Draghi underwhelmed in the delivery of the ECB easing package, leading to (eventually) sellers being overwhelmed by the buy-side pressure. In the end, even if this time the cleanout of weak-handed longs went deeper than the last ECB disappointing meeting on July 25th, it was Deja Vu all over again (sell the rumor, buy the fact), as the market could not justify such a depressed EUR valuation after the ECB did the bare minimum to satisfy the overly dovish expectations, judging by the EUR behavior in recent weeks. The Swissy, this time detached from the shackles of its over-dependence in ‘risk-on’ flows, manage to find buying interest as it piggybacked the EUR from the distance. Surprisingly, and probably a testament of how over-extended these markets are, the AUD, NZD, CAD all pared back gains after the ECB even if bond yields and equities continue to rise in tandem as the US and China keep sweeting the risk appetite with a more constructive tone in the latest headlines. The USD continues to trade steadily when crosschecking its performance against G8 FX (not against the EUR as a standalone view), while the JPY sellers remain in the pain cave with not yet an end in sight. Lastly, the Sterling keeps behaving as one of the most unexciting currencies to get involved in as the flow of Brexit news peters out due to the UK parliament suspension.
Traders are waking up this Monday to an ‘eye-popping’ move in the price of Oil, with Brent Crude up over 20% soon after the open, following the unprecedented accuracy in an attacked perpetrated in multiple Saudi Oil refinery facilities, claimed by Houthi rebel from Yemen. The attack happened in the world’s biggest crude production facility in Abqaiq and Saudi Arabia’s second-biggest production facility in Khurais. The ramifications were felt throughout the marketplace, from currencies to stocks and bonds. The immediate pattern during Intermarket hours has been quite predictable, with the Canadian Dollar, the Norwegian Krone and the Yen bought strongly. The first two on the basis of its strong correlation with Oil as one of the largest exporting nations, while the Yen gets a bid as the geopolitical risks are heightened as the US points its finger to Iran. In terms of the main losers, the Oceanic currencies AUD, NZD were hit due to the increase in risk aversion, with the Turkish lira and Indian rupee especially fragile due to the nations’ profile as heavily dependable on Oil imports. The key topic of discussion that the market is seeking out answers for is the length of the disruption before full capacity is back on track. Will it be just a matter of days, weeks, or months? Obtaining clarity in this front is essential to adjust the outlook for Oil and the wider market profile.
It was a very busy Monday for Oil traders as the market digested the news emanating from Saudi Arabia after suffering the sudden loss of 5.7m b/d of oil production, which marks the largest outage the market has ever seen in volume terms, surpassing the level from the Iraqi and Kuwaiti 1990 Gulf War. The CAD, NOK, but also a firm USD, were the outperformers while currencies the likes of the Euro of the Kiwi were punished the most. The market continues to be glued to any relevant update from Saudi Aramco that may clear up the key question mark to set Oil fair valuation, now heavily dependable on how fast can the Saudi restore its Oil output back to full capacity. Note, in line with the rather benign risk environment prior to the events in Saudi Arabia, do not mistake the attack as an admission that the forex environment should turn more risk-averse as the preponderance of technical evidence is not yet there, neither in equities, fixed income or in the performance of the JPY or CHF, with most of the safe-haven bids at the open of Asian markets in the latter two rapidly evaporating as the day rolled along. Currency traders will have to soon be expanding its focus as a line-up of Central Banks comes up, with most of the attention placed in the FOMC. It is precisely this high-impact event that may have helped to keep the USD bid off a critical support in the index, as the market is at risk of a less dovish forward guidance tone by the Fed amid firmer US fundamentals and the US-China trade war justifying extra patience, even if that view may now be challenged if we see an increase in geopolitical risks in the Middle East. An underpinning factor for the re-emergence of the USD buying interest is the development in the funding market, where we saw a massive jump in 3-month FRA/OIS spread (3m LIBOR vs overnight index swaps), which implies a spike in USD demand in the system.
