Intraday Market Thoughts ArchivesDisplaying results for week of Sep 23, 2018
A main theme in markets in 2018 has been fear of a trade war but now that heavy China tariffs have been implemented and markets have sailed along, it's increasingly clear that central banks aren't nearly as worried as newspaper headline writers. Eurozone flash CPI for September remained at 2.1% with core CPI slipping to 0.9% y/y. US August core PCE is up next, expected to remain unchanged at 2.0%. Canada July GDP is also due next. A new short in a primary index has been issued.
A genuine trade war isn't something developed markets have encountered in at least a generation. The concerns are no-doubt real and the situation is worsening. That said, it hasn't been as bad as feared. The tariff boogeyman has crawled out of the shadows and economic activity hasn't stopped. Increasingly, global central bankers are brushing aside the concerns and committing to gradual rate hike paths despite the risks.That's likely to continue and is a tradeable theme for the remainder of the year. Here's Ashraf''s detailed look at performance of the USD in the past Fed tightening cycles.
BoC-NAFTA AxisCAD is recovering from NAFTA-related worries after Bank of Canada's Poloz speech was entirely focused on a tightening economy as he pledged to continue raising rates at a gradual pace. The BoC-NAFTA axis continues to impact CAD with the former imposing a slower but more lasting positive weight on the currency, while the latter has more sudden but short-lived impact. Eventually, markets and central bankers may be hit by a jolt of fear but for now, the mode is to keep calm and carry on with normalization.
As for trade deals, there's no doubt that the odds of a NAFTA deal declined with Trump's comments Wednesday. But how much? Perhaps to 90% from 95%. The next main short-term risk is the release of the text of the deal Friday. That might include another round of public comments from Trump and/or Lighthizer and leave the Canadian dollar to finish the week on a soft note. CAD will shall await Jul GDP and US core PCE data as it awaits along the 1.30 support.
Even with that, the market is comfortable that Congress, corporations, donors and even the public want a deal enough to stop it from eventually happening.
In the UK, the knives are out once again for Theresa May with Boris Johnson criticizing the collective failure of her government. Negotiations in the next six weeks are going to be brutal as she fights off attackers on all sides but GBP has held its ground and that's an encouraging start.
|Eurozone CPI Flash Estimate (y/y)|
|2.1%||2.1%||2.0%||Sep 28 9:00|
|0.1%||0.0%||Sep 28 12:30|
Markets were busy digesting the aftermath of the Fed's rate hike during Thursday's Asian trade until a new twist emerged in Italy's budget negotiations with the EU. CAD fell further as Trump played hard ball with Canada over NAFTA. The RBNZ held rates at 1.75% as expected, with US rates finally rising above those of New Zealand.
درج اليورو بعد الفدرالي (فيديو للمشتركين فقط)
The Fed hiked rates to a range of 2.00%-2.25% on Wednesday but sent mixed messages about the path of rates ahead. In the bond market, US 10s are also yielding 40 basis points more than kiwi bonds. It's rare to have the US as the high yielder in developed markets and those spreads are likely to widen.
As for the Fed, the statement removed a reference to 'accommodative' in what was initially seen as a sign that rates are near neutral and that hikes will soon slow. That move reversed in the press conference when Powell indicated the shift in wording didn't signal anything.
In comments on the path of rates, Powell sounded like he'd just spent two days of FOMC meetings listening to academics debate where neutral is, without getting any answers. Instead he said the Fed will stay on its path and judge what to do next based on incoming data. As for the path, it's not entirely clear but he said the lowest estimations of neutral are 3% so hiking every second meeting in 2019, barring any surprises, is a solid baseline.
Salvini Flirts with BudgetThe euro fell anew alongside Italian bonds after Matteo Salvini, Italy's co-deputy prime minister and League party leader stated that raising govt expenditure and driving the budget deficit above 2% of GDP would be “worth the effort” if it resulted in economic growth. The comments were at odds with Economy minister Tria who had been supporting the reduction of the budget deficit below the 2% level. Brussels requires EU nations to keep the budget deficit below 3% of GDP. The matter will resurface again next week when Italy's leadwers back from the UN conference in NY.
Separately, the Canadian dollar swooned Wednesday as NAFTA negotiations sour. First, the White House leaked that it's planning to publish the text of a bilateral US-Mexico trade deal on Friday. Trump has long threatened to exclude Canada but that was mostly through to be bluster. Trump doubled down later saying he rejected a one-on-one meeting with Trudeau and that the US doesn't like Canada's main negotiator, Chrystia Freeland.
Still, Trump conceded there was a “good chance” of a deal with Canada but that chance has certainly dwindled. That was reflected in a rally in USD/CAD to 1.3040 from 1.2950.
|Fed Chair Powell Speaks|
|Sep 27 20:30|
An FOMC decision to hike rates on Wednesday is a foregone conclusion but signals about what's next are what will move the market. GBP was the top performer Tuesday while JPY lagged. The Premium video on the current and potential trades titled:"Ahead & Before the Fed" is now posted.
The Conference Board on Tuesday said September US consumer confidence was at 138.4 compared to 132.1 a month earlier. That's a fresh high since 2000 as optimism spreads about jobs and the economy. Numbers like that are why markets and economists are virtually unanimous that the Fed will raise rates to a range of 2.00%-2.25% on Wednesday. Today's release of higher than expected 3.5% rise in US new home also helped sentiment.
