OANDA Market Insights podcast (episide 37)

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

This week’s big stories: Global market sell-off, Oil prices slide, ECB holds rates, EC rejects Italy budget, UK Budget preview.

Geopolitical Risk Hits Dollar as Other Safe Havens Rise

The US dollar is lower across the board on Tuesday. The market is navigating a perfect storm as the stock rally hit a speed bump at the same time geopolitical risk is on the rise. Multiple elections around the globe and trade concerns between big economies (China-US, EU and UK) have triggered risk aversion. Asset classes that had lost their safe haven appeal are back. Gold is having a moment as even the USD is not the final destination. Investors are dialling back their risk appetite and pulling out of stocks, flocking to traditional safe haven assets. 

The Bank of Canada (BoC) will publish its benchmark rate on Wednesday, October 25 at 10:00 am EDT and will host a press conference with Governor Stephen Poloz at 11:15 am EDT.

- BoC expected to hike interest rate to 1.75%
- API crude inventory points to a buildup, but weather could play a factor
- Fed speakers to boost US dollar

Loonie Flat Awaiting BoC Rate Decision and Poloz Speech

The USD/CAD lost 0.10 percent on Tuesday. The currency pair is trading at 1.3086 ahead of the Bank of Canada (BoC) rate announcement. The central bank is highly anticipated to lift interest rates to 1.75 percent. The move is for the most part priced into the loonie, but the press conference by Governor Stephen Poloz is what investors will be focusing on. The expectation is for a dovish hike, rising rates while at the same time highlighting the major headwinds facing the Canadian economy.

usdcad Canadian dollar graph, October 23, 2018

Inflation and retail sales disappointed, but still showed enough momentum behind the economy to validate a higher benchmark rate. The biggest factor keeping the BoC awake at night was the uncertain fate of NAFTA. Teh signing of the USMCA has taken that away, although ratification is still six months away.

The loonie is slightly higher ahead of the BoC, with risk appetite subdued as the global stock market sell off has safe havens bid. Geopolitics continue to be a major factor with currencies reflecting the market sentiment.

Euro Higher as US dollar Loses Footing

The EUR/USD is flat on Tuesday, but has accumulated 0.34 percent in losses this week. The single currency is trading at 1.1474 as the Italian budget continues to put downward pressure on the currency. The European commission has rejected the 2019 budget proposed by Italy with a three week period to submit a new one.

Italian politicians are sticking to their guns and the showdown between Rome and Brussels shows no sign of a reaching a middle ground.

The European Central Bank (ECB) will publish its monetary policy decision on Thursday, with no changes expected. The central bank is set to start hiking rates next summer, but higher spending from Italy could derail those plans.

GBP Rebounds on Irish Backstop Alternative

Sterling is higher against the US dollar on Tuesday, but continues to be under pressure raking up a 0.59 percent loss this week as Brexit turmoil puts pressure on the pound.

Risk aversion has made investors seek the safety of gold, the Japanese yen and the Swiss franc. Political uncertainty around PM Theresa May has also done the currency no favours.

The lockdown on the Irish border received some good news as the EU could offer a UK wide customs union and avoid a hard border between Northern Ireland and the Republic.

So far positive rhetoric has pushed the currency higher, but lack of details is a concern as being 90 or 95 percent close to a deal during a speech is not the same as being close to signing an agreement. The market is expecting details sooner rather than later as the deadline is fast approaching and without a backstop there can be no trade deal.

Oil Lower as Saudi Arabia Pledges to Close Production Gap

Oil is trading lower on Tuesday. West Texas Intermediate lost 4.56 percent as the Saudi Arabia investment conference drew to a close. Energy prices recorded a the biggest daily loss in three months as rising global growth concerns hit stock markets and demand for crude going forward.

West Texas Intermediate graph

Saudi Arabia has pledge it will increase production to keep prices stable and concerns of negative backlash following the killing of journalist Jamal Khashoggi have eased.

US sanctions against Iranian exports are providing some support but downward pressure has been more persistent. The release of the US weekly crude inventories published by the Energy Information Administration (EIA) on Wednesday could tip the balance, although the market has been pricing in a drawdown due to minor weather disruptions.

West Texas Intermediate graph

Geopolitics directly affecting the supply of oil was a big factor in October, but it now seems Saudi Arabia will increase production as much as possible sending energy prices lower.

