The Daily Edge - A Complete Cross Asset Analysis

Quick Take

The Pound is trading slightly weaker, even if the depreciation at the open of markets is well contained, after a sufficient majority of MPs in the UK parliament supported the Letwin motion to withhold the approval of PM Johnson Brexit proposal. The behavior in the Pound suggests that the market also sees slimmer possibilities of a ‘no deal’ Brexit ever eventuating.

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As the market awaits the next chapter in the Brexit saga (vote scheduled for today at 18 GMT), we’ve seen punchy movements in stocks and bond yields, a clear testament that the groovy mood in financial markets continues to improve. The market seems to have come to terms that beyond the fogginess and daily noise from the Brexit circus or the US-China Phase I trade deal, the verdict is that the worst case scenario have now been largely avoided. In other words, the market has re-calibrated to near null the expectations that either the UK will leave the EU without a favorable deal in place, even if we continue to go in circles for a protracted period of time, or that the US and China will return back to square one. These two themes moving in the direction of risk hawks has translated in a Sterling that keeps holding extraordinarily firm, accompanied by the rampant demand still seen in high-beta currencies (AUD, NZD, CAD), while the usual suspects when risk appetite is present (JPY, CHF) suffer from steady outflows. Meanwhile, the US Dollar, and using a metaphor here, is still to see the light at the its of this multi-week long obscure bearish tunnel as the market endorses the idea of a rate cut by Oct 31st. Lastly, the Euro remains in a tight range, with offers overpowering the tepid bids in the last 24h, even if flows have been tampered by the ‘wait and see’ on Brexit.

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Once again, it was all about Brexit and the delayed vote ‘showdown’, which leaves the market with some bitter/sweet taste, as UK PM new Brexit bill was approved in the ‘principles’, but the idea of a soft Brexit by Oct 31st is at this point a hallucination at best as the vote over timetable to enact the necessary legislation was rejected. It means that the promise to leave the EU by Oct 31st is not realistic, and as a result, the Sterling was sold from its hefty levels, even if there is a glimpse of hope that a short-term 10 day extension may be granted as opposed to an extended new deadline for Jan 2020, in which case, amendments of the withdrawal bill may follow. If the Brexit extension moves into early next year, then the UK appears to be headed towards a fresh general election. Brexit is the never ending story indeed with lots of unknowns still up in the air. Amid the Brexit-related volatility in the Pound, risk assets traded on the backfoot, leading to renewed demand towards the recently smashed JPY, USD currencies. The same could not be said about the Swissy, negatively affected by the latest episode in the Brexit saga and hence piggybacking the behavior in the Euro, which still exhibits tepid weakness too. The high-beta/commodity currencies complex (AUD, NZD, CAD), with the exception of a strong CAD, could not find follow through demand as the risk dynamics took a hit.

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The market is in the midst of transitioning towards the next chapter in the Brexit saga. We must await now on whether or not the EU grants a 3-month extension to Jan 31st 2020 as the next deadline, a decision most likely to be taken by Friday as a period of consultation with EU member states is currently underway. The base case, despite the idea of another long delay doesn’t sit well with France, is for a general election in the UK to be the next sensible step. Overall, judging by the stubbornness in the Sterling, the market still exhibits a behavior as if the odds of an accidental no-deal Brexit are largely eliminated. The Kiwi is the only currency challenging the high-altitude the Pound keeps flying at in the last 24h, while the Canadian Dollar also shows decent demand flows as longs price in Justin Trudeau’s Liberal party obtaining a larger share of the support than previously thought, alongside the backing of Oil prices after an unexpected 1.7mn barrels draw on crude inventory by the EA. The Euro and the Swiss Franc have traded in very confined ranges, although the prevailing market rhythm has been dominated by sellers, especially on the latter as risk appetite is retained. It is precisely the minor improvement in risk dynamics once again that has sent both the Yen and the US Dollar back down, with the outlook for the world’s reserve currency still constructive near term.

