OANDA Trading Asia markets update

Asia markets update

The weekend headlines have not been a blessing for ‘risk sentiment” and while the optimist in me is siding on this too shall pass. But with markets closed in Japan, China and South Korea as a large part of Asia celebrates the Mid-Autumn festival, it impossible to gauge sentiment in these drastically diminished liquidity conditions.

While Hong Kong markets are trading poorly but it difficult to separate the wheat from the chaff after last Friday the Pboc announced they would issue T-bills via the HKMA in Hong Kong money markets, which implies driving local interest rates higher. But of course, shelving the US-China trade talks is not rated highly for local risk sentiment either, a bit of a double whammy of sorts today for Hong Kong.

However, it was unlikely that either the US or China was going to pull a rabbit out of the hat before the US midterm election anyway. However, traders remain in wait and see mode while treading rather gingerly in today Asia session. But indeed, this discussion will likely continue throughout the 24-hour trading cycle.

But overall, no one is taking anything for granted and certainly won’t underestimate the possibility of the US announcing reviews of further China tariffs at some point in time given the Trump administration ‘modus operandi’ of applying non-stop pressure.

Currencies

More risk-sensitive currencies, especially EM are feeling the pinch from weekend headlines bluster, but liquidity is extremely thin and likely contributing to some outsized moves. For reference, G-10 volumes are around 50 % lower as per EBS data. But what action we are seeing is small AUD selling.

Indian Rupee

Not too surprising the INR back under pressure from rising crude prices and domestic credit wobbles after one of the large Non-Banking Financial Companies missed an interest payment last Friday

Oil Markets

Oil investors are trading the weekend news very favourably, Saudi Arabia and Russia ruled out any expeditious supply increases at the Algeria meeting while decidedly ignoring U.S. President Trump’s call to increase supplies and ease price pressures.
Not a great deal of oil market noise today, but traders are quickly pivoting to US inventories data with some small discussion around reports that Cushing Oklahoma delivery point may have declined further in the week ended September 21. But ultimately all these noises pale in the lead up to November 4 Iran sanctions, which continue to underpin sentiment

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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.

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

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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.

Markets flat as China quickly responds to tariffs

Ball back in Trump’s court as China responds with counter-tariffs

Markets are taking new tariffs between the US and China in their stride again on Wednesday, with stocks in Europe and futures in the US looking quite flat ahead of the open on Wall Street.

The latest tit-for-tat between Washington and Beijing has been on the cards for some time and while investors would have preferred to avoid the need for them, they were prepared and it was well priced in. In fact, the US tariffs were probably towards the lower end of expectations so the announcement didn’t really carry the same shock factor that previous announcements or reports have.

What may have a greater impact is Donald Trump following through quickly on phase three, as he has indicated he would which would dramatically ramp up the intensity and pace of the trade war between the two countries and could lead to more undesirable outcomes. There is clearly a good reason why the Trump administration has chosen not to include certain products – specifically those it stripped out after the consultation period – and opted initially for 10% rather than 25% and I think this may stop him acting in the rash manner he indicated he would.

OANDA Trading Asia market closing note : Irrational exuberance ? YUAN

UK inflation spikes in August sending sterling higher

Over in the UK, attention has switched briefly away from politics – or more specifically Brexit – and onto the data after CPI numbers for August showed prices rising by 2.7%, a significant beat on expectations. The release triggered quite a strong response in the pound, rallying above 1.32 against the dollar for the first time in almost two months before settling up around a quarter of a percent on the day.

UK Inflation

I don’t personally think this changes much from an interest rates perspective, especially in the near-term with the Bank of England having only recently raised interest rates to post-financial crisis highs and shown a willingness to proceed with caution over the coming years. We’re also heading into a crucial period for Brexit talks and I think policy makers will want to withdraw from the spotlight during that time and then reassess the situation once the terms of the divorce are clearer.

Tariffs? – So what!

GBP to remain sensitive to Brexit ahead of Salzburg summit

The increase itself may also be temporary and reflect firms taking advantage of a great summer and enthusiastic consumer, something that may take its toll in the months ahead. I don’t expect the BoE to react too much to this summer spike and instead take a more conservative view unless we see further evidence of it becoming a longer-term trend.