Gold Higher on Safe Haven Demand

Gold rose 0.76 percent on Tuesday. The yellow metal was supported by a soft dollar and the stock market fall.

The market is in a perfect storm as the stock rally hit a speed bump at the same time geopolitical risk is on the rise. Multiple elections around the globe and trade concerns between big economies (China-US, EU and UK).

Investors are pulling back as stock market sell off has been the trigger. Asset classes that had lost their safe haven appeal are back. Gold is having a moment as even the USD is not the final destination. Investors are dialling back their risk appetite and pulling out of stocks, flocking to traditional safe haven assets. 

The Trump tax cut boost is starting to fade and is being replaced by trade concerns are starting to hit companies. Caterpillar is citing rising costs and has underperformed. There is little hope the US-China trade dispute will end as quickly as the USMCA was signed. 

The last quarter of 2018 will be packed with market events as central banks are expected to close out the year with major policy decisions and big political events (US midterms, Italian budget, Brazil elections, etc) 

Market events to watch this week:

Wednesday, October 24
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
11:15am CAD BOC Press Conference
Thursday, October 25
7:45am EUR Main Refinancing Rate
8:30am EUR ECB Press Conference
8:30am USD Core Durable Goods Orders m/m
Friday, October 26
8:30am USD Advance GDP q/q

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

Live FX market analysis – 23 October 2018 (video)

With equity markets selling off, investors are wonder whether this is it. Has the bill finally come due? Has the gradual build up of risks finally taken its toll on investors? Or, as we’ve seen so often in the past, is it just another over-hyped correction that will play out before normal order resumes? Senior Market Analyst Craig Erlam discusses some of the things rattling investors at the moment and why the market is reacting as it is.

Craig also gives his live analysis on EURUSD (15:35), GBPUSD (17:56), EURGBP (20:38), AUDUSD (23:46), USDCAD (25:46), GBPCAD (27:05), NZDUSD (28:41), USDJPY (29:48), GBPJPY (31:22) and EURJPY (32:17).

Asia market update: US-China digging in for the long haul?

When” Xi “speaks, the market listens, at least in China it does as shares in Hong Kong, and Shanghai has been moving convincingly higher after Chinese President Xi Jinping vowed “unwavering” support for the country’s private sector. But the big noise in local markets is the much anticipated personal tax cuts are a bit more free-handed than had been expected. And what investor doesn’t like the sound tax cuts!!

But with Trump suggesting he wants China to ” Feel more pain” and that trade war with China is at ” the beginning of the beginning” according to Whitehouse insiders. It certainly appears that both sides are digging in for the long haul and would certainly bring into question the planned November meeting if it even remains scheduled that is.

Newswires were reporting “Prime Minister Theresa May will tell parliament on Monday that 95% of Britain’s divorce deal has now been settled but will repeat her opposition to the European Union’s proposal for the land border with Northern Ireland. So, the Pound remains stuck in the much as May yet again rejects another EU Ireland proposal.

US Growth in Q3 to Guide Dollar

The US dollar is mixed on Friday. Investor’s appetite for risk rose and safe haven currencies (JPY and CHF) fell while positive China and Brexit news saw the NZD, EUR, GBP and AUD advance against the USD. The Canadian dollar was dragged down in the last trading day of the week after softer than expected retail sales and inflation data. Next week’s Bank of Canada (BoC) monetary policy meeting is anticipated to bring a 25 basis point rate hike. Despite the miss inflation has been above the central bank’s target and businesses are optimistic about strong sales.

  • BoC expected to hike interest rate to 1.75%
  • German Business Climate to cool down
  • US first estimate of Q3 GDP to confirm solid growth

Euro Caught Between Brexit and Italian Budget

The EUR/USD fell 0.41 percent in the last five days. The single currency is trading at 1.1510 after rising on Friday due to a combination of softer US housing data and positive Brexit News. The gradual pace of rate lifts by the U.S. Federal Reserve had a negative impact on previously owned homes in September.

The euro rallied on Friday after a report that Theresa May’s government is ready to drop the time limit demand on the Irish border. The EU and the UK are said to be close to a deal, 90 percent by the estimate of the EU’s top negotiator, but the final 10 has proven hard to agree on.

Italian budget issues continue to drag on the euro. The threat of a downgrade of Italian debt does not seem to faze local politicians that are ready to square off against Brussels.

