt was lower also helped to push down yields.

Italian BTP yields are down -5 bps along the curve, having jumped by up to +12 bps yesterday. Elsewhere, Germany’s 10-year Bund yield has eased to +0.47% as some Euro investors returned to safe-haven assets.

Note: Bunds backed up to a four-month high of +0.506% Wednesday, but have struggled to maintain this level, rallying back down after renewed Brexit concerns and the infighting in the Italian government.

In Japan, the Bank of Japan (BoJ) has cut its purchase of super long JGB’s. This has send Japanese yields to 2018 highs. The 40-year yield has jumped +5 bps to +1.04% while 10’s gained +1.5 bp to +0.13%.

Stateside, the yield on 10-year Treasuries has jumped + 2 bps to +3.08%, the highest in more than four-months.

4. Hong Kong dollar spikes

Expectations of a rise in bank lending rates and tightness in cash supplies caused a sharp spike in HKD overnight, pulling it off the weak end of its narrow trading band it had been stuck in for the six-months.

The HKD rallied to $7.8244, hitting its highest levels since late February. Since March, it had stayed near $7.85, the lower end of the Hong Kong Monetary Authority’s (HKMA) managed trading band.

USD/INR rose to an intraday high of $72.47 before fading after a sharp spike lower in Indian Indices on liquidity concerns of Indian Housing name Dewan Housing.

ZAR (+0.46% to $14.2629) found support after S. African President Ramaphosa announced a number of policy reform plans this morning, including re-prioritising +$3.5B of public spending to boost economic growth and create jobs.

GBP/USD (£1.3185) falls from yesterday’s highs as the E.U warns the U.K of a possible “no-deal” Brexit. Initial support is around £1.3171.

5. Euro zone business growth eased

Data this morning showed that Euro zone business growth eased this month although optimism picked up a tad from last month’s two-year low.

Nevertheless, growth remained robust and firms were able to increase prices, which should keep the ECB happy.

Digging deeper, there remains a divergence between services and manufacturing – the dominant service industry beat forecasts for no change in the pace of growth from last month. IHS Markit’s Euro Zone Services Flash Purchasing Managers’ Index (PMI) rose to 54.7 from 54.4.

Manufacturers however failed to live up to expectations. The factory PMI slumped to a two-year low of 53.3 from 54.6 – the market was looking for 54.4.

Divergence raises the question, how long can you maintain a strong service sector growth without an upbeat manufacturing sector?

Forex heatmap

EUR/USD – Surging euro hits 1.18 despite soft manufacturing PMIs

EUR/USD has paused in the Friday session, after posting strong gains on Thursday. Currently, the pair is trading at 1.1772, down 0.05% on the day. On the release front, German and eurozone manufacturing PMIs disappointed, missing their estimates. There are no major U.S events on the schedule.

German and eurozone manufacturing PMIs were soft in September. The German indicator dropped sharply, from 56.1 to 53.7, missing the estimate of 55.7 points. This marked the weakest reading since August 2016. It was a similar story from eurozone manufacturing PMI, which fell from 54.6 to 53.3, the lowest level since October 2016. This marked the ninth straight month that the indicator has weakened – in December 2016, the indicator stood at 60.6 points. There was better news from services PMIs. German Flash Final Services PMI rose to 56.5, above the estimate of 55.1 points. The eurozone release improved to 54.7, above the estimate of 54.5 points.

The US-China trade war is heating up, with the two economic giants exchanging tariffs this week. On Monday, U.S President Trump announced 10% tariffs on some $200 billion worth of Chinese goods. China quickly responded, slapping 10% tariffs on $60 billion in US exports. These tit-for-tit tariffs have become a familiar script, only this time investors haven’t panicked and snapped up U.S dollars. Investors are somewhat relieved that the tariffs are just 10%, and China is taking measures to reduce the effect of the tariffs on its economy, including increasing stimulus and infrastructure spending. Global growth remains strong, despite the tariff spat. However, China has also threatened to cancel upcoming trade talks with the U.S, in protest of the recent U.S tariff.