GBPUSD Daily Chart

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Sterling is going to remain sensitive to Brexit reports in the coming months and tomorrow’s meeting in Salzburg will be the next hurdle. Traders will be paying very close attention to any comments coming from the summit and will be looking for any hints that significant progress is being made towards a deal that will avoid a disastrous no deal Brexit. Traders are clearly becoming more optimistic but that’s coming from a low base, with a lot of pessimism having been priced in since April.

Economic Calendar

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

OANDA Trading Asia market closing note : Irrational exuberance ? YUAN

Irrational exuberance? YUAN

EM Asia currencies

The Yuan

Could be little more than a case of irrational exuberance as the markets have completely latched on to Premier Li Keqiang comments which, at the World Economic Forum, said China would not devalue the currency to stimulate exports and as one would expect the Australian dollar is getting taken along for the ride

Traders are positioning long USDCNH based a weaker RMB currency profile that was thought would underpin domestic economic activity and possibly prop-up equity markets. So, if the US does ramp up tariffs, I’m not sure what possible counter-strategy mainland authorities would implement that would be as easy and as impactful as steering the Yuan weaker. None the less the USD has been trading broadly weaker on the news despite my overly pessimistic view of the current proceedings.

The Thai Baht

Despite the BoT leaving its policy rate unchanged at 1.50%, USDTHB is dipping lower to June levels. . The markets are viewing the two dissenting votes as hawkish. But the THB has been an excellent regional haven play as its been pretty insulated from the trade war fracas. A hefty current account surplus will do that for you in this environment, not to mention tourists aren’t about to skirt BKK anytime soon and that industry provided nearly 20 % of GDP.

G-10

The Euro 
Once again, the Euro has a spring in its step in early London trade. However, pushing through the August high of 1.1730 remains critical for a substantial extension. Frankly, the EURUSD is where the near-term US dollar (X JPY) battle lines are forming as the ECB has shifted less dovish and should continue to so with Italian risk falling. But Brainard has signalled the Fed intentions, so the battle lines are forming around 1.1730

 

US yields take a runner.

One could expect a bit of apprehension to enter the fray, and traders to tap the brakes not just from a relief rally hangover perspective, but local bond and currency traders could start looking over their shoulders at US 10y bond yields that have raced higher to 3.05 %.

While everyone thought US bond yields could begin to rise in September as the markets emerged from summer holiday, but few could have predicted returns to come on as strong as the did with US 10Y touching to 3.05 %
While last NFP data produced robust wage growth data, I think its as much a function of hawkish fed speak as anything else.

The most significant shift in my view comes from Fed Governor Lael Brainard, who I dare say it was starting to roost with the Hawk suggesting the sitting Federal Reserve Board is a tad more hawkish than markets have priced.

While last week lower than expected US CPI, print does suggest we are nowhere near a reprice higher of the Fed curve from an inflationary standpoint.

But with the market emerging from its summer slumber and the US economy rocking on overdrive, traders may soon realise that they are pricing 2019 rate hike risk far too pessimistically. If the strong run of US economic data continues and an even more so on the first glint of inflation.

The pragmatist in me says this is USD supportive and not an especially appealing prospect for local Asia markets, in my view.

Tariffs? – So what!

China responded to the latest US tariffs with tariffs of their own of between 5-10% on $60 billion worth of American imports. Looking at markets, you’d think nothing had happened!

 

Dow at eight-month high

After an early wobble, the index powered 0.7% higher to close at its highest level since January, helped by gains in some counters that had been previously negatively affected by earlier tariffs. The S&P500 failed to hit a new record high above last month’s peak while the Nasdaq held a healthy bounce of the 55-day moving average. The US dollar, measured against a basket of six currencies, rose 0.15% as US 10-year yields climbed to their highest since May.

 

 

Across Asian equity markets, sentiment was not quite so bullish, though most indices did trade in the black. The Nikkei edged a 0.03% gain while China shares rose 0.77% while the Hang Seng gained 0.68% by lunchtime. The US dollar maintained its bid bias with USD/JPY hitting its highest in two months as US yields held their higher levels.