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With the UK PM Johnson intending to go all in for a general election, the Pound found consistent selling. There is still some major unknowns keeping the market guessing how it will all play out in the Brexit conundrum. The base case is that a 3-month extension to the Brexit deadline will be granted by Monday the latest, while another piece of the puzzle for the election to come to fruition is the need of Labour support as Johnson needs a 2/3 majority. Once no-deal is ruled out and if the extension allows, only then Labour may give the green light, although with the party behind in the polls, it’s a tough one from a purely political standpoint. Johnson has Dec 12th in mind as election day. Amid this dicey scenario, and with data out of EU PMIs not helping, alongside a retaliatory speech by US VP Pence on China, risk appetite took a hit, emboldening the allure towards the likes of the Japanese Yen or the US Dollar. However, the currency that stood out among the G8 FX complex was the Canadian Dollar. On the flip side, the Oceanic currencies traded on the back-foot as yesterday’s speech by US VP Pence is a reminder of the ongoing frictions in the US-China relationship, seen as a barometer of how close they may be to a comprehensive and meaningful trade deal down the road. The reaction in the AUD, NZD tells us not any closer. The behavior in the EUR was clearly dominated by sellers keeping the upper hand on ephemeral episodes of strength, with neither an uneventful ECB or EU PMIs acting as a source of encouragement at all. Lastly, the Swiss Franc topped it off with a rather mix-bag performance, pressured by the Brexit jitters and EU PMIs but sufficient demand was found as risk off picked up.

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Calmness in the currency market should be the dominant dynamics this Monday before things start to heat up as new developments in Brexit transpire, we find out the latest stance by RBA Governor Lowe or the latest inflation figures Down Under, but most importantly, the market takes a stance to the latest Fed policy decision (FOMC) on Wed. If that’s not enough, market will have to contend with the preliminary US GDP Q3, BoC and BoJ policy calls, China/US PMIs, and to top it all off, US NFP on Friday. Ahead of the wild swings that are to come, the risk appetite made a comeback last Friday as the US and China edge closer to finalize Phase One of the so-called trade deal. The latest demand flows into the currency markets have benefited, in order of magnitude of gains, the Canadian, Australian and US Dollar. The Japanese Yen, despite traded in a ‘risk on’ environment, managed to eke out marginal gains at an index level ahead of the volatile moves that await ahead. The European currency complex (EUR, CHF, GBP) came under renewed sell-side pressure as sell-side systems dominated amid the negative vibes around Brexit as the EU delays a deadline extension until this Monday. Another currency that did not behave in congruence with the improving risk conditions was the NZ Dollar, faced with steady sell side pressure, unlikely to last under the current conditions.

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The attitude towards the endorsement of high-beta currencies continues at a steady pace, as reflected by the out-performance of the AUD and CAD, with the preponderance of evidence suggesting that the US and China are a few steps from the first finishing line (Phase One trade deal inked). The removal of the no-deal Brexit risk in the near term, officiated by EC President Tusk in an announcement on Monday, coupled with solid earning reports in the US, kept the funky mood intact. As a result, the JPY and CHF suffered the consequences by seeing further outflows, with the USD unable to sustain its bullish momentum as diversification into the European currencies (EUR, GBP) ensued as the market was finally re-assured that there won’t be any final minute setbacks in the Brexit saga, with a general election mid Dec the consensus view now. Lastly, the NZD was unable to find enough buyers to revert its bearish moves, initiated last week, even if a fundamental-led trigger has resulted in renewed buying in the last few hours as news broke out that the NZ Superannuation Fund is reviewing its FX hedging policy, which may imply less selling of NZDs offshore (less buying of foreign currency).