As the price of Oil adjusts lower on the appeasing words by the Saudi Arabia energy minister that the Kingdom is set to return to full oil production capacity within 2-3 weeks, the market is in the transition period to accommodate and expand its focal point to the FOMC. The market sees the possibility of a 25bp rate cut as almost baked in the cake, even if Chair Powell has definitely earned time to take it easy as the US economic data has firmed up and the expectations for another US-China trade truce build up. Ironically, with a squeeze in the short-term USD funding market as the spike in the repo rate reflects (shortage of USD supply), which has caused the Fed to step up by injecting liquidity into the system, there is even talk that given how tight the liquidity pool is to have sufficient USD liquidity in the system, considerations may be given to a light return of QE. Interestingly, it was a day when both the high-beta and the risk-sensitive currencies lost value in absolute terms in the indices, with the European currencies taking up the slack of gains. The CAD felt the damage of a falling Oil, as did the AUD to a dovish RBA minutes outcome. The NZD appears to be playing more catch up with the AUD here. The JPY and CHF were not in high demand as the risk appetite remains supportive, especially in equities even if no backing from global bond yields in the last couple of day.The GBP and the EUR can be found on the other side of the spectrum as said, both rising with conviction, while the USD loses its shine a bit ahead of the Fed verdict on policy.
The USD is trading higher as the FOMC validates my assumption of improving US economic data coupled with a tentative US-China trade truce in Oct acting as sufficiently convincing arguments to take the foot off the pedal, in other words, no longer committing/hinting to further rate cuts this year. This makes the disconnect between the median dots plot and the market expectations rather pronounced, with one more rate cut fully priced by the end of 2019 with the disparity only widening into 2020 and beyond. The JPY joins the USD as one of the main beneficiaries of the post FOMC contained volatility we’ve seen, with all eyes on the BOJ presser by Kuroda after an unchanged policy decision today. The GBP also continues its ascend, really defying gravity here as the market keeps pricing out the risks of a disorderly Brexit. The EUR and CHF had a mixed-bag day. The main losers include the AUD, knocked down after a poor reading in the Australian employment report (RBA rate cut calls on the rise), the NZD has also been trading on the back foot with the market not buying into a modest recovery in the NZ GDP release a few hours ago, while the CAD is also a tad lower, mainly dragged by lower Oil prices.
The Sterling is hands down the currency running away from the FX pack in an upside direction, while the opposite is true about the New Zealand Dollar. The rest of currencies indices, when crosschecking its performance against a basket of G8 FX, are still sandwiched in rather compressed ranges, with the exception of the Aussie, as sellers start to make further strides after the conviction of another rate cut by the RBA in October gets priced into the Oceanic currency. The USD continues to show a benign technical picture in the index, which should bode well for the currency next week as the market readjusts the neutral policy stance by the Fed as the current base case. The EUR is also showing its most combatant side with further demand found in the European session but unable to be sustained through the North American trade. The CAD has been treading water for the past few days with very limited volatility in its index, while both the CHF and JPY exhibit strength after the market perceives the latest policy calls by the SNB and the BOJ as falling short of the easing expectation built ahead of the events. As a result, both currencies were boosted even if the technicals are still rather dubious at this stage.
There has been a change of dynamics at the open of markets in Asia, with risk being bid again as signs of progress in trade discussions between the US and China were highlighted by the Chinese Commerce Ministry over the weekend. The usual suspects when optimism arises, that is, the AUD, NZD were bought back, with sell-side pressure applied to, most notably, the JPY and CHF. The CAD remains with a relatively stable outlook with the Oil up-gap this Monday to potentially act as a bullish contributor today. The USD is holding its ground quite firm with technicals in favor for further gains. The EUR keeps struggling at a supply area in its index, as I elaborate in today’s chart analysis, while the GBP saw a setback in the last 24h as reports emerge that the UK and EU are as far from an agreement to replace the backstop as ever. Today’s key highlights to act as an extra stimulus of price gyrations include EU/US PMIs and ECB’s Draghi testimony in the EU parliament.
The EUR was sold aggressively after the German PMI printed its weakest level in 10 years, which raises the alarm bells of a technical recession in the country. The poor results in the manufacturing sector out of France and the EZ as a whole were a further baggage for the EUR, as was the realization that in Germany, the sluggish manufacturing performance is now spilling over into the services sector as well. The Pound remains in a correction lower aid the tepid action in the Brexit news flows. The USD and CAD indices are both in a constructive path from a technical perspective. Meanwhile, the market prepares to embrace further volatility in the AUD and NZD as RBA Lowe speech and the RBNZ monetary policy meeting come into focus in the next 24h of trading. Lastly, the risk sensitive currencies (CHF, JPY) are both facing major resistance levels, so if holding long exposure in these currencies, be aware that in an indices basis, out performance of these currencies is not the base case.
