Dollar Recovers Ahead of September FOMC – OANDA Market Beat

OANDA Senior Market Analyst Alfonso Esparza reviews the major upcoming market news, macro analysis and economic indicator releases that will impact currencies, stocks other asset classes.

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The greenback recharged and on Monday it is now higher against most major pairs.

Positive Brexit and ECB comments gave an edge to the Euro and Sterling.

The U.S. Federal Reserve will host its two-day meeting on Tuesday and Wednesday this week.

Live FX Analysis – 25 September 2018 (Video)

In this week’s FX webinar, Senior Market Analyst Craig Erlam discusses the upcoming Federal Reserve meeting and provides and update on Brexit and trade wars.

Craig also gives his live analysis on EURUSD (12:04), GBPUSD (17:23), EURGBP (22:05), AUDUSD (24:38), USDCAD (27:24), GBPCAD (28:30), NZDUSD (29:54), USDJPY (30:47), GBPJPY (32:31) and EURJPY (34:25).

GBP/USD – British pound edges higher despite sharp US data

GBP/USD has posted gains in the Tuesday session, continuing the trend seen on Monday. In the North American session, the pair is trading at 1.3162, up 0.34% on the day. On the release front, British CBI Industrial Order Expectations came in at -1, well off the estimate of 5 points. In the U.S, CB Consumer Confidence, jumped to 138.4, crushing the estimate of 132.2 points. On Wednesday, the spotlight will be on the Federal Reserve, which is likely to maintain interest rates at a range between 2.00% and 2.25%.

The Brexit talks continue to sputter, and British Prime Minister May suffered another blow last week, when her proposals on Brexit were rebuffed by European leaders at a summit in Salzburg. Investors and the business sector remain jittery about the British economy, and the concerns are becoming compounded as the days tick closer to Brexit Day next March. The week started off poorly, as CBI manufacturing order expectations came in at -5, compared to an estimate of +1 point.

The U.S and China fired more trade salvos at each other this week, and that could spell bad news for the Japanese yen. On Monday, the U.S imposed tariffs on some $200 billion worth of Chinese goods, while China responded with tariffs of $60 billion on U.S products. There may be more headwinds ahead, as China sharply attacked the U.S, saying it had plunged “a knife to China’s neck” with the new tariffs. The Chinese have canceled trade talks with the Trump administration, and no new talks are likely to be held until the mood improves between the world’s two largest economies. Previous rounds of tariffs between the two economic giants have boosted the U.S dollar, but so far, investors have reacted calmly and have not snapped up the U.S dollar at the expense of other currencies.

$100 per barrel oil ??

Euro bounces as Italy targets lower deficit ratio

If in doubt, look to the Fed for direction

 

GBP/USD Fundamentals

Monday (September 24)

  • 6:00 British CPI Industrial Order Expectations. Estimate +5. Actual -1

Tuesday (September 25)

  • 4:40 British MPC Member Vlieghe Speaks
  • 9:00 US HPI. Estimate 0.2%. Actual 0.2%
  • 9:00 US S&P/CS Composite-20 HPI. Estimate 6.2%. Actual 5.9% 
  • 10:00 US Consumer Confidence. Estimate 132.2. Actual 138.8
  • 10:00 US Richmond Manufacturing Index. Estimate 22. Actual 29

Wednesday (September 26)

  • 4:30 British High Street Lending. Estimate 39.7K
  • 6:00 British CBI Realized Sales. Estimate 18
  • 10:00 US New Home Sales. Estimate 630K
  • 10:30 US Crude Oil Inventories
  • 14:00 US FOMC Economic Projections
  • 14:00 US FOMC Statement
  • 14:00 US Federal Funds Rate. Estimate <2.25%
  • 14:30 FOMC Press Conference

*All release times are DST

*Key events are in bold

 

GBP/USD for Tuesday, September 25, 2018

GBP/USD September 25 at 11:05 DST

Open: 1.3118 High: 1.3176 Low: 1.3095 Close: 1.3162

 

GBP/USD Technical

S1 S2 S1 R1 R2 R3
1.2852 1.2966 1.3088 1.3173 1.3301 1.3458

In the Asian session, GBP/USD ticked lower. The pair posted gains in European trade and is steady in the North American session

  • 1.3088 is providing support
  • 1.3173 was tested earlier in resistance. It is a weak line
  • Current range: 1.3088 to 1.3173

Further levels in both directions:

  • Below: 1.3088, 1.2966 and 1.2852
  • Above: 1.3173, 1.3301, 1.3458 and 1.3550

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.