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The Australian Dollar is the top performer as technicals, following a macro breakout of resistance at an index level, and fundamentals, with the US-China trade deal Phase One looming near, aligning as congruent factors supporting the bullish movement seen. The fact that RBA’s Governor Lowe didn’t sound ready to ease policy in the near term as part of a speech on Tuesday, coupled with in-line Aus CPI numbers, has also benefited the AUD. We shall not forget that ‘true risk on’ appetite as dominant market dynamics has also been a major contributor to see the outflows in safe-havens (bonds, gold) head into the appeal of the AUD. It means JPY, CHF longs remain the side most vulnerable to further losses, even if a pause and full reassessment of the risk profile is due later on Wednesday as the Fed releases its latest policy decision, with a 25bp rate cut almost fully priced in (94%). This will make the language used by Powell in today’s presser critical as the market will be fixated in whether or not more cuts are ahead. The US Dollar is trading quite weak heading into the event as the combo of ‘risk on’ and a re-adjustment of dovish expectations for this month have taken its toll on long exposure. A currency that saw a major long-liquidation after an impressive run ahead of another key risk event today (BOC) is the CAD, with longs still licking their wounds after a rapid depreciation. On the Sterling front, the overall sentiment was bullish on Tuesday as the UK parliament finally voted in favor of a General Election for Dec 12th after the Labor party. Lastly, the NZD traded in an erratic behavior, first boosted in Asia only to give back all its gains as the New Zealand Treasury said risks exist that the S&P ratings agency could remove their positive ratings outlook on the country, eclipsing the news that the NZ Superannuation Fund is reviewing its FX hedging policy (NZD positive).

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Quick Take

https://www.globalprime.com.au/market-research/de/oceanic-currencies-flourish-north-americans-wither?utm_source=forums.babypipsutm_medium=post&utm_campaign=de&fbclid=IwAR0jWHbw1b7M59SEwPpMqvW1w_5_wJLcoIaSbK_dEOo5ocin9WU7mMFjhlA

The Oceanic currencies continue to be the darlings in FX as other Central Banks keep caving in by either lowering rates further (Fed) or flirting the possibility of it (BOC). The rise in the AUD and NZD must be contextualized in an environment conducive to ‘risk on’ conditions to thrive as the market has come to terms that the two most relevant tail risk in the macro space, that is, the US-China trade war, coupled with Brexit, can be both put to bed for a while. On the other side of the spectrum we find the CAD, absolutely annihilated by a surprisingly dovish outcome by the BOC as it initiates discussions to slash rates on an insurance basis amid 'worsening global conditions". The outcome of the FOMC has not been pretty for USD bulls, with a V-shaped turnaround to the initial hawkish interpretation of the Fed statement sinking the USD index towards new lows. Powell said in the presser that t would take a significant rise in inflation to shift the stance to raising rates, in other words, implying that the policy will be either on hold or lower. From there, the market had an immediate change of heart and it never looked back. The Japanese Yen remains under pressure amid new all time highs in the S&P 500. Meanwhile, the European currencies complex (EUR, CHF, GBP) also benefited from the post FOMC flows, even if the GBP was the clear laggard among the three.

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The combination of a surprisingly strong US NFP last Friday, alongside more tentative evidence that the formalization of the US-China Phase One trade deal is around the corner, were the drivers keeping the bid tone in the equity market with the S&P 500 and Nasdaq making fresh all time highs. As a result, this lingering positive mood in the stock market underpinned the buy-side interest in the high-beta currencies (AUD, NZD, CAD). The market, through its price action, exhibited an immediate recognition of how impressive the US NFP print was, judging by the low expectations ahead of it, leading to the miss in the US ISM print not to alter the ‘risk on’ mood. The USD, still weighted by the realization that the Fed won’t be raising rates any further before Powell’s tenure ends - US yields hint this scenario -, and JPY - capped by ‘risk on’ flows - were the main laggards in the last 24h, alongside a Pound that keeps finding it hard to make further leeway as UK election scenarios gets assessed. The Euro and the Swiss Franc, which have a tendency to move in tandem unless major episodes of risk aversion or the idiosyncrasies of isolated fundamentals play a bigger role, had a solid day.

