Intraday Market Thoughts Archives
Displaying results for week of Sep 16, 2018Four Reasons USD is Slipping
The US dollar has suddenly turned in a move that's left some market watchers scratching their heads, while others vindicated. Earlier this week, Ashraf' issued a special video for Premium subscribers titled "Invalid Thesis" related to the US dollar. The DOW and DAX trades were stopped out while the EURUSD and USDCAD were closed at a profit. Canadian CPI and retail sales are due next. Meanwhile, the pound is falling across the board on a BBC announcement that PM May will make a statement at 15:45 London time indicating she will not be changing her position on Brexit (TRNSLTN: sticking with her Checkers Speech and augmenting odds of a no-deal Brexit).
The US dollar has quickly fallen to multi-month lows on a variety of fronts even as Treasury yields rise to multi-month highs and economic optimism rises. It's a change in correlation that's caught many off guard. Here are some of the reasons for the shift:
1) Global growth Trade wars are a looming risk but so far the hype hasn't matched the reality. Companies may be able to better-withstand the pain than believed
2) Midterms Pollsters are saying there is a 75% likelihood Democrats will take the House. That will cripple any chance of further US tax cuts but, more importantly, it will curb Trump's ambitions on trade and leave the US deadlocked once again.
3) Positioning This has been a looming risk on almost every front. CFTC positioning shows the market unequivocally long US dollars and better economic data in the UK and elsewhere has inspired short covering.
4) Twin deficits Rising yields are at least partly due to US trade and current account deficits expanding and the potential costs of financing external debts at a time when opportunities are beginning to present themselves elsewhere.
What's next? Stephen Jen pioneered the idea of the 'dollar smile'. It's a chart illustration of how the US dollar strengthens as growth is either 1.5% stronger or 1.5% weaker than G7 peers. The latest signal from the market may be that growth elsewhere will catch up to the US in the year ahead as the effects of the tax cut fade and other economies pick up. It's early days still, but this is a long-term trend to watch.
| Act | Exp | Prev | GMT |
|---|---|---|---|
| CPI (m/m) | |||
| -0.1% | 0.5% | Sep 21 12:30 | |
| Prime Minister May Speaks | |||
| Sep 21 12:45 | |||
بين حاجز الداو و الدولار
ما هي الخطوات القادمة بعد ما كسر الدولار دعمه و وصل الداو جونز الى قمة جديدة؟ الفيديو الكامل
USD Breaks Support
2 days after Ashraf posted an-all clear video on the US dollar to subscribers, a broadening sell-off in the US dollar is underway after heightened divergences on Wednesday, but a trend of outperformance in commodity FX emerged on a combination of trade and global growth optimism. USDX breaks to 4-week lows below the 100-DMA for the 1st time since April. CAD drags USD below 1.29 and the Premium short in USDCAD has been closed with 140-pip gain. A detailed note has been sent to subscribers regarding what's ahead for USDCAD. GBP is the biggest outperformer on higher than expected retail sales, while the NZD is the 2nd highest performer of the day after a GDP beat. US jobless claims and existing home sales are next.
و أخيرا تم حل مسألة الدولار (فيديو للمشتركين)
US economic data included a nearly 10% rebound in US housing starts after two months of weakness. They were at a 1282K pace compared to 1238K expected. In the bigger picture, the market is signaling better global growth; or at least the ability to weather the latest flare-up in the China-US trade war. The optimistic signals have been undeniable despite worrisome US and China moves and ultimately, there's no arguing with the market, at least in the short term.
Could the broad USD decline be a usual reflection of the broad pick-up in global growth dynamics, which argues for more upside in non-Fed tightening in the course ahead? Yes, the Fed is expected to raise at least 4 more times (including 2 this year)...but let's revisit this assessment in November..as we near the December meeting.
NAFTA negotiators didn't make any kind of breakthough and headlines about no deal this week briefly hurt the loonie but USD/CAD finished on the lows in part because of report the US was ready to bend on Buy America provisions.
The Australian and New Zealand dollars are also making solid gains. To underscore the better sentiment on growth, Japan's Nikkei 225 has risen more than 1% for four straight sessions.
| Act | Exp | Prev | GMT |
|---|---|---|---|
| GDP (q/q) | |||
| 1.0% | 0.8% | 0.5% | Sep 19 22:45 |
Rendez-vous Trading à Paris
XTB-France avec la participation d'experts des marchés financiers et professionnels de la bourse, vous invite à l'événement de l'année 2018 au sein des Salons Hoche à Paris Jeudi le 11 octobre à partir de 18h30. Alexandre Leclair, Karen Peloille, Ashraf Laidi, Luc Vaudan & Jean-Louis Cussac. Inscrivez-vous maintenant.
Growth Trumps Trade
The market's reaction to US tariffs and China's retaliation on Tuesday was remarkably positive as risk trades pushed higher at the expense of the Japanese yen and the Swiss franc. The Australian dollar was (and remains today) the top performer while JPY and CHF lag. The market reaction is a combination of eleveated traders' expectations explained here and the resilience of the global economy is. The macro data of the day is the upside surprise in UK inflation, particularly the core CPI breaking the BoE's target to hit 2.1%.