Yen at two-month low versus dollar on Wall Street surge

 

EUR/USD Fundamentals

Friday (September 21)

  • 3:15 French Flash Manufacturing PMI. Estimate 53.3. Actual 52.5
  • 3:15 French Flash Services PMI. Estimate 55.2. Actual 54.3
  • 3:30 German Flash Manufacturing PMI. Estimate 55.7. Actual 53.7
  • 3:30 German Flash Services PMI. Estimate 55.1. Actual 56.5
  • 4:00 Eurozone Flash Manufacturing PMI. Estimate 54.4. Actual 53.3
  • 4:00 Eurozone Flash Services PMI. Estimate 54.5. Actual 54.7
  • 9:45 US Flash Manufacturing PMI. Estimate 55.1
  • 9:45 US Flash Services PMI. Estimate 54.9

*All release times are DST

*Key events are in bold

 

EUR/USD for Friday, September 21, 2018

EUR/USD for September 21 at 6:25 DST

Open: 1.1778 High: 1.1803 Low: 1.1770 Close: 1.1772

 

EUR/USD Technical

S1 S2 S1 R1 R2 R3
1.1553 1.1637 1.1718 1.1840 1.1961 1.2055

EUR/USD was flat in the Asian session and continues to drift in European trade

  • 1.1718 is providing support
  • 1.1840 is the next resistance line

Further levels in both directions:

  • Below: 1.1718, 1.1637, 1.1553 and 1.1434
  • Above: 1.1840, 1.1961 and 1.2055
  • Current range: 1.1718 to 1.1840

US-China trade war, yesterday’s news.?

US-China trade war, yesterday’s news.?

The US stock markets catapulted to a new record high on Thursday as investors continued to sidestep fears over the escalating global trade war and instead focused on a boomy American economy. And at least for today anyway, US-China trade war was yesterday’s news.

Make no mistake the US economy is running on all cylinders, robust growth, soaring employment and rising capital investments. Suggesting the healthy US economy is more than just a short-term knock-on effect from the intravenous elixir of easy credit and fiscal glucose. The US economy is thriving.

Oil Markets

And when you thought the ducks were aligning for a significant push higher in oil prices, enter President Donald with yet another timely twitter castigation of OPEC. Which comes just days before OPEC, Russia and non-OPEC partners meet in Algiers this weekend to review the state of the oil market, with a focus on the likely supply impacts of US-led Iran sanctions. Another case of President Trump having his cake and trying to eat it also, as its those US imposed sanctions on Iran and Venezuela that are causing the spike in oil!!

The market had until that point been trading fluidly with the assumption that Saudi Arabia is now comfortable with Brent at $80 or even higher, which is challenging the markets long-held supposition that prompt Brent between $70 and $80 was OPEC sweet spot.

But with significant support levels holding firm and sentiment is securely buttressed by Iran sanction, politically inspired dips in a bullish market will undoubtedly be bought. The problem, however, is we’re heading into a weekend where what was initially thought to be a meeting of OPEC steering committee to discuss Oil markets current affairs,  has morphed into an unofficial OPEC meeting with 20 + nations at the table, which means traders were going to profit take and reduce risk anyway. I guess President Trump brought forward that decision for traders  20 hours earlier than expected and perhaps the follow through a little thicker than anticipated.

So why the 1.5 % sell-off?

And while Saudi Arabia is revelling in these Iran sanctions, they are also worried that any sanctions-related, oil prices spike  will trigger fresh criticism from Trump, especially ahead of the November election where the blame for high energy prices will squarely fall on the Trump administration ramping up geopolitical risk, for the sake of a hawkish international policy mandate.

Indeed, Saudi Arabia does fear the ” wrath of Trump ” and are taking few chances with the longshot NOPEC bill lingering, but the real question is, even if they wanted to ramp up production, could they??

Gold Markets.
The precious complex is quiet while modestly reacting to the weaker dollar but surging US Bond yields are holding back speculators and not to mention there’s nary a hedger insight with US equity markets rising above all-time high-water marks.

Currency Markets

So where are the dollar bulls ?? more comfortable to short bonds in this market than to go long dollars, so look over at the bond desk!!