The European Central Bank (ECB) will publish its main refinancing rate and host a press conference on Thursday, October 25. No changes are expected, but investors need to be aware of the tone of the press conference as Mario Draghi could push a more dovish rhetoric.

Loonie to get BoC Rate Hike Boost

The USD/CAD fell 0.74 percent in a weekly basis. The currency pair is trading at 1.3117 and will look at the Bank of Canada (BoC) for support. The central bank is highly anticipated to announce a 25 basis points interest rate hike. The central bank has lifted rates twice in 2018 and rising inflation is forcing the hand of the BoC.

Canadian dollar weekly graph October 15, 2018

The rate decision has been priced in for some time, but the fundamental picture has worsened reducing the probabilities of a rate hike while still at near 80 percent. The NAFTA renegotiation was a big risk keeping the BoC awake at night, and with the USMCA some of that risk is lifted.

With inflation data lower than forecasted it now validates the gradual approach of the BoC and unless there is hawkish rhetoric from Governor Poloz, the loonie will continue to underperform against the USD.

Oil Drops as US Weekly Buildup Pressures Prices

West Texas Intermediate lost 0.95 percent this week. WTI is trading at $69.36 after staring a rebound on Friday due to surging Chinese demand. Supply concerns continue to guide daily price action. The US weekly inventories showed a buildup last week and pushed prices lower. Iranian exports have been cut ahead of the start of US sanctions, but there are reports that OPEC and other major producers are already closing the gap.

Saudi Arabia is embroiled in a diplomatic scandal and is quickly losing the goodwill it gained for having engineered price stability with the production cut agreement. The OPEC and major producers agreed to limit output to stop the free fall in energy prices and have extended the agreement to this year.

Trade war concerns eased on Friday as China and the US have agreed to meet during the sidelines of the G20 meeting in Buenos Aires. The leaders of the two nations will fly in a day ahead of the event to try and mend the trade relationship.

Gold Rises for Third Week Straight

Gold rose 0.6 percent last week. The yellow metal is trading at $1,229.40 despite gradual rate hike talk by Fed members and the minutes form the September FOMC. The rebound of the stock market correlated with the rise of the yellow metal. Safe haven appetite in gold holdings has returned and in a market with no shortage of geopolitical risk for the remainder of the year the yellow metal is set to continue on its rise.

Market events to watch this week:

Wednesday, October 24
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
11:15am CAD BOC Press Conference
Thursday, October 25
7:45am EUR Main Refinancing Rate
8:30am EUR ECB Press Conference
8:30am USD Core Durable Goods Orders m/m
Friday, October 26
8:30am USD Advance GDP q/q

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

OANDA Market Insights podcast (episode 36)

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

This week’s big stories: PM faces Brexit transition backlash, Trump shifts tone on Saudi crisis, UK inflation lower than expected, China growth lowest since financial crisis.


Asia rebound leads europe higher

Sentiment improves even as China GDP disappoints

European equity markets are poised for a more positive open on Friday, buoyed by the gradual improvement in Asian markets overnight following a shaky start.

Sentiment across the globe has remained cautious at best this week but all things considered, I think investors will be heading into the weekend somewhat relieved. If this time last week - when investors were weighing up the potential fallout of a couple of really bad days for the markets - you offered them a somewhat shaky week but one that ended roughly where it started, they would have snapped your hand off.

Chinese data over night threatened to sour things heading into the weekend, with growth in the third quarter slipping to 6.5% from 6.7% and missing expectations. And that was certainly looking the case early on but perhaps the better than expected retail sales and fixed asset investment numbers, as the government looks to support the faltering economy in the face of US tariffs, offset the GDP disappointment. This was accompanied by offers of support for non-state backed listed company’s from the central bank and others, which likely eased concerns about the recent slowdown and stock market declines.

China offers verbal support as growth hits lowest in nearly a decade

Positive tones coming from Brussels as May offers another concession

Theresa May’s Brussels visit may not have been the complete waste of time it was looking even 24 hours ago, with leaders suddenly sounding more optimistic that a deal can be reached. It would appear that May’s transition extension proposal has sat better with Brussels than it inevitably will do in London, with some of the more staunch Brexiteers already voicing their disdain for such a move.

Still, these are the sacrifices that the PM is consistently being forced to make in order to progress talks and avoid a no deal Brexit, something some of her louder colleagues at home don’t have to worry about. With time running out though, I struggle to see how this really resolves the problem of the Northern Irish border and the backstop unless further concessions are made. The EU may now have a reputation for eleventh hour deals but as the deadline nears, traders are not going to bank on another and the nerves will start to creep in.