Global equity markets are again rallying in concert. A positive reaction to tariffs and a trade war between the two largest economies would have been unthinkable a few years ago but it emphasizes how solid global markets are.
We often talk about news being the best measure of a market and if markets can't be damaged by a trade war, then what can damage them. The nature of all news is that it's worrisome. If you own a stock, a bond or a currency you have to be on guard against the risks. What we don't talk about enough is that things are getting better.
Even recent comments from ECB and BOE were upbeat despite looming problems to both regions. The yield curve is worrisome but it hasn't inverted yet and even if it does, you can't bet on that alone. Economic data in most of the world is solid with FX traders focusing on relative strength. This may be another explanation to the USD's retreat.
Another sign is the relentless march of money into new ideas. Last year it was cryptocurrencies and at the moment it's marijuana stocks. The animal spirits are alive and it will eventually end in pain but in the words of Chuck Prince, “As long as the music is playing, you've got to get up and dance.”
| Act | Exp | Prev | GMT |
|---|---|---|---|
| CPI (y/y) | |||
| 2.7% | 2.4% | 2.5% | Sep 19 8:30 |
Recurring USD Pattern 18 Months Later
Trump's latest announcement to impose tariffs on 10% of Chinese exports started off with a risk-off reaction in Asian trade before markets stabilized on the rationalisation that traders had been expecting levies of as high as 20%. The USD reaction to tariffs-related announcements remains largely driven by the initial reaction in equity indices, with the yen relationship being the most consistent in FX. Combining the Trade War factor (Offsetting CNY to US tariffs) with that of the Fed question (how high can they raise rates despite signs of peaking inflation) and the emerging market predicament (how high can the USD rally when EM repay USD-debt) and you end up with a blurry (contradictory) picture for the US dollar.
Alternatively, you could refer to the above daily chart of the USDX and assess the recurring pattern between price and moving averages interaction. Whether the 55-DMA shall cross below the 100-DMA as it did 18 months ago following the right shoulder failure remains to be seen. Yet, what does it mean for EURUSD? Yesterday, I argued for invalidating a long-term head-&-shoulders formation in favour of a more pressing and immediate technical development. The argument is further supported when factoring USDX into the individual USD pairs. The full video for Premium subscribers can be found here.
قرار ترامب و أول تقاطع موت في خمس سنوات
أول تقاطع موت في خمس سنوات للدولار الأمريكي ـ هل ستتغير وجهة الدولار بعد قرارترامب نحو الصين؟ التحليل الكامل
Tariffs and Terminal Rates
A weekend report (another one) suggested Trump could finally announce the long-rumored $200 billion in Chinese tariffs as soon as Monday. We will also take a shift in Fed rhetoric that could keep a bid under the US dollar. CFTC positioning showed GBP shorts easing up. Friday saw a miss in US retail sales after, 2 day after a miss in CPI. Equity indices are in the red due to the latest signs of pessimism on the trade front. Thursday's pre-ECB Premium trade is 70-pips in the green but will likely be kept open after a key support has been broken. Later today, Ashraf shall post the weekly Premium video, shedding important technical light on the US dollar.
The good news is that tariffs won't be as harsh as feared. The bad news is that we may be a day away from another step closer to a US-China trade war. Several reports suggest Trump will announced tariffs on $200 billion in Chinese imports on Monday or Tuesday in an effort to win trade concessions. China has promised to retaliate. Trump called for 25% tariffs but after hearings, the reports say that will be scaled back to 10%. Ashraf tell me Trump will continue sending mixed messages and delaying resolution until after the Nov mid-term elections to garney support from his base.
It's been remarkable how the US market has brushed off trade risks so far this year and we will be watching very closely to see how markets react.
In the bigger picture, the US dollar made some headway last week against the yen in part to due to comments from Brainard. We often focus on the next central bank meeting or maybe two meetings ahead but we should rather be looking at the terminal rate – how high interest rates will rise before the Fed or any other central bank pauses. Lately, indications are mounting that could be higher than believed.
Right now the market thinks the Fed sees risks of a pause or at least a significant slowdown in hikes at 3.00% or sooner. However last week, Fed Governor Lael Brainard introduced a new wrinkle. She started talking about 'short-term neutral' and 'long-term neutral'. Her point was that short-term neutral might be higher than long-term neutral.
Extrapolating from that, rates could rise well-above 3.00%. Looking at derivatives pricing, the market sees about a 20% chance of more than four hikes in the next year-and-a-half. So if we get two more hikes this year, the pace would slow to just two hikes (or less) in the following 14 months.
What Brainard is hinting at is there could be more. We'll be watching closely to see how that debate evolves but it will take some patience – the Fed is now in its pre-FOMC blackout period.
CFTC Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.EUR +11K vs +8K prior GBP -61K vs -70K prior JPY -54K vs -52K prior CHF -35K vs -40K prior CAD -27K vs -26K prior AUD -44K vs -44K prior NZD -23K vs -25K prior
There were no dramatic shifts and the preference for the US dollar remains high but the slide in cable shorts is notable. If the tone on Brexit talks improves, it could be a quick rush to the exits.