If in doubt, look to the Fed for direction

Tuesday September 25: Five things the markets are talking about

It’s a return to the drawing board for many investors who are now back online beginning their holiday shortened Asian trading week.

Euro equities are trading mixed following a “get back to basics” Asian session as investors ponder the outlook for global trade and U.S politics.

The U.S dollar continues to hang tough, while stateside, Treasury yields consolidate atop of +3.1% while crude oil trades at a four-year high.

In Europe, Italian bonds rally as the country edges closer to delivering a budget.

Topping investors’ agenda this week is today’s two-day FOMC meeting, along with the Fed’s updated forecasts and the chair’s quarterly press conference (Sep 25-26).

Note: The market is looking for a third +25 bps rate hike and is pricing in another one for December. Investors await Fed chair Powell’s views on trade and tariffs tomorrow.

1. Stocks mixed results

In Japan, the Nikkei rallied for a seventh consecutive session overnight, helped by gains in chip-related stocks that offset weakness in construction equipment manufacturers. The ‘big’ dollar trading through ¥112 also helped to support overall sentiment. The index gained +0.3% to hit its highest print in more than eight-months.

Note: Both Hong Kong and South Korea indexes were closed for holidays on Tuesday.

Down-under, Aussie stocks traded flat overnight as an escalation in Sino-U.S trade tensions hit risk sentiment, while energy stocks rallied on a firmer oil prices. The benchmark dipped -0.1% on Monday.

In China, stock fell on Tuesday in their first trading session after fresh U.S tariffs on +$200B worth of Chinese imports began yesterday. At the close, the Shanghai Composite index was down -0.58%, while the blue-chip CSI300 index was down -1%.

In Europe, in early trade, regional bourses are being supported by stronger commodity prices and optimism over the Italian budget.

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

Indices: Stoxx50 +0.3% at 3,419, FTSE +0.3% at 7,482, DAX +0.2% at 12,373, CAC-40 +0.2% at 5,486, IBEX-35 +0.4% at 9,550, FTSE MIB +0.5% at 21,450, SMI +0.3% at 8,972, S&P 500 Futures +0.1%

2. Oil hits new four-year highs as OPEC resists output rise, gold steady

Crude oil prices remain better bid after Brent hit a fresh four-year high amid looming U.S sanctions against Iran and an apparent reluctance by OPEC and Russia to raise output to offset the expected hit to supply.

With OPEC and Russia having ignored Trump’s twitter pleas to increase production, coupled with U.S sanctions to hit Iran exports in November, should again provide support for oil ‘bulls’ to seek higher price prints.

Brent crude futures are up +30c, or +0.4% from Monday’s close at +$81.69 a barrel, a level not seen since November 2014. U.S West Texas Intermediate (WTI) crude futures are at +$72.28 a barrel, up +20c or +0.3% from yesterday’s close.

The U.S from Nov. 4 will target Iran’s oil exports with sanctions, and Trump continues to put pressure on governments and companies around the world to fall in line and cut purchases from Tehran.

Ahead of the U.S open, gold prices trade steady as the market remains somewhat cautious ahead of today’s two-day U.S Fed meeting, which could offer direction on future interest rate hikes. Spot gold is little changed at +$1,199.06 an ounce. U.S gold futures are also steady at +$1,203.70 an ounce.

Note: Gold has fallen -12% since hitting a peak in April against a backdrop of trade disputes and rising U.S interest rates.