The proceedings for a formal impeachment inquiry on President Trump by Democrats is officially underway after a press conference by House Speaker Pelosi, which led to a major setback in risk trades as equities and bonds yields experienced sharp falls while the price of gold jumped, in part driven by broad-based USD weakness.
The confluence of receding risks of an impeachment ever making it through the Republican-controlled Senate coupled with US President Trump talking up the immediacy of a trade deal with China on the sidelines of the United Nations, resulted in a healthy recovery in risk sentiment as the abrupt reversal in the CHF, Gold depicts. The valuation of the JPY held surprisingly steady even as equities/bond yields rose. The USD and the CAD were the currencies attracting the most demand by market forces, while the European complex, without exception, was the complex most punished, especially the GBP as the UK parliament returned to business as usual, followed by the EUR, which accumulates 5 days in a row losing values in its index, with the net change in the CHF minuscule for the day but nonetheless impressive the turnaround it had. The Oceanic currencies, especially the NZD, also went through reversal days, after the RBNZ-induced gains petered out as the market still prices in further rate cuts down the road. The Aussie, in the meantime, has recovered some of its lost ‘mojo’ at a critical area of demand in its index as part of an improving risk context, which should see it better bid.
There is a sense of charged uncertainty in financial markets as the Trump - Ukraine saga continues with the release of a whistle-blower complaint, alongside the news that the US is unlikely to extend waivers for US firms to supply Huawei, which further depressed sentiment as reflected by the surge in demand for US bonds as a vehicle to protect one’s portfolio. It didn’t matter for the interest of the USD, which stood well bid this time, in line with the bullish outlook in the index. The most noticeable movers in the last 24h include the EUR, which remains under free-fall ever since the terrible German PMI print on Sept 23 (new yearly low in EUR/USD), and the NZD, re-invigorated by the upbeat tone of RBNZ Governor Orr, who hinted at unlikely the need for ‘unconventional’ policy tools. The Sterling, like the Euro, is also under selling pressure, as the impasse to make the next political movement on the Brexit conundrum drags on. The Aussie keeps finding pockets of tepid demand at a macro support area in the index, while the CAD has put on another decent performance but is now faced with a major daily resistance in the index. The Yen has traded in a compressed manner, reflecting the state of uncertainty in US politics, while the Swissy extended its selling bias in the last European session only to find emerging bids that have so far overwhelmed sellers since the US.
The New Zealand Dollar is the main mover today as traders react to a disastrous ANZ business confidence, around a decade low. The Kiwi, alongside the Sterling, are the two currencies with the poorest performance in the last 24h, even if the British currency has landed into a pivotal daily demand imbalance area. The surprise move by BOE hawk member Saunders into the dovish camp has deteriorated the outlook for the Pound at a fundamental level, as the market prices in a bigger role from the Central Bank as an influencing factor for the currency as hints were given that the Central Bank may start being more proactive in its policy setting regardless of a Brexit resolution. The USD and the CAD continue to move in bullish tandem, with the correlation between the two North American currencies at very elevated levels. It’s important to note that at an index level vs G8 FX, the Canadian Dollar has now officially broken into fresh highs for the year. Short NZD/CAD has been a spectacular trade this year. The Swissy has found renewed buying interest, underpinned by the return of demand for Euros last Friday, alongside the sell-off in US equities as chatter builds the US may limit investments into China. The Japanese Yen remains quite indecisive at an index level, compressed right in the middle on a week-long range that must first breakout to establish a more lasting bias. This week includes volatile events to influence currency valuations, including the RBA policy meeting on Tuesday, Canadian GDP, US ISM Manuf, US NFP or Fed’s Powell speech.
It didn’t matter that the pendulum swung from risk off late on Friday to a more benign profile on Monday, neither made a difference to experience month and quarter end flows, the buy-side activity in the world’s reserve currency (USD) and the Canadian Dollar continues relentless, with the latter printing fresh yearly highs at an index level, while the US Dollar is just at a stone’s throw from achieving this same milestone. But in the next few hours, the Australian Dollar is the currency set to command the market’s attention, as the RBA prepares to release its latest monetary policy decision, with the overwhelming consensus agreeing that a 25bp rate cut will be delivered. Meanwhile, on the other side of the USD, CAD spectrum, we find the NZD, EUR, CHF. The former troubled by terrible back-to-back business confidence prints on Mon and Tues, while the Euro feels the heat of a market now more decisively discounting the ECB perma QE stance, reinforced by the German CPI miss on Monday (QE linked to inflation). Lastly, the Sterling has found robust buy-side interest once again, as the currency retests the origin of its aggregate demand back on Sept 13 as shown in today’s index analysis.