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The Australian Dollar is the top performer currency after the RBA kept its rate unchanged at 0.75% while hinting that the easing bias may no longer be warranted as the statement added the sentence that the recent policy cuts is supporting employment, income growth in Australia and a return of inflation to the medium-term target range. The return to inflation was the novel remark the market is now pricing in, which is a subtle form of saying they don’t see the need for more cuts. The USD has also shown signs of life again after suffering days of constant sell-side pressure on the back of the FOMC. The bullish outside day in the DXY is a testament of the renewed buying interest. The Canadian Dollar, as usual, has been piggybacking the move in the USD (exception to divergence is when fundamental play a bigger role as last week’s BOC bombshell). The Yen, which closed in NY surprisingly strong judging by the ‘risk on’ conditions in stocks and bond yields, has come under renewed sell-side pressure by value traders. The Swiss Franc is another currency that does not seem to justify the levels it trades at based on the punchy ‘risk on’ movements, but beware it’s not as clear cut to be traded on risk as the Yen is, since it tends to have a much bigger influence depending on the directional bias of the Euro much more often. The New Zealand Dollar traded excessively weak on Monday, in a move that looked fairly counter-intuitive judging by the NZ-China upgraded trade agreement news, presenting a good opportunity to pick bottom prices. Lastly, the Pound has been treading water as the Brexit saga enters a period of ‘low volatility’ ahead of next month’s UK general election (polls to dominate the proceedings).

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Quick Take

The Aussie ended up as the top performer with the convergence of strong bids a by-product of the RBA preparing the market for a period of neutral monetary policy after a more optimistic forward-guidance on inflation, coupled with renewed hopes of an imminent Phase One trade deal between China and the US. A report by Politico, and followed by another story by the FT, both detailing that the US is considering a removal of the Chinese tariffs, moved the needle for risk dynamics to improve. We could characterize the environment as a ‘true risk on’ day in financial markets, as both the S&P 500 and the US 30y bond yields, as the two key risk barometers, rose in tandem. The Japanese Yen and the Swiss Franc, as a consequence, suffered the pain of the leveraging mode in market conditions, with ‘carry trade’ strategies thriving. The sell-side pressure in the Euro was quite steady throughout the day even if no real catalyst can be attributed other than an awful Spanish unemployment report. This downside move in the Euro appeared to be the nail in the coffin for the Swissy to gather further downside momentum amid ‘risk on’. The USD fared quite well in an environment of rising US yields after the market has a rethink about the fundamentals in the US following a solid recovery in the US ISM non-manuf, which adds to the positive US NFP from last Friday. The CAD, as is the case when not driven by domestic risk events, followed the USD tail by appreciating against most G8 FX, although to a lesser degree. The Pound gathered bullish momentum through the European session as the UK polls indicate the Conservatives are well ahead of the ‘lead’ ahead of the UK general election. Lastly, the NZD failed to follow the bullish dynamics in the AUD, as the market continues to price in a 60% chance of a rate cut by the RBNZ next week, a probability that worsened after today’s poor NZ jobs report.

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QUICK TAKE

The market has gone into defensive mode, even if just moderately, following reports that the US-China Phase One trade deal and its subsequent signature ceremony could be delayed until December, with the immediate reaction by Mr. Market being that a delay implies more friction/disagreement. However, in the big picture, the headline is far from damaging the outlook for stocks, with the US 30-year bond yield not placing much weight either judging by the lack of downside follow-through. While it is no longer a far-fetched scenario to think that the US-China trade negotiations could collapse, it is still far from being the base case for the market. What this implies is that the lower beta-currencies go, especially the AUD and NZD (not so much the CAD outlook as it got hurt by BOC transition into dovish mode), the better deals one could get at key liquidity areas as the market is still clearly inclined to stick to the main thematic of giving the US and China the benefit of the doubt in Phase One of the trade deal. The USD also continues to show a conducive upward stepping formation, finding a third leg up at an index level, further evidence that the market may be over-reading the trade delay headline judging by the initial fall in the Oceanic currencies, a move not manifested in a major deterioration in the risk profile. What this also implies is that the moves up in the Yen and the Swiss Franc may be a stretch that provides sell-side opportunities (the risk-weighted line accounting for the S&P 500 and US 30y hints that). In terms of the European block, the EUR saw steady buy-side flows as the EU data improved, while the Pound failed to sustain the buying interest ahead of today’s BOE.