3. Italian yields’ fall on budget hopes, Bund yields rally

Italian borrowing costs rally, narrowing the gap with its German counterparts, on signs that Italy’s coalition is likely to reach a compromise over next years budget. The ruling coalition is willing to keep the budget deficit below +2% of GDP.

In contrast, Germany’s Bund yields continue to back-up, trading atop of their four-month highs, a day after ECB chief Mario Draghi pointed to a “vigorous” pick-up in underlying inflation.

In early trade, Italy’s 10-year BTP yield has fallen -9 bps to +2.86%, narrowing the spread over the benchmark German Bund yield to around +232 bps, from around +245 bps late yesterday.

In Germany, the 10-year bund yields has rallied to a four-month high at +0.54%, a day after posting their biggest one-day jump since June.

Elsewhere, the yield on 10-year Treasuries has advanced +1 bps to +3.09%, its highest yield in almost 19-weeks. In the U.K, the 10-year Gilt yield has climbed +1 bps to +1.624%, , the highest in more than seven months.

4. Bitcoin’s pullback quickens

In early trade, BTC has slid to new intraday lows, falling nearly -4% to +$6,400 in the overnight session, moving the cryptocurrency back toward this month’s lows. The BTC ‘bears’ continue to eye the +$6,000 region.

TRY has rallied +6% in the past 24-hrs to $6.1374 on reports that Turkish authorities are sending signals that an American pastor facing terrorism charges could be released next month.

EUR/USD (€1.1762) softened slightly after comments from ECB’s Praet noting that comments from Draghi yesterday were nothing new. The pair fell -30 pips to a low of €1.7133 following the comments.

Note: The ‘single unit’ found support yesterday after ECB President Draghi said there has been a relatively vigorous pick-up in inflation.

5. Swedish PM Lofven ousted in no-confidence vote

Earlier this morning, Swedish PM Stefan Lofven lost a no-confidence vote in parliament and will step down after four-years in power, but with neither major political bloc holding a majority it remained unclear who will form the next government.

Note: Voters delivered a hung parliament in the Sept. 9 election with Lofven’s center-left bloc garnering 144 seats, one more than the center-right opposition Alliance.

SEK is down -0.18% at €10.3374.

Brexit sterling shorts back to July 2016 levels

“Bear” pound speculators hold nearly the same amount of net short positions in sterling as they did in July 2016.

This would suggest that the markets worries about how the Brexit divorce on March 29, 2019 will look, and the uncertainty surrounding it, has got back to levels it was at just after the referendum vote.

According to CFTC latest data, sterling shorts have increased by +18K to +79K in the week to Sept. 18 – this is the highest level of “short” positions in four-months.

Pound bid

The pound trades higher this morning, both against the dollar and the euro, reversing some of the losses it made on Friday after E.U leaders rejected U.K PM Theresa May’s Brexit deal proposal and May reiterating in a speech that a no-deal scenario was better than a bad deal.

GBP/USD (£1.3152) remains handcuffed to Brexit rhetoric and PM May woes and has reclaimed the psychological £1.31 handle after comments this morning from U.K Brexit Minister Raab indicated that he is confident he will make progress on Brexit.

There are also whispers that PM May has started contingency planning for possible snap election in November – however, Raab reiterated that “no election is planned.”

Canada: Wholesale trade, July 2018

Wholesale sales rose for the third time in five months, up 1.5% to $63.9 billion in July, more than offsetting the 0.9% decline in June. Sales were up in four of seven subsectors, representing approximately 66% of total wholesale sales.

The personal and household goods; food, beverage and tobacco; and motor vehicle and parts subsectors led the gains in July, while the miscellaneous subsector posted the largest decline.

In volume terms, wholesale sales increased 1.2%.

Increase in July attributable to higher sales in four of seven subsectors

The personal and household goods subsector rose for the second consecutive month, up 4.2% to $9.2 billion in July. Sales were up in five of six industries, led by the textile, clothing and footwear, and personal goods industries. In volume terms, sales in the subsector increased 4.6%.