The bigger question is whether they will stay 'accommodative'. The current statement says that policy remains accommodative but that word could be removed. If so, such a removal would make today's rate action hike a dovish hike as it would indicate the Fed is closer to neutral and the pace of hikes could soon slow. While it would not t jeopardize a December hike, it may be the difference between 2 and 4 hikes in 2019.
A compromise could be saying that policy is 'somewhat accommodative' which would tee up its removal in December. All else equal, how that's managed will determine the kneejerk in the US dollar. Nonetheless, it's not the only moving part. The Fed will release new forecasts that are likely to include a bump up in the 2018 GDP forecast above the currently 2.8% level.
The dot plot focus may be on the 'longer run' median which could move up to 3.0% from 2.75%. That might not necessarily mean anything, because the composition of forecasters is changing but it would fit into the narrative of a more-hawkish Fed. It is too early in the year for markets to worry about whether 3 or 4 Fed hikes will be signalled for 2019.
In the press conference, the market may hone in on the path of rates next year. At the moment, there's a wide range of expectations. If Powell is upbeat on the economy and suggests wage pressures, more hikes will be priced in and the US dollar will rally. And rest assured that any change in the forecasts and the word "accommodative" will be widely questioned during the Q&A.
There's a risk he could temper than by signaling slow progress on inflation and a potential wait-and-see approach. With market positioning already heavily long dollars, the risks are balanced.
|FOMC Press Conference|
|Sep 26 18:30|
The euro is the top performer of the day after Draghi's comments yesterday helped the euro higher on Monday as he maintained an upbeat, hawkish tone. Attempts from ECB's Praet to cool off the gains worked temporarily. The pound is also performing strongly today, while the franc is the only loser against the USD.
After the ECB decision, reports leaked out that some members of the governing council wanted to downgrade the balance of risks but one of those people certainly wasn't Draghi. In comments in Brussels Monday he said they see a vigorous pickup in underlying inflation and an ongoing, broad-based expansion that vindicates the ECB views.
The comments immediately sent the euro to the highest since June at 1.1815. Yet, news from Draghi's native Italy helped to pull the euro back lower as Italian 10-year yields rose 12 basis points to 2.95% on fears of a larger Italian budget deficit that could destabilize the country's politics or the EU.
The government has until Thursday to unveil a budget package and whether or not it shows a deficit above or below 2% will be a main euro driver. The numbers could be announced at any time and leaks/details could also move the market beforehand. In the bigger picture, the US dollar rebounded Monday and oil rallied 2%. Economic data and news in North American trading remain light.
Wednesday's FOMC rate hike, dot plot and press conference will be the highlight of the week.
سيكون محور ندوتنا الإلكترونية القادمة يوما قبل قرار الاحتياطي الفدرالي المتوقع أن ترفع الفائدة للمرة الثالثة في العام، سيقوم الأستاذ أشرف العايدي بتغطية خطط التداول على المدى القصير و المتوسط في أزواج اليورو/دولار، الدولار/ الين و الدولار مقابل السويسري إحجز مقعدك الآن للمشاركة من السعودية فقط
President Trump's tariffs on China have taken effect on the week when the Fed meets to raise rates for the 3rd time this year and speculation mounts on whether UK voters may be called up again as talk about a second referendum or a snap election will be the way to go. CFTC positioning showed big moves in GBP and AUD. There are holidays throughout Asia to start the week, while Germany's IFO sentiment survey emerged slightly better than expectations. ECB president Mario Draghi indicated today “relatively vigorous” pickup in Eurozone inflation, further bolstering chances that ECB will begin raising rates next year after it concludes its QE program in December. A new USD trade has been issued to Premium subscribers, supported by 2 charts.
On Friday, cable fell by the most in a single day since June 2017 as it plunged to 1.3075 from 1.3265 on a sudden diplomatic crisis for Theresa May. France's Macron led a messaging switch from the EU as he attacked Britain's negotiating position. That was compounded by the usual fear-mongering in the UK press.
As the attacks on May intensified, she was forced to make a statement where she warned that no Brexit deal was worse than a bad one. The pound took no comfort in that on fell to a new low.
As the opposition Labour Party gathers for Party's annual conference, members overwhelmingly said they want a say on the final deal. Reports also leaked out that Conservatives were game-planning for a snap election on a potential hard Brexit.
What next? A new vote or election would be GBP-positive after the initial jitters but that's still unlikely. Instead, look for May to continue to stagger forward towards some kind of deal. The main players in negotiations have been generally upbeat so a deal is likely closer than the screaming headlines in the UK press suggest. Traders must adopt extra care when selecting the right GBP pairs and crosses. A new GBP trade was issued on Friday.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +2K vs +11K prior GBP -79K vs -61K prior JPY -64K vs -54K prior CHF -18K vs -35K prior CAD -30K vs -27K prior AUD -68K vs -44K prior NZD -32K vs -22K prior
What's impressive about increasing cable shorts is that they piled in before things went sideways after Salzburg. Even in a crowd that's already trade, there appears to be plenty of appetite to sell the pound. Meanwhile, the timing on the fresh shorts in AUD and NZD was poor with both making hefty gains this week.