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The new trend high in the AUD index tells us where we stand in the US-China trade deal saga, with optimism reigning again on the back of a headline by China’s Commerce Minister stating that it has reached a compromise with the US “in principle” to cancel some of the existing tariffs. It didn’t really matter that Bloomberg and Reuters came out with conflicting reports about the veracity of the news, the market never looked back. Testament of the funky mood can be seen in the punchy moves in both the S&P 500 (new all-time highs) and the US 30-year bond yield (at one stage more than 5% higher), reinforcing the thematic of ‘true risk on’ in the market place. This environment is also supporting the likes of the New Zealand Dollar, piggybacking the rise in the AUD, which in turn followed the appreciation in the Yuan as the #1 proxy. The USD remains well bid up across the board, with the exception of the weakness shown against the Oceanic currencies. The Canadian Dollar has not attracted as much buy-side flows but still capitalized n the groovy vibes towards beta-currencies by showing a combatant stance against funding currencies. These latter group (JPY, CHF, EUR) felt the pressure of the thriving risk appetite dynamics in the market, making new lows at an index level, while the GBP loss value again as the BOE sees two dissenters championing for a cut, and to make matters worse, the Tories start to see the lead in the polls dropping ahead of the general election next month.

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The US Dollar has been the darling of the G8 FX complex in the last week of trading as the recovery in US bond yields continues its course. The market remains unfazed by the noise in the US-China trade negotiations as depicted by the ebbs and flows in stocks and fixed-income, which anchors the ‘true risk on’ dynamics. The value of the Japanese Yen, once again, is not justifying what we are seeing elsewhere, which should provide opportunities to engage in short-side action at levels rich in liquidity. By the same token, the discrepancies observed among the depressed price action in beta-currencies, especially the AUD and NZD, and the ‘risk on’ environment, makes these currencies rather cheap and with value to be bought by any logical standard (the chart insights section breaks it all down). The Kiwi can been seen as an aggressive speculative long at the current levels if we assumes that the RBNZ will stand pat when they meet mid this week (consensus is for a 25bp rate cut). I wouldn’t be as convinced to hold a bullish bias on the CAD as the f employment report in Canada last Friday strengthened the case for the BOC to stick to the recently shifted dovish script. As per the European currencies complex, the Pound, the Euro and the Swiss Franc, have all been under steady downward pressure across the board as the G8 FX indices chart below illustrates.

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The Sterling received a boost in demand as the decision by Nigel Farrage’s Brexit Party not to contest against the Conservatives seats but to instead go after the Labour-held seats at the upcoming election on December 12, plays into the view that the prospects of a hung parliament may be less likely. The Kiwi, as the market prepares for the RBNZ monetary policy decision on Wednesday, has been showing signs of a long accumulation campaign in the works as I elaborate in the chart insights section. The Swiss Franc has followed in lockstep the positive performance of the New Zealand Dollar, even if the rise cannot really be attributed to any news in particular but rather flows-led. The Euro managed to hold into a tight range, with demand flows, at a marginal level, benefiting the currency the moment that the GBP popped up midday in the UK. The US Dollar, amid sparse trading activity going through the books as the bond market was closed to commemorate the Veteran’s Day, traded generally weaker. A similar story is observed when looking at the Aussie Dollar, attracting steady sell-side flows ever since last Friday’s RBA SoMP, which offered little surprises nonetheless. The Canadian Dollar saw sellers take back control of the intraday price action, with the currency also weighted by the correlation it exhibits with the USD, which traded weaker.

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QUICK TAKE

The NZD has been marked up aggressively after a surprising decision to hold rates unchanged at 1% by the RBNZ. Ahead of the risk event, the marked was pricing in 76% chance of a rate cut in today’s rate call following the low reading in yesterday’s RBNZ’s survey of business inflation expectations (1y and 2y out). The AUD has failed to piggyback the rise in the NZD as a WSJ crossed the screens warning that tariffs continue to be the main stumbling block as part of the U.S. and China Phase One trade deal. The world’s reserve currency (USD) has found steady demand to start the week following its top performance last week. There has been no drivers for the USD even if that’s about to change as the market prepares for the US inflation report and a Fed Chair Powell speech testifying on Capitol Hill before the Joint Economic Committee. What still doesn’t add up is the stubborn appreciation by the Yen and the Swiss Franc amidst the reflationary trade environment (carry trades encouraged) currently present. The rise since last week in equities and global bond yields in tandem is a testament of the anomalies at play between the risk profile (positive) and the relative high levels in JPY, CHF. The Euro and the Pound continue to show a stark contrast in performance, the latter boosted by Farrage’s Brexit party not contesting Tory seats in the election, while the Euro keeps under pressure by micro sell-side campaign even if the German economic sentiment data keeps improving. Lastly, demand flows into the CAD remain limited as the market is still under the impression that selling the currency is a well justified trade based on the newly adopted dovish stance by the BOC as it readies to go for insurance rate cuts.