Following two consecutive months of declines, sales in the food, beverage and tobacco subsector were up 2.6% to $12.0 billion, mainly on the strength of higher sales in the food industry (+2.4%). The gain in July was partly attributable to an increase in prices as sales in the industry were up 1.6% in volume terms.

Sales in the motor vehicle and parts subsector increased 2.4% to $11.1 billion, the first gain in four months. While increases were reported in all three industries, the motor vehicle industry (+2.0%) contributed the most to the overall gain in July.

Of the three subsectors posting declines in July, the miscellaneous subsector was the largest contributor, edging down 0.2% to $8.2 billion. Two of the subsector’s five industries declined in July, accounting for approximately 41% of the subsector’s sales.

Sales up in six provinces

Sales increased in six provinces in July, which together represented 97% of total wholesale sales in Canada. Quebec and Ontario accounted for most of the gain.

Sales in Quebec increased for the third time in four months, up 3.2% to $11.9 billion in July. Six of seven subsectors increased, led by the personal and household goods (+5.8%) and the food, beverage and tobacco (+5.0%) subsectors. Sales in the personal and household goods subsector increased after two consecutive declines, reaching their highest level on record, while sales in the food, beverage and tobacco subsector increased for the second consecutive month.

Wholesale sales in Ontario rose for the second month in a row, up 1.1% to $32.6 billion in July, on the strength of higher sales in four of seven subsectors. The motor vehicle and parts subsector (+3.1%), which rose after three consecutive monthly declines, and the personal and household goods subsector (+4.0%), which increased for the second consecutive month, contributed the most to higher sales in Ontario.

In Alberta, sales increased for the third time in five months, up 2.5% in July to $7.0 billion. The machinery, equipment and supplies subsector (+4.9%) contributed the most to the gain. The gain in this subsector was attributable to higher sales reported in the construction, forestry, mining and industrial machinery, equipment and supplies industry.

Sales in British Columbia rose 0.7% to $6.7 billion in July, on the strength of higher sales in the food, beverage and tobacco and the building material and supplies subsectors. Both subsectors increased following two consecutive monthly declines.

In dollar terms, the Atlantic provinces reported the largest decline in July. Sales in Newfoundland and Labrador decreased 4.6% to $354 million, on the strength of lower sales in the miscellaneous subsector.

The food, beverage and tobacco subsector contributed the most to the decline in Nova Scotia (-1.0%), New Brunswick (-0.8%) and Prince Edward Island (-0.8%).

Inventories rise in July

Wholesale inventories increased for the fifth time in seven months, up 1.4% to $87.1 billion in July. Gains were recorded in six of seven subsectors, representing 86% of total wholesale inventories.

In dollar terms, the personal and household goods subsector (+4.3%) recorded the largest gain, on the strength of higher inventories in five of six industries. This was the third consecutive monthly increase for the subsector.

Inventories in the building material and supplies subsector (+2.2%) grew for the fifth consecutive month in July. The increase was mostly attributable to gains in the electrical, plumbing, heating and air-conditioning equipment and supplies industry (+4.1%).

The food, beverage and tobacco subsector (+1.8%) posted a second consecutive monthly increase, mainly due to higher inventories in the food industry (+2.0%).

The machinery, equipment and supplies subsector (+0.6%) rose for the fifth time in seven months, on the strength of the farm, lawn and garden machinery and equipment industry (+1.5%).

The lone subsector to decline in July was motor vehicle and parts, down 0.8% following three consecutive monthly gains.

The inventory-to-sales ratio was unchanged at 1.36 in July. The ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current levels.

StatsCanada

Fed and trade threats to drive markets

Monday September 24: Five things the markets are talking about

Global equities are under pressure as China called off planned trade talks with U.S, potentially triggering an escalation in the tariff war between the world’s largest economies.

Note: U.S’ tariffs on +$200B in China goods took effect at midnight, while China’s counter tariffs on +$60B of U.S goods also came into effect this morning.

Presidents Trumps’ veiled threat to OPEC to increase global crude supply was met with a tepid response over the weekend. The Saudi oil minister said that the market was adequately supplied.