Asia Market update: China data

Italian borrowing costs his four and a half year high as budget talks begin with Brussels

As if Brexit isn’t enough of a headache, the EU has another fight on its hands as the populist coalition government in Italy attempts to circumvent the blocks budget rules in order to follow through on campaign promises that are, unsurprisingly, much easier to make than deliver on.

With discussions now underway and Italy having until Monday to respond to the European Commission’s concerns about its budget plans, both sides would be wise to not let this get heated. Brussels will want to avoid providing bait to the eurosceptics while the government will have one eye on the bond markets at all times, with Conte already in discussions with the ratings agencies in a desperate attempt to avoid a downgrade.

That would be catastrophic for the government’s plans and would likely trigger another spike in its borrowing costs, with the 10-year yield already at a four and a half year high and the spread over Germany at a five and a half year high.

Italy 10-Year Yield

Source - Thomson Reuters Eikon

Economic Calendar

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

Fed minutes rattle investors

Market sensitivity to Fed hikes evident again after minutes

We’re seeing mixed trading in Europe so far on Thursday, following a less than impression in Asia overnight – particularly in China – while US futures are pointing to further losses on Wall Street which saw some late weakness on Wednesday.

The Fed minutes caused further unrest on Wednesday, as they reaffirmed the widely held opinion at the central bank that interest rates have further to rise including another hike this year. Why this came as such a surprise is something of a mystery as the minutes didn’t appear to deviate from the message after the meeting when the central bank raised interest rates and removed the reference to policy being accommodative.

This may instead be a reflection of the fragility of financial markets right now and sensitivity to higher interest rates which appeared to be behind the recent sell-off. In many ways, the minutes are outdated as they don’t take into consideration the current unstable market environment which, if it persists, may encourage policy makers to take their foot off the gas a little. One thing is clear, the minutes will not make Trump happy after a series of public attacks against the Fed for raising rates in a manner that undermines his growth goals.

DAX edges higher as German inflation creeps higher

May risks wrath of Brexiteers after Brussels visit

It’s not been a great 24 hours for the UK, with Theresa May’s speech in Brussels – which she hoped would end the impasse between the two sides – creating more uncertainty, as the proposed emergency November summit was seemingly abandoned and the discussion switched from a deal later this year to a potential extension of the transition by “a matter of months”. This is likely to infuriate the Brexiteers within the Conservative government, if it turns out to be accurate, and could accelerate her removal as Prime Minister.

GBPUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

May’s position is already hanging by a thread and if reports are true that four more letters would trigger a vote of no confidence, then her days may well be numbered. That said, there’s nothing to say there’d be enough votes in parliament to remove May which may explain why they’ve instead chosen to berate her plans from the periphery for months, rather than replace her with a Brexiteer that can work towards the Canada+++ deal they seem to favour. It’s this that may explain why the pound hasn’t fallen too far on the reports, with an extended transition maybe even being seen by some as beneficial as it keeps the UK tied to the EU for longer and reduces the possibility of a no deal Brexit.

Aussie gains as unemployment hits 6-1/2 year low

Decline in UK retail sales expected after bumper summer

The bad news for the UK was compounded this morning by data showing consumer spending in September slipped even more than expected, with retail sales falling by 0.8% compared to August. It’s worth noting that the weaker showing in September is probably more a reflection of the bumper summer the UK has just experienced, with good weather and World Cup fever encouraging the public to loosen the purse strings a little.

UK Retail Sales (YoY)

This was never likely to last in such a challenging environment for the consumer, with real wages having spent most of the last 18 months falling as the post-Brexit referendum sell-off in the pound pushed inflation above earnings growth. These things tend to even themselves out so a slowdown in spending in the run up to what is typically an expensive time of year for the consumer doesn’t come as a surprise.

Economic Calendar

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

Fed minutes eyed as markets recover

Fed minutes in focus as markets rebound following sell-off

US futures are trading slightly in the red on Wednesday, paring gains from the previous day as risk appetite continues to improve.

A decent rebound in the US on Tuesday on the back of strong earnings numbers has gone some way to allaying fears about last week’s sell-off. The results are a timely reminder about the strength of the US economy right now and despite the large amount of underlying risk that still exists, investors have plenty to be optimistic about.