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Quick Take


The Australian Dollar is by far worst performer as the week comes to an end with the market realizing that the big miss in the Australian employment report, alongside soft economic activity in China and struggles to seal the US-China trade deal, is a setback for the RBA to remain on hold as the odds of another rate cut soar by early next year. In stark contrast, the Yen and the Swiss Fran keep attracting the most buy-side flows as the macro picture remains supportive with weekly demand levels in control. The decline in global yields in the last 24h as the US and China hit a snag in the prospects for a quick resolution of the trade truce has fueled further demand for these funding currencies. The Pound continues to trade at a steady pace as longs build up after the sentiment-driven spike after Farrage’s Brexit party decision not to contend Conservatives-controlled seats led to a re-pricing of the UK election outcome in favor of the Tories. The New Zealand Dollar, after the RBNZ shocker, has lost a tad its mojo dragged by a combination of downside pressure in the Aussie, the RBNZ leaving the doors wide open for further easing early next year and the US-China hitting an impasse in the trade negotiations. Lastly, the Euro and the Canadian Dollar, have been notoriously underperforming this week, even if the Euro appears to be carving out a bottom as I explain in today’s chart section.


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Quick Take

The trifecta of new all-time highs in the primary US stock indices (S&P 500, Nasdaq, Dow Jones) was not ignored by Forex traders, allowing for a strong reversal of the buy-side flows in the funding currencies, which up to that point on Friday, had drawn most of the demand interest. The retracement in the JPY and CHF allowed the GBP and NZD, both emboldened by British political news and the lingering positive momentum by the RBNZ keeping its powder dry on rates. The ebullient mood in equities, even if not reflected in global yields, was not an impediment for the market to re-engage in bidding up a depressed Aussie, despite ending as the main under-performer for the week as the interest rate cuts by the RBA are firmly on the table on the back of the big miss in Australia’s employment numbers the prior day. The USD and CAD, amid the lack of fundamental-driven events, traded in lockstep to the soft side last week, with the AUD the only currency performing worse than the North Americans. Lastly, the EUR kept finding follow through demand as the market appears to finally mark up the price of the single currency after a period of what looked in the charts a long accumulations campaign intraday.

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Quick Take

The Pound keeps charging higher to start the week as polls indicate the Conservatives lead ahead of the UK general election expands while UK PM Johnson confirms that all conservative candidates have vowed to support the deal to exit the EU. The Euro is also off to a solid start with demand flows consistent with the view that if history is any indication, the printing of a monthly outside bar in Oct represents a clear risk of a shift in bias on dips. One can find the rationale for this view in the charts section. The appeal towards funding currencies has returned, fueling the momentum of the EUR further, but also allowing a recovery in the JPY and CHF as CNBC reports that China is growing pessimistic on a trade deal prospect. The headline trumped the progress made by the Oceanic currencies during Monday, with the Aussie especially punished after we also learned that the RBA minutes left the door wide open for an near-term rate cut, a view reinforced by the recent big miss in the Aussie jobs last week. The behavior in the North American currencies, especially the sell-side flows noticed in the US Dollar, was another highlight on Monday. A combination of negative US-China trade headlines, the strength in the EUR/USD, which inevitable drags the USD index down with it, alongside the theories doing the rounds that a meeting between Powell and Trump that took place on Monday implies either Trump pondering the idea of walking away from a China deal, hence assessing the situation with Powell, or simply further pressure to ease. Regardless, the market’s reaction was to bid up stocks from the lows reached intraday after the Chinese news and dump the US Dollar in response.

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