The ‘big’ dollar continues to find support on pullbacks, while Treasuries trade under pressure along with Euro sovereign bonds.

Topping investors’ agenda this week is the FOMC meeting along with the Fed’s updated forecasts and the chair’s quarterly press conference (Sep 25-26). The market is looking for a third +25 bps rate hike and is pricing in another one for December. Investors await Fed chair Powell’s views on trade and tariffs.

Elsewhere, the Reserve Bank of New Zealand (RBNZ) will also meet Wednesday (Sept 26) and no rate hike is expected. The U.K posts its final estimate of Q2 GDP, while the Eurozone releases the September flash harmonized index of consumer prices (Sept 28). Also on Friday, Canada will release its monthly GDP data for July.

1. Stocks see red

Asian volumes were light and liquidity a concern as markets in China, Japan, South Korea and Taiwan were closed for holidays. Both Hong Kong and South Korea will be closed on Tuesday.

Note: Despite Japanese markets closed, Japans Economy Minister Motegi and USTR Lighthizer are expected to hold trade talks today in New York. Japan is said to considering a bilateral trade agreement with the U.S.

Down-under, Aussie stocks edged lower overnight, as lower commodities prices hit materials stocks while financials slipped on new revelations of wrongdoing in the sector revealed in a quasi-judicial inquiry. The S&P/ASX 200 index fell -0.1% at the close of trade. The benchmark rose +0.4% on Friday.

In Hong Kong, stocks plummeted after the U.S imposed fresh tariffs on an additional +$200B of Chinese imports and as Beijing cancelled planned talks between the two sides. The Hang Seng Index fell -1.62%.

In Europe, regional bourses opened in the ‘red’ and continue to trade lower. Market risk sentiment continues to be impacted over trade concerns as U.S tariffs came into effect at midnight and China cancels trade talks – consumer discretionary sector among worst performers.

U.S stocks are set to open in the ‘red’ (-0.2%).

Indices: Stoxx50 -0.3% at 3,419, FTSE -0.1% at 7,480, DAX -0.3% at 12,389, CAC-40 -0.2% at 5,481, IBEX-35 -0.5% at 9,543, FTSE MIB -0.5% at 21,427, SMI % at , S&P 500 Futures -0.2%

2. OPEC, Russia reject Trump’s call for immediate boost to oil output

Yesterday in Algiers, both OPEC and Russia ruled out any immediate, additional increase in crude output, effectively rejecting Trump’s calls for action to “cool” the market.

The recent price rally has mainly stemmed from a decline in oil exports from OPEC member Iran due to fresh U.S sanctions.

Also, according to OPEC’s projections, a strong rise in non-OPEC production could exceed global demand growth, which could eventually put pressure on prices.

Oil prices remain better bid this Monday morning as U.S. markets tighten ahead of Washington’s plan to impose new sanctions against Iran.

Brent crude futures are at +$79.74 per barrel, up by +94c, or +1.2%. U.S West Texas Intermediate (WTI) crude futures have rallied +74c, or +1.1%, to +$71.52 a barrel.

The market remains concerned about U.S inventory levels. U.S commercial crude oil inventories (EIA) are at their lowest level in three-years, and while output remains around the record of +11M bpd, recent subdued U.S drilling activity points towards a slowdown.

Gold prices have edged a tad lower this morning as the U.S dollar holds firm on news that China has cancelled trade talks with the U.S, while the market waits for this week’s FOMC meeting for guidance on future rate hikes. Spot gold is down -0.1% at +$1,198.36, after declining as much as -1.3% on Friday. U.S gold futures are little changed at +$1,201.60 an ounce.

3. HK interbank rates jump to 10-year highs after HKD surge

Some of the short-term rates banks in Hong Kong charge each other leapt to their highest levels in roughly a decade, in the first trading session after a sudden surge in the tightly controlled HKD.

Note: Speculators have been covering some significant ‘short’ HKD positions and the lack of liquidity has not helped the move.

