Macro: Sandcastle economics
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FX Update: Conflicting trade headlines keep FX traders sidelined
John J. Hardy
Chief Macro Strategist
Summary: Currencies continue to show little reactivity to US-China related headlines and risky currencies have fared well despite modest bouts of risk off in the major global equity markets. US Fed measures of current GDP, meanwhile, suggest mounting risks that the US is tilting toward recession.
We have an odd mix of US Trade Deal headlines as yesterday saw reports that a “Phase 1” trade deal was not likely until early next year, which seemed behind the sharp mark down in global equities during the New York session yesterday. Later, China’s chief negotiator Liu He expressed “cautious optimism” on the prospects for a deal, though he was apparently confused about US demands – likely due to an unpredictable Trump. Elsewhere, the Hong Kong bill supporting protesters there and aimed at revisiting Hong Kong’s special trade status annually depending on a “sufficient autonomy from China” test passed both houses of US Congress by a vote of 417-1 and will likely be signed by president Trump, according to Bloomberg. I have thought that this bill would be incompatible with any trade deal, phase one or otherwise, but let’s see – China’s response on the matter will be critical and Trump could sign the bill as soon as today.
Both of the Fed measures of the current quarter’s GDP – the NY Fed’s NowCast and the Atlanta Fed’s GDPNow suggest the current rate of growth here a bit more than half way through Q4 is running at +0.4%, an anemic rate that could tilt lower with a bad November and December data cycle. Today sees the US Nov. Philadelphia Fed regional business survey and the weekly initial jobless claims. The latter is a bit more interesting this time around as last week’s number spiked suddenly after a string of benign readings. More than one weak reading in a row could accelerate concerns that payrolls for November will be weak and quickly alter the forward projections for Fed policy – which have remained stable over the last several sessions even as long US yields have moved sharply lower.
Elsewhere today, the biggest specific risk on the calendar is to CAD on the talk, or “fireside chat” from Governor Poloz.
Chart: EURUSD
Little drama in EURUSD on the chart at the moment as the exchange rate sits about a figure from the key upside pivot near 1.1180 and less than a figure from the tactical downside pivot at 1.1000. Even very tactically, it is arguable that 1.1050 is a downside pivot here. The chart has remained in a compressed 3% range for more than three months as we await developments. With possible more downside surprise potential in economic data from the US rather than Europe, it will be interesting to see the USD developments on downside data risks and whether these outweigh USD liquidity issues into year-end. EURUSD has done a relatively poor job of following developments in rate spreads.
The G-10 rundown
USD – not impressed with the greenback’s performance on the minor bout of risk off we saw yesterday – interesting to see reactivity to data, as indicated above, though this theme only tested on large surprises, with key data not up until the week after next.
EUR – today sees the ECB minutes, but the ECB interest only picks up from here. Interesting to see a possible change of approach from new ECB President Lagarde on fiscal stimulus as she may campaign for a Euro-wide budget rather than encouraging individual EU members to change their domestic fiscal stance.
JPY – lack of reactivity in evidence here as well as we got both cylinders of support firing in lower rates and a bit of risk off yesterday and yet JPY fails to put in a particularly strong showing.
GBP – can we really expect the market to draw strong conclusions on sterling ahead of the December 12 election – chief question now is how much of a majority Tory government is already in the price. 1-month GBPUSD options volatility quite elevated at near 12.0% and puts have a slight premium as the knee-jerk reaction to a hung parliament perhaps a greater volatility risk (to the downside) than GBPUSD call spreads or EURGBP put spreads are a way to trade for a solid, non-runaway positive reaction in sterling to a Tory victory.
CHF – traders not inspired by the picture here until parity falls in USDCHF and EURCHF is somewhere beyond the 1.0850 lows or above the 1.1050 range cap.
AUD – excruciating lack of price action, though in the crosses, AUD has absorbed a bit more pressure on US-China trade concerns. Westpac money laundering story also an interesting one for risks to the country’s credit impulse if other banks are implicated.
CAD – still on the weak side despite oil bounceback as the Tuesday comments from BoC’s Wilkins have weighed on the loonie – BoC governor Poloz likely to echo many of the same comments in today’s “fireside chat” and US economic weakness concerns add downside risk for CAD.
NZD – A small data point, but New Zealand Oct. Credit Card spending dropped 1.5% month-on-month and the year-on-year figure only up +2.5%, the lowest growth rate in over six years. AUDNZD has neared its 200-day moving average in recent days.
SEK – the price action getting dicey here and SEK may be following NOK’s lead to a degree on the latters reaction to swings in the oil price. Yesterday’s rally cut short just as the prior days sell’off also reversed. Most interesting technical