Indeed, a tangled web of confusion as USD remains doughy and while US yields didn’t lead overnight, they did hold stable support levels. Of course, the first discussion across our global trading desks was will the USD weakness linger. And the conclusion was a resounding maybe!! While the dollar was widely expected to wobble into the US midterm elections, I think that playbook trade has been brought forward by many factors that we will look at below. But ultimately USD should remain constructive post-midterms for no other reason than as the US economy is doing better than anyone else’s and the Feds will continue to raise interest rates.

The dollar leak

So modern-day forex desks are staffed by a compliment of the brightest kids, grizzled veterans and machine learning algorithms using 3000 data points, and still, no one can predict the course of the USD beyond 24 hours, well 8 hours to be exact in this market. So, forget trying to play long ball (6-month conjectures) and let’s look at some granularity that got us to the point this week where DXY/USGG10YR correlation has temporarily snapped.

EM markets have been catching the tailwind from CBT rate hike, CBR surprise rate hike, BI potential mandatory FX conversion for exporters and the RBI currency countermeasures. All of which contributed to taming the beast (USD) to various degrees. But a significant factor in adding to the current run of dollar weakness is the drop on safe-haven appeal after China suggested they won’t weaponise yuan in a trade war.

Yesterday the RBI stepped up their game as USDINR NDF fell abruptly this afternoon on wire reports suggesting RBI is studying the efficacy of taking oil companies USD demand away from the market. The state-run oil companies were now sourcing their entire dollar demand in markets, and the RBI is now considering opening a swap window to alleviate the pressure, something they have baulked at in the past.
Indeed, desperate times lead to drastic measures.

The Yuan rallied further on news that Mainland authorities are reportedly cutting import tax from most of its trading partners as soon as next month. Of course, the breadth and the actual tax % will be the key. Current estimates are the tax cut will be applied to around 1,500 consumer products. This move triggered more unwinding of trade war hedges as China will get creative to counter the adverse economic effects of US tariffs.

Trump constant attempt to undermine the Feds is also a distraction, as the markets knowing full well the Administration is lobbying for lower interest rates and a weaker USD in this trade war environment. None the less USD has put itself in the centre of discussion regarding what Fed Chair Powell is up to with Congress. Markets are chatty about this article  Bloomberg

And while the Forex markets have become a point for of frustration for some, overnights the price movements appear to be more related to USD haven hedge unwinds as opposed to any long-term structural adjustments the USD as the markets remain well within well-worn ranges.

G-10

The Euro

The EUR was toying with the market all week, and finally, the dollar bears got the bravado to take on the 1.1730 level which predictably triggered a cascading effect to 1.1780. So, with the USD bulls sidelined, short-term speculators seized the moment with the Euro Stoxx reaching a fresh all-time high and Bund yields moving higher pressed the 1.1730-50 zone and made a quick profit on the day.

The Japanese Yen

USDJPY is being carried higher by a higher NKY and higher USD rates

Asia FX
Regional Risk is very steady supported by thriving global equity markets a slightly weaker USD and a positive glean that North Korea’s leader Kim Jung-un has asked for a second summit with President Trump and has reportedly agreed to ‘verifiable’ dismantling of a missile testing site during the North/south summit.

Join me live at 8:30 AM SGT  discussing my views on   MONEY FM 89.3 Singapore   

 

 

Oil Falls After Trump Targets OPEC

Oil fell after US President Trump targeted the Organization of the Petroleum Exporting Countries (OPEC) for not doing enough to keep crude prices low. This comes ahead of the organization’s meeting in Algeria with other major producers. The production cut agreement has been the most important factor in the stabilization of crude prices since the 2014 drop. Supply disruptions have kept prices in current ranges even as the OPEC and partners such as Russia will be discussing ramping up production.


West Texas Intermediate graph

The biggest disruption to supply this year has come from the reapplication of US sanctions against Iranian exports. Global producers that are part of the supply curb have telegraphed their intentions but weather and geopolitical factors have been offset with global growth and energy demand forecast downgrades.

Weekly US inventories threw another drawdown data point on Wednesday and have kept the black stuff bid. President Trump has used twitter as a macro policy tool and this time his aim fell on the OPEC. The organization has limited options and will look to Saudi Arabia for leadership as some members have pressured internally to increase production for their own national interests. This time the US is mixing political and economic factors to force an increase in supply, even though the White House is the one who triggered the latest disruption.