Considering the fact that a major contributor to the sell-off appeared to be rising US bond yields – which have come off as risk appetite has returned – today’s FOMC minutes should be very interesting. Given the events of the last couple of weeks, there is a chance that the minutes are a little outdated, but that won’t stop people pouring over them for clues about where exactly we are in the tightening cycle and how much further there is to go.

Little hope for Brexit breakthrough at EU summit

Powell was a primary catalyst for the spike in yields a couple of weeks ago when he declared that we’re not yet near the neutral rate and could go beyond, which flies in the face of the belief of many that we’re in the latter phase of the tightening cycle. It will be interesting to see whether others share the views of Powell, although we may be better informed by the comments of the many policy makers that are speaking this week, including Lael Brainard today.

May heads to Brussels as patience wears thin on both sides

For the UK, this week may be dominated by what’s happening in Brussels but the current state of the economy will also be a focal point for traders, with today’s CPI data being the second of three notable releases.

UK CPI Inflation

Inflationary pressures moderated once again in September after a brief summer spike that accompanied a surge in activity as consumers made the most of the good weather and the country’s unexpected World Cup success.

Dollar in holding pattern; Asian equities follow Wall Street

The return of grey skies and dark evenings has been a timely metaphor for the mood in Brussels right now, with good will wearing thin and the two camps becoming increasingly hostile towards each other despite only a small number of issues remaining. Theresa May heads to Brussels today in the hope of bridging the divide over these issues but any agreement this week is extremely unlikely with attention now switching to an emergency summit in November.

Economic Calendar

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

Little hope for Brexit breakthrough at EU summit

May heads to Brussels as no deal preparations continue

Risk appetite appears to be gradually returning to markets following strong earnings-driven gains in the US overnight as attention now shifts to Brussels were Brexit talks will continue.

All eyes in Europe will be on the EU summit over the next couple of days as Theresa May heads to Brussels to try and break the impasse on the Northern Ireland border and the backstop arrangement. As the pressure has increased and the deadline neared, relations appear to have deteriorated rather than improved which has been worry but I still believe a deal will come, just not this month.

The EU has become renowned for its 11th hour deal making and I expect these negotiations to proceed in much the same way. For me, it’s the prospect of a deal not getting through parliament that represents the greatest risk rather than the leaders of the 28 deciding to suddenly abandon talks and shoot themselves in the foot in the process. We will hopefully be a lot clearer on the prospects of a deal by the end of the week.

Dollar in holding pattern; Asian equities follow Wall Street

Oil stable for now as Trump seeks to diffuse Saudi tensions

Oil prices appear to have stabilised a little in recent sessions after coming off their highs earlier in the month. Iranian sanctions have contributed strongly to the rise in oil prices in recent months but global growth concerns over the last week or two has clearly taken some of the heat out of the rally and at the very least, been the catalyst for some profit taking.

Brent Crude Daily Chart

OANDA fxTrade Advanced Charting Platform

The disappearance of journalist Jamal Khashoggi threatened to heighten tensions between the US and Saudi Arabia, which immediately drew attention back to oil as many saw it as being a potential weapon against US sanctions. But this was short-lived, with Trump clearly going out of his way to diffuse the situation rather than take his usual more combative approach, in a clear sign of his lack of appetite for a confrontation with Riyadh.

Asia market update: Focus on Yuan

Trump increasingly frustrated with the Fed

Trump once again weighed in on the central bank on Tuesday, claiming it is his biggest threat and that he’s not happy with what it’s doing as the inflation numbers are very low. Trump has repeatedly tried to pile pressure on the central bank to slow its rate hikes while claiming to respect its independence so the latest attack comes as no surprise.

And while the dollar has often softened in response to his comments, I don’t yet see them as a real risk to the central bank’s independence and we’re yet to see any evidence that it’s having any impact whatsoever on policy making. In fact, it’s simply another attempt by Trump to lay the groundwork for future finger pointing in the event that the economy falters, just as he did at the first sign of weakness last week.

The Fed minutes will likely highlight the Fed’s determination to plough on later on today, with the central bank having previously alluded to one more hike this year and a few more next. Given everything that’s happened since the meeting though, I wonder whether the minutes are already outdated and in fact, the comments we’ll get over the course of this week – including from Lael Brainard today – will be more relevant.

Economic Calendar

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