Live FX Market Analysis – 16 October 2018 (Video)

It’s been another turbulent week in FX markets with last week’s sell-off suitably spooking investors, Saudi Arabia causing a stir following allegations of murder at its embassy in Turkey, Brexit talks stalling and Italy risking the wrath of the European Commission after submitting its budget. Senior Market Analyst Craig Erlam discusses all of these and more in this week’s webinar.

Craig also gives his live analysis on EURUSD (16:37), GBPUSD (18:09), EURGBP (20:05), AUDUSD (21:56), USDCAD (24:25), GBPCAD (29:37), NZDUSD (30:14), USDJPY (31:05), GBPJPY (31:50) and EURJPY (32:40).

Markets stable for now but risks pile up

Saudi in the spotlight as lies start to unravel

Investors may not be feeling particularly comfortable yet but we are seeing some welcome stability in the markets on Tuesday, with Europe posting small gains following a mixed session in Asia overnight. US futures are also pointing a little higher which will provide some comfort following a number of rather explosive sessions.

As ever, politics is driving everything right now and while a trade spat between the US and China has gone quiet, it’s been Saudi Arabia in the spotlight following the disappearance and alleged murder of journalist Jamal Khashoggi. Brexit is never far from the headlines as the UK and EU continue efforts to resolving the Northern Ireland backstop – without much success – while Italy offers another headache from within after it submitted its first populist budget that put it on a collision course with Brussels as it breaks its fiscal rules.

The buck cannot find a bid

Oil eases as Trump takes heat out of situation

Oil prices have continued to edge lower on Tuesday, as Trump appeared to take some of the heat out of the Saudi situation following a phone call with King Salman. Trump appeared reassured by the conversation after the King denied any knowledge of what happened, which suggests he’ll be in no rush to impose sanctions or other measures against the country.

WTI and Brent Crude Daily Charts

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While it later emerged that Saudi Arabia was willing to admit that Khashoggi was unintentionally killed during an interrogation, having previously claimed he left via the back door, traders don’t appear to believe that this will influence Trump’s response to the situation with the American President clearly very reluctant to enter into a tit-for-tat with a key middle eastern ally.

Saudi Arabia has a number of options at its disposal for responding to US sanctions, including causing severe disruption in the oil market if it suddenly reduced output in what is already a tight market. Prices have already risen to levels not seen in four years and if the Saudi’s decide to use this as a weapon, it could cause prices to soar which would be very damaging for the global economy. There is a hope that the self-harming nature of such a move would deter such action.

Commodities Weekly: Gold at 2-1/2 month high as safe haven status reborn

UK wage growth accelerates in August

The UK labour market data this morning provided some positive news among the constant flow of tedious rhetoric regarding to the stalled Brexit negotiations. Despite the low growth environment the country finds itself in due to the uncertainty around the negotiations, unemployment remained at a 43-year low in August while wage growth exceeded expectations, rising 2.7% or 3.1% when bonuses are stripped out.

UK Real Wage Growth

Source – Thomson Reuters Eikon

Real wage growth has been among the greatest casualties so far of the referendum result, having fallen in large part due to the currency impact on inflation. While we have edged back into positive territory this year, the increases are tiny which makes even a small beat today something to celebrate. The pound rallied following the data, breaking 1.32 against the dollar before paring gains.

GBPUSD Daily Chart

Economic Calendar

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

OANDA Market Insights podcast (episode 35)

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

This week’s big stories: Global market sell off, IMF warns Italy, Chancellor optimistic on Brexit, Crude slumps on market uncertainty.

European update – GBP/USD pares gains after data

Investors remain risk averse as multiple concerns weigh

Relatively flat sessions across much of Asia and some weakness in Europe on Wednesday is taking its toll on US futures ahead of the open on Wall Street.

There are a number of worries for investors right now, from the pace of rising bond yields and the impact on investor sentiment, to Italy’s populist coalition playing a game of chicken with the European Commission, stalling Brexit negotiations and the ongoing trade conflict between the US and China. This is all taking its toll on investors and while the US may have recently scaled record highs, supported in a major way by tax reforms passed late last year and the economic fallout from them, others are not faring as well and the longer it goes on, the more it’s likely to catch up with Trump as well.

No one getting too excited despite increasingly positive Brexit reports

The UK is very much in the spotlight this morning, following reports that progress has been made on the Irish border. While traders are yet to get too excited about the prospect of significant progress despite the fact that we are now a week away from the EU summit, at which leaders had previously hoped to have a deal in place to sign off on. It’s been a long time since this was seen as a realistic target but time is running out and at the next summit in November, the pressure will be significantly higher to have an agreement in place or no deal Brexit is going to become increasingly likely.