 

S&P sees greater impact for US

On the latest tariffs, ratings agency S&P commented that it saw that the aggregate impact of both tariff and confidence effects would be more pronounced on the US economy than China’s. A full-blown trade war, with tariffs of 25% on all non-fuel goods, is seen shaving 1.2% off the US’ GDP over 2019-2021 with the loss for China about 1%. Their major concern is that China may start responding with non-tariff actions, once tariff possibilities are exhausted.

Possibly in a hint of things to come, recent data released by the US Treasury Department showed that China’s holdings of US Treasuries fell to a six-month low of $1.17 trillion in July, down from $1.18 trillion in June. While some say the selling may have been to fund USD/yuan sales to support the local currency, others fear it may be a partly in response to the US imposing tariffs on Chinese goods.

China Holdings of US Treasuries

Source: US Treasury Department; Oanda

 

 

Bank of Japan: No talk, no action

The Bank of Japan left its benchmark interest rate unchanged at 0.10%, as expected. It also maintained its 10-year JGB yield curve control at about 0%, also as had been expected. The vote on yield curve control was 7-2, with members Harada and Kataoka dissenting. The central bank also maintained its annual pace of JGB holdings at 80 trillion yen and annual ETF purchases at six trillion yen. Given the non-event style of the decision, USD/JPY barely moved afterwards, stuck at 112.36 and holding close to its two-month high.

 

 

Pound lifted by May’s Brexit chatter

On the eve of an EU summit in Austria, UK PM Theresa May spoke with the UK’s Express newspaper saying the withdrawal agreement is virtually agreed and would be the right plan for the UK and deliver a good deal for the EU. She also warned that calls for a second referendum risks shattering trust in the government. Talking about the rumored plot against her leadership from within her own party, she insisted she plans to stay in Downing Street to deliver a program to transform Britain long after next year’s Brexit deadline.

 

GBP/USD Daily Chart

Source: Oanda fxTrade

 

GBP/USD touched an eight-week high of 1.3176 early in today’s session and is testing the 100-day moving average at 1.3165. The pair has not closed above this moving average since April 26. GBP/USD is currently sitting at 1.3155.

 

UK prices in the spotlight

We get to see the whole range of UK price indices for August today. Producer output prices are expected to rise 0.2% from July, while consumer prices are seen jumping more, with a 0.5% increase over the previous month. Retail prices are also expected to rise from July, with a 0.6% gain forecast. Euro-zone construction output for July completes the European session. The only US data today are housing starts and building permits for August, along with the Q2 current account balance. That is expected to show an improvement in the deficit to $103.5 billion from $124.1 billion. The day is rounded off with a late speech by ECB’s Draghi.

 

The full MarketPulse data calendar can be viewed at https://www.marketpulse.com/economic-events/

 

Source: MarketPulse

Live FX analysis – 18 September 2018 (Video)

Senior Market Analyst Craig Erlam discusses the key market themes from the summer – most notably US tariffs and Brexit – and the events to watch out for this week.

Craig also gives his live analysis on EURUSD (17:48), GBPUSD (21:36), EURGBP (24:42), AUDUSD (25:44), USDCAD (28:33), GBPCAD (31:02), NZDUSD (32:41), USDJPY (34:16), GBPJPY (35:25) and EURJPY (36:31).

Markets flat on China tariff expectations

Investors await new Chinese tariffs

It’s been a mixed start to the week in financial markets as investors await a possible announcement of new tariffs on China which could come as early as today.

The ongoing conflict between the US and China continues to be a primary driver of market sentiment, with investors concerned about the prospect of a full blown trade war as neither side shows a willingness to blink. It was reported last week that the US invited Chinese officials for further talks, something they were open to but reports over the weekend suggest this wouldn’t go ahead if Donald Trump follows through on threats of tariffs on another $200 billion of goods.