The overnight HK interbank offered rate jumped +2% to +3.85%, it’s highest since 2007. One-month Hibor rose less sharply, but still reached nearly +2.17%. On Friday, HKD unexpectedly surged +0.42%, its biggest gain since 2003.

Note: The currency, which is pegged in a range of $7.75 to $7.85 to the U.S. dollar, was little changed at $7.8113.

Elsewhere, Italian government bond yields are backing up again this morning, again reflecting some unease among investors given this week’s deadline for the government to present its budget targets.

Note: ECB’s Mario Draghi speaks at the European Parliament later today, while on Wednesday; the Fed is expected to raise interest rates again.

Two-year Italian bond yields are up +4.5 bps on the day at +0.81%, while the ten-year yields are +3.5 bps higher at +2.87%. The gap over benchmark German Bunds yields have widened from Friday’s close at around +241 bps.

The yield on U.S 10-year Treasuries has increased +1 bps to +3.07%. In Germany, the 10-year Bund yield has rallied less than +1 bps to +0.47%, while in the U.K, the 10-year Gilt yield has climbed +1 bps to +1.563%.

4. Dollar hold firms, but G7 does find some support

GBP/USD (£1.3123) remains handcuffed to Brexit rhetoric and PM May woes. Sterling has begun Monday’s session on the front foot, reclaiming the psychological £1.31 handle after comments from U.K Brexit Minister Raab indicated that he is confident he will make progress on Brexit. There are also whispers that PM May has started contingency planning for possible snap election in November – however, Raab reiterated that “no election is planned.”

The EUR (€1.1770) is again wading towards the key €1.18 handle. Consensus does not expect this week’s data or monetary policy decisions to mount a serious challenge to the ‘single unit’s recent rally. The FOMC meeting is due on Wednesday, but a +25 bps increase to +2.25% is already priced into EUR/USD. The government in Italy is expected to roll out new fiscal projections, but the 2019 budget deficit will probably be set at close to +2% of GDP, which is similar to where the deficit stands now. While eurozone inflation data later this week should provide the euro with “minor support.”

The INR continues to weaken; with the USD/INR rallying to an intraday high of $72.73. There have been rumours that Reserve Bank of India (RBI) has intervened to cap dollar gains. Trade concerns continue to weigh as China cancels trade talks with the U.S.

5. German business sentiment slipped in September

Ifo data this morning showed that German business sentiment slipped this month following a sharp rise in August, as companies slightly lowered their business outlooks.

The Ifo business climate index decreased to 103.7 from an upwardly revised 103.9 in August, but still beat forecasts. The street had been looking for a decline to 103.2.

“Despite growing uncertainty, the German economy remains robust,” said Ifo president Clemens Fuest.

In manufacturing, managers were less content with the current situation in September compared with the month before. Business expectations, however, hit their highest level since February.

“Manufacturers plan to ramp up production in the months ahead,” according to the Ifo Institute.

Forex heatmap

Numerous crosscurrents in play

Numerous crosscurrents in play

US equities 

On Friday the Dow and S&P opened and closed again at fresh highs on massive volumes due to options expirations, and while headlines over the weekend suggested that trade talks between both US and China will be shelved until after the US midterm elections, markets will not view this in too much of a negative light. It’s not so unexpected, and frankly, the US administration would be just as happy to keep trade wars out of the headlines ahead of the politically charge midterms where the Whitehouse will need to expend much political energy righting their political ship. But more importantly, the markets were viewing the November G-20 summit as a critical focal point where it’s expected both Ji and Trump will take to the sidelines with the intentions agreeing on a roadmap to settle this trade dispute. Not to mention, backchannels will most likely be open. But make no mistake, this will be a bumpy ride and don’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.

Regardless, the astounding closing price action in equities last week, particularly the Shanghai composite and the US Indices suggest the markets are incredibly confident on a US-China trade deal by year-end, more Chinese stimulus to come, and hopefully a stable Yuan.