It does seem over the last 24 hours that reports have been becoming more positive, which has been reflected in the currency but we’re yet to hear anything of substance and fatigue may be setting in from all of the vague and at times, unfounded, claims that’s keep filtering out. There does seem to be something more to the more recent comments but traders are being patient, for now.

European open – Brexit reports provide early lift

UK economy flat lines in August

Sterling has been paring gains since the start of the European session and the raft of UK data hasn’t done anything to put a floor under it. GDP data for August was a little disappointing as the economy didn’t grow following a bumper month in July. It would appear the consumer buzz from the unusually good summer and World Cup has worn off, which was to be expected at a time when the consumer is feeling the squeeze following a period of negative wage growth. The July data was revised higher though which offset the disappointment from the August data.

GBPUSD Daily Chart

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Other figures released alongside the GDP data were a little better with manufacturing and industrial production data exceeding expectations on the month, while numbers for July were also revised higher. Unfortunately, accounting for such a small portion of the economy, this failed to get traders too excited and instead we just saw a collective shrug of the shoulders. As has been the case for some time, politics is driving markets right now and the data just doesn’t have the sway it once did.

Pound extends gains on Brexit noise

Oil slightly lower as Hurricane Michael upgraded

Oil markets remain a particular point of interest having recently risen to 2014 levels and threatening to go higher. It has lost some of its spark over the last week as traders lock in some profits but we’re not yet seeing much appetite for lower prices. With Iranian sanctions coming next month and Hurricane Michael – following its upgrade to category four – threatening some near-term output in the US, the bulls may still feel pretty confident.

The IMF’s warnings on global growth on Tuesday may also have weighed a little but broadly speaking, I think few were surprised at the lower revisions given the environment we currently find ourselves in.

Economic Calendar

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

European open – Brexit reports provide early liif

Robbins and Barnier make progress on Irish border

A relatively mixed session in Asia overnight has provided little direction for Europe markets ahead of the open on Tuesday, although it would appear investors haven’t been short of news flow to get their teeth into.

Reports overnight that “meaningful progress” has been made between Theresa May’s chief negotiator Olly Robbins and EU Brexit negotiator Michel Barnier – much to the annoyance of UK Brexit negotiator Dominic Raab I imagine – helped the pound hang on to earlier gains as we enter into a real crunch period for exit talks. Naturally, the report lacked any useful detail but that is something we can hopefully hear more about in the coming hours or days, if this is in fact true which isn’t always the case.

GBPUSD Daily Chart

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Sterling traders – who have been very sensitive to any Brexit-related speculation – were surprisingly unmoved by the reports which emerged late in the evening, although this may simply reflect to constant flow of news we’ve been getting and that this represented more of the message we had been seeing spill out throughout the day. Still, it’s rare cause for optimism, although there’s clearly still some way to go.

Pound extends gains on Brexit noise

Tria seeks to calm investors but stands by budget

Italy has emerged as a greater cause for concern for Europe recently, with the populist coalition of the eurosceptic right and left seizing the first opportunity to collide with Brussels only to find that it is in fact investors that represent a greater risk to their budget plans. Yields on Italian debt have spiked recently after the government proposed widening its fiscal deficit in order to stand by its election promises, something that has drawn criticism from both the European Commission and investors due to both the impact on its already huge debt levels and it’s unrealistic assumptions that risk it missing targets.

Italy’s Finance Minister Giovanni Tria has attempted to take a more calm approach in light of rising yields – very different to the hostility shown by his colleagues to both Brussels and the markets – in an attempt to ease some of the pressure on Italian debt but this is failing to calm fears. Tria stood by the need to spend more and generate more growth but urged calmer discussions with Brussels. Taking on Brussels, providing overly optimistic forecasts and attempting to fuel euroscepticism in the country isn’t the best way for the government to keep investors on side, much to the annoyance of the most vocal anti-establishment figures in government.

OANDA Trading podcast : CNH and IDR insights with MONEYFM 89.3

Dollar softens as Trump once again attacks Fed hikes

The dollar has been given some reprieve after US President Donald Trump gave his two cents on the central bank – not for the first time – claiming once again that he’s not too pleased with the pace at which they’re tightening. Trump has taken it upon himself to regularly chime in on the decisions of the independent central bank, something a President would typically refrain from doing so as to avoid blurring the lines between the two.

US Dollar Index Daily Chart

Source – Thomson Reuters Eikon

Some see this as a desire on his part to have more control over interest rates – which may be true – but I think it’s much more simple than that, a force working against him is an annoyance and he’s laying the groundwork early to direct the finger of blame at when the economy stumbles and markets slip.