With China threatening to cosy up with Russia and the EU if Trump continues with this hostile trade approach, it will be interesting to see how the White House responds as lawmaker opposition may grow. Trump clearly thought this would be a straightforward monetary fight and may have been caught off guard by the willingness to use alternative tactics to fight back. Investors in the US are continuing to take this in their stride for now but that may not last.

DAX slips on fears of more US tariffs on China

Positive Brexit comments offer hope for deal

The UK will be hoping to use the more hostile and fractured geopolitical environment to its advantage as Brexit negotiations continue. The deadline is fast approaching and we appear to be hearing a more open tone from EU officials who clearly view the risk of no deal Brexit as being very real and damaging and are therefore keen to avoid it. While the EU will still be fully committed to ensuring the UK doesn’t cherry pick post-Brexit and the single market integrity is protected, officials will be keen to minimalize divisions.

IMF pessimistic on UK outlook particularly in no deal scenario

It’s this that I believe will ensure a damaging no deal Brexit is avoided rather than the worry of economic implications for the EU, which of course there also would be. The IMF warned of just that this morning, claiming that even under a broad Brexit agreement the economy will only grow at around 1.5% over the next two year, with a disruptive Brexit being significantly worse.

These pessimistic forecasts for the UK, both in the deal and no deal Brexit scenarios, won’t come as a surprise to anyone and will likely be heavily disputed by those Brexiteers who have constantly attempted to downplay the analysis of supposed experts. While the forecasts are gloomy, the expectations for a deal appear to be improving along with the more conciliatory comments in the media which is providing support to sterling.

No tariffs, now tariffs, what gives?

The pound has run into some resistance around 1.3150 but continues to trade above 1.30 this morning after the IMF forecasts. I think this reflects a slightly more optimistic investor and assuming negotiations don’t suddenly turn sour, it could be a sign that the pound sell-off has run out of steam.

GBPUSD Daily Chart

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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

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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….

Sterling Pauses on Reports of Leadership Challenge

China using Russia to get at the US as trade tensions rise

US futures are trading relatively unchanged ahead of the open on Wednesday, taking the lead from Europe where markets have been quite calm early in the day.

It’s been an uneventful day in financial markets so far, with only low level data being released and no major political stories causing a stir. This is likely to just be a temporary lull as tempers continue to flare between the US and China, with the latter using its relationship with Russia to send a message that there’s more than one way to win a trade war.

With China involving the WTO in the dispute and the US preparing more tariffs – and threatening an eventual tariff on all imports – it doesn’t appear this threat is going away any time soon and is something we should just get used to. This could work to the advantage of the EU with Trump engaging in negotiations in an attempt to forge closer trade ties, remove barriers and eliminate the apparent need for new tariffs.

Asia risk continues to wobble (OANDA Trading Podcast 938Now)

Threat of leadership challenge weighing on sterling

The constant flow of Brexit speculation and reports are continuing to find their way into the media, something that is unlikely to change as we get ever closer to the deadline with a deal. Over the last couple of weeks that’s resulted in a lot of volatility for the pound with traders getting very excited at the release of anything that indicates a move away from the no deal scenario.

GBPUSD Daily Chart

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While I’m sure the pound would have plenty further to fall in the event of a no deal Brexit, a large amount of pessimism has been priced in now which may explain why we see such significant surges in response to relatively insignificant reports. Still, that is the current reality and it’s likely to see the pound remain in its volatile state for some time.

Working against these more optimistic stories has been reports of a leadership challenge with some of the more vocal Brexiteers in Theresa May’s own apparently plodding against her, dissatisfied with the direction negotiations are headed in. The threat of this has prevented the pound making further gains in recent days as its seen as increasing the chances of no deal Brexit or at least a harder one.

EUR/USD – Euro slightly lower as eurozone industrial production misses mark

BoE tomorrow likely to be uneventful

With the Bank of England decision to come tomorrow, the pound is not likely to be steady for long. The central bank isn’t expected to announce any changes tomorrow and will probably prefer to drift into the background as much as possible for the remainder of the year until a deal is reached but that won’t stop traders picking apart the minutes and looking for clues on the timing of the next rate hike.

Economic Calendar

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