The Australian Dollar has lost a significant amount of value on the back of a well-telegraphed 25bp rate cut by the RBA, with the one-way street bias in the Oceanic currency since the event a clear manifestation of the build up in expectations for further easing by the Central Bank. The NZ Dollar acted as a slower version replica of the movements seen in the AUD, as the market expects the RBNZ to follow suit with lower rates now that the RBA has made a move again. The US Dollar was another notable mover after a decade-low print in the US ISM Manufacturing PMI, which has led to a quick re-assessment for a lower valuation in the world’s reserve currency as bets for further cuts by the Fed in October are back on the rise. The Sterling also suffered its fair share of volatility, with the sell-side pressure predominant since the European session, only to see a major bounce of a daily demand area after a rather dubious, which later turned out to be devoid of substance, that the EU was considering time limits on the Brexit backstop. The main beneficiaries were the Yen and the Swissy as a by-product of the sell-off in bond yields globally, while the Euro also put on a meritorious turnaround day. Last but not least, the Canadian Dollar index deserves a special mention as it continues to make history by printing fresh highs (this year).
You wouldn’t have guessed it was a true ‘risk-off’ environment out there as the EU-US trade war escalates by analyzing the performance of the NZD and the CHF. The former ended up as the main winner, only surpassed by the perky Yen, while the latter succumbed to a depressed inflation print out of Switzerland, which increases the risk of further negative rates by the SNB. Again, risk sentiment matters as much as fundamentally-derived flows. But the NZD performance is one I still scratch my head. The utter evaporation of longs in the CAD off fresh yearly highs is also quite an X-file to ruminate about, without much of a particular catalyst other than the fall in Oil prices, which in my opinion, does not justify the annihilation of CAD longs. The USD saw solid demand right off the gates in Europe, but gave it all back as capital flows entered in the US. Meanwhile, both the Euro and the Sterling were well underpinned by demand flows, the latter driven by the subtle positivism so far around UK PM’s plan to solve the Irish backstop. Last but not least, the most volatile currency on Tuesday, the Australian Dollar, saw slow fluctuations as the short-side interest dries out after its overextended move.
This week’s back-to-back disappointments in the US ISM prints, both the manufacturing and services, have swiftly shifted the narrative from a Fed thought to be firmly sidelined this October to a rapid build up of expectations for the Central Bank to ease again when they meet in Oct 31st. A lot still can happen until then but that’s where we are at today, with the chances of a 25bp rate cut almost fully priced in (~90%). Amid this scenario, it’s no wonder that long bets in the USD have evaporated this week, with the CAD mark-down phase even more dramatic, partly due to the strong correlation between the two North American currencies, which also plays into the view that sooner or later, the Canadian economy will be hit by the slowdown in the US, which will force the BOC to ease policy in line with the global theme we are seeing. The AUD and the NZD were surprisingly strong once again, as it the market suddenly found comfort in short-term long plays as an alternative option amid the debacle of the two darlings of the Forex market until this week, referring to the USD and CAD, both at fresh yearly highs prior to Tuesday’s onset of the epic rollover. Meanwhile, the Euro found renewed selling pressure off the highlighted hourly resistance in what should be considered as a very choppy day, with the Sterling attracting solid bids as UK PM Irish border proposal gets assessed by the EU and the Irish government, with not yet an official rejection. Lastly, the Yen held firm as one of the main beneficiaries of the woes in the US PMIs, while the Swiss Franc has gone through a whole different phase, depressed ever since the major miss in Switzerland’s CPI on Wednesday, raising the alarm bells of lower rates by the SNB.