Oil pares gains as IMF lowers growth forecasts

The latest IMF forecasts could be taking some of the spark out of the oil rally in the near term, with lower growth naturally weighing on demand. Oil continues to be well supported though as Iranian sanctions prepare to come into force, taking significant supply out of the market, while Hurricane Michael in the US is expected to provide some additional near-term supply disruptions.

Brent and WTI Crude Daily Charts

Economic Calendar

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

Why are investors still nervous about Italian bank “doom loop”?

Italy’s banks remain a source of heartburn for investors more than five years after the worst days of the eurozone debt crisis sparked fears that a so-called doom loop between sharply rising government bond yields and troubled lenders could trigger wider financial chaos.

That’s in part because Italian banks, while making progress toward cleaning up their balance sheets, continue to add to holdings of sovereign debt—meaning that in times of crisis the doom loop swings back into action.

That dynamic was on display again Monday.

Italian government bonds fell sharply again, sending the yield on the 10-year bond, known as BTPs, 14.2 basis points higher to 3.563%, according to Tradeweb. The all-important premium demanded by investors to hold 10-year Italian paper over German government bonds widened to 301.3 basis points, or 3.013 percentage points, up from less than 1.2 percentage points in April, before the formation of Italy’s populist government.

MarketWatch

Italy and China drag markets lower

Markets lower as we head towards quiet US session

A bank holiday in the US and Canada on Monday should ensure we see thin trade at the start of the week, with news flow and economic releases from that side of the pond also likely being fairly muted.

Of course we can never account for the Presidents Twitter account which has the ability to cause a wobble all on its own but broadly speaking things are expected to be very quiet. US markets are open but trade is expected to be very thin, while futures are pointing lower again as the recent rise in bond yields weigh on riskier investments.

I don’t expect this sell-off to last too long and think it’s more a symptom of the aggressiveness of the yield rises, as opposed to real concerns about the prospect for stocks and the economy in a higher interest rate environment. The rise in US yields which has prompted a similar increase in the US dollar – which continues to push higher this morning – was initially triggered by a flurry of strong economic indicators and hawkish comments from Federal Reserve Chairman Jerome Powell and the move still appears to have some legs.

Muted response to PBOC’s liquidity easing move

China takes a hit after week holiday

The decline in US futures this morning is also likely being aided by sell-offs in Asia and Europe at the start of the week. Chinese stocks have been shocked back to life after the week long holiday, with the Shanghai Composite ending its first day back almost 4% lower, on the back of last week’s broad declines and despite the 100 basis point reserve requirement ratio (RRR) cut, intended to support the economy in the face of a trade war with the US.

The cut to the RRR will likely only draw increased criticism from the US, who has accused the country of manipulating its currency to keep it artificially weak. The cut though has not weakened the currency too much although it does continue to creep slowly towards the seven handle against the dollar that many traders view as being psychologically significant.

Asia market update: riding the risk roller coaster

Italian fiscal concerns drag on Europe

The sell-off in Asia may have been enough to weigh on risk appetite in Europe but as it turns out it doesn’t need much help, with the coalition Italian government’s determination to collide with Brussels over its budget plans causing more than enough of a stir in the region. Italian 10-year yields have spiked again today with the spread between it and Germany’s surging above 300 basis points and to the highest in five years.

This is also taking its toll on Italian equity markets which are clearly leading the losses today, with banks taking a bit hit in the process due to the still close links between the two. Italy hasn’t been the only casualty though, with the rest of Europe being caught up in the losses and Greece in particular being drawn into the firing line, with it seen as being among the most vulnerable to renewed aversion to European debt markets.

Economic Calendar

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

 

OANDA Market Insights podcast (episode 34)

OANDA Senior Market Analyst Craig Erlam and Stephen Innes, Head of Trading Asia review the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Bond yields spike, US jobless rate hits 49 year low, Italy launches ambitious budget plan, India the latest EM concern, Brexit and more.

 

Money FM with Craig Erlam – Italy, Brexit, USMCA

Why is Italy threatening to sue the EU? And will disagreements over the Irish border sink Brexit?  Michael Switow from Money FM asks Oanda’s Craig Erlam.

Lower deficit promises see Italian borrowing costs fall

Italian borrowing costs have fallen early on Wednesday morning as investors digested news that Rome could lower its public spending in the coming years.

The yield on the 10-year Italian bond fell 3.31 percent at about 7.40 a.m. London time.

The market reaction followed reports by the Italian newspaper Corriere della Sera that the government is planning to lower public deficit from 2.2 percent in 2020, to 2 percent in 2021, from an expected 2.4 percent next year.

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