NAFTA 
On the no less political contentious NAFTA 2 trade talks. Canada is expected to join a NAFTA 2.0 agreement. But the Quebec election falls on Oct 1, and with the Provincial Liberals pulling ahead in the polls every so slightly, it’s debatable how much of a rush the Federal Liberals will be to ink a deal before month end. Especially given the political fallout from any concessions around the dairy industry, as the bulk of Canada’s Milk industry is based in Quebec.

Focus 

Traders will continue to monitor Chinese equities, DXY and copper.

Copper is fantastic leading indicators of risk and the economic cycle. Shanghai copper rose smartly on Friday bolstered by China’s fiscal efforts to bump up demand.

US Yields 

The US 10 yields finished the week above 3.05 % and could be setting the stage for a push higher. Rate differentials are still very much in favour of the USD story. But unlike when US yields rocketed higher in May, the UK and Canadian yields are breaking higher, while Japan is staying the top end of YCCC But more significantly Bunds are trading in the 50 bp region so there’s a bit more yield competition for the dollar to contend.

The US dollar 

Speaking of which, the USD could trade defensively ahead of this weeks FOMC as USD Bulls erring on the side of caution. With 2 US rates hikes priced into the balance 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.

Oil Markets 

Last week oil prices were trading buoyantly on reports Saudis are more than happy with a Brent price above $80 or that OPEC, more generally, is not considering raising output. That was until President Trump castigated OPEC ahead of this weekends Algiers meeting.

However, 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 easing price pressures. Not wholly unexpected mind you as the markets have been leaning toward December 3 OPEC summit for more formal decisions

WTI is trading the weekend news very favourably, up over 1 % at the NYMEX open and additionally spirited on by reports  of inventories at the Cushing Oklahoma delivery point may have declined further in the week ended September 21.

But bullish sentiment could be tempered somewhat by several reports suggest ing OPEC producers generally agree that oil prices above Brent $80 a barrel would be too high. Which plays into the long-held market axiom that OPEC is looking to stabilise prices within the $70-80 $ sweet spot

Gold Markets 

With risk sentiment soaring there has been very little demand for Gold and when you factor in the fact that Gold traditionally trades poorly ahead of anticipated Fed hike, the USD will have up ground to entice buyer back to the market.

G-10

Japanese Yen

The Yen continues to consolidate but with the BoJ continuing to float the idea of shiting policy for no other reason than to support the beleaguered banking sector after years of 0 % interest rates. These trial balloons could contiued to weight on the top side despite USDJPY getting massive support from the favourable interest rate differentials.

The Euro 

I still think Italy risk is way underpriced and the Eurozone economic recovery is so uneven that the EURUSD could move lower given the US robust US economic story.

EM Asia

Hard to envision anything other the current account ( ca)deficit currencies remain vulnerable while ca surplus countries will contiued fare well.

The Chinese Yuan

China will move towards current account deficit and with interest rates likely to move lower to stimulate the economy the RMB will either trade weaker or remain stable at the at the CNY weakest levels of the current range.

The Malaysian Ringgit

The song remains the same. Positive updraft from global risk sentiment coupled with rising oil prices. But offset by increasing global yields, especially those in the US which lessens the appeal for local bonds.

The Rupee and Rupiah 

As for the regional whipping boys IDR and INR, this a very complicated landscape and surging oil prices will continue to be an outsized problem for both currencies, And despite pledges to fix deficits, there has been no proof in that pudding. Instead, BI and RBI are coming up with creative yet very patchy methods of different interventions like the mandatory conversion for export proceeds in Indonesia, for example, or taking oil demand off the market in India.

Which brings us full circle, to this weeks FOMC, where it’s expected both BI and RBI will raise interest rates to match next week Fed hike. So, their ongoing currency struggles will continue to make headlines. However, without addressing the real underlying problems around deficits, hiking interest rates to prop up currency is like putting a band-aid on a broken leg as speculators will continue to target deficit currencies at every opportunity.

Friday Rupee sell-off was directly related to the impact of the RBI raising interest rates which have reportedly caused a massive corporate default for a shadow lender in the housing sector and triggered a significant sell-off in local equity markets.

Ultimately the consumer pays the piper in any rate hike scenario.

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