With the US NFP failing to act as a driver to set the next directional bias in currencies, it’s going to come down to this week’s China-US trade talks and Trump’s impeachment saga as the major catalysts to inject volatility into the Forex arena. The US NFP was seen, as the Fed funds pricing attests, as a glass half full on the back of a jobless rate that hit a 50-year low, a headline number around expectations, in a nonetheless environment of low wage growth. However, this week’s gap down in risk is a timely reminder that US-China trade negotiations are set to dominate the proceedings, with Bloomberg reporting that the Asian giant won’t budge on key sticking points. The Japanese Yen and the Swiss Franc were bought from the get go, extending Friday’s gains, which in the case of the Japanese currency, has evolved into a constructive daily uptrend. The US Dollar has been trading on the back foot with an ephemeral US NFP-induced spike unable to find follow through. The Euro remain in no man’s land. The Pound has been under pressure as of late with the key ‘hard’ questions on Brexit still up in the air as the divorce deadline approaches. Meanwhile, the oceanic currencies the likes of the Aussie and the New Zealand Dollar are starting to give up some of its upside from last week .Special mention deserves the Kiwi, which has had a solid run. Lastly, the Canadian Dollar finally found buying interest off its weekly low after a relentless selling that last for over 48h in a row since mid last week in light of the US ISM manuf/non-manuf shockers.
Even if traders should re-calibrate any over-optimistic expectations of a big trade deal between the US and China this week, the market has so far treated the news that China is only willing to mid halfway from all US demands as yet again, another glass half full type of event. To draw some parallels, just as the market treated the law that forces a no-deal Brexit to be delayed as a positive development for the GBP, the same way seems to be interpreted if the US and China can agree to another truce that would avoid the next increase in tariffs scheduled for October 15, as it would remove an immediate risk out of the way, even if the underlying issue will remain. The behavior by the Yen tells us there is clearly some build up of expectations that yet another vague temporary ceasefire can be agreed upon, although by connecting the dots, one should be in high alert, as Trump has reiterated in multiple occasions that either the US pulls off a big deal with China or he’d rather have no deal at all. It implies partial complacency by Mr. Market. I mention partial because the Aussie and Kiwi were in the losing group of currencies on Monday, which you wouldn’t expect if a truce is being priced in. Bottom line, I think the movements in the Oceanic currencies are a better reflection of the dicey environment. The US Dollar, the Canadian Dollar, the Swiss Franc and the Euro were all, in a larger or lesser extent, the beneficiaries of Monday’s flows, while the British Pound is once again under tepid pressure as UK PM Johnson gets a devastating rejection of its Irish plan.
As a large Chinese trade delegation readies to catch a plane en-route to Washington, the US administration is not setting the stage for the most optimal collaborative environment, a view that this time was unquestionably vindicated by the risk averse flows hitting stocks and bond yields. This demoralized outlook ahead of the trade talks took its toll on those keeping short-side exposure on funding currencies the likes of the JPY or CHF, this time both enjoying rampant demand in tandem. On the flip side, the Sterling was absolutely annihilated in early European hours as it finally transpired, via the horse’s mouth (UK PM Johnson) that a Brexit deal is ‘nearly impossible’ following a disastrous telephone call on Tuesday morning with German Chancellor Angela Merkel. The USD held firm following a neutral speech by Fed’s Chair Powell in which no hint was given that the Central Bank will be lowering interest rates again at the end of this month, despite this view plays against the market pricing. The Aussie and Kiwi have recently been characterized as stubbornly firm currencies, immune to the bad omen of this week’s trade talks. One would think these currencies are set to suffer the most from the poor prospects of a ‘no trade truce’ with China. What’s interesting is that the latest actions by China, be it via sending the largest trade delegation out of all trade talks so far, or a stronger Yuan fixing today, is sending a message to the US that they have a genuine intention to find some middle ground for both nations to find a compromise. Lastly, price action in the Euro and the Canadian Dollar was desperately uninspiring, with the former still finding solid resting offers on strength.
It’s all about the US-China trade outcome, with the erratic swings in currencies a testament of how unpredictable trading around these high-stake events can be. The latest we’ve learnt reflects the confusion and state of uncertainty. On one hand, reports suggest that the US and China made no progress on key trade issues, leading to speculation that the Chinese delegation will cut the trip short to just one day of meeting with their US counterparts. On the the other hand, a report via Bloomberg said the US is considering a currency agreement with China. The instruments most intertwined with risk aversion (Gold, bonds, Yen, Swissy) caught a solid bid ahead of the Tokyo open before an epic reversal, while the likes of the Aussie or the Kiwi were marked down only to fly higher on the speculation of a currency accord. Meanwhile, in the Brexit saga, the usual dose of algo-led volatility in the Pound was observed, although the net result was an acceptance of lower levels, prove that the market is not buying into a resolution of the Brexit conundrum. The USD put on a combatant performance to reverse its early losses on Wednesday, even if it’s now under some pressure. The Euro broke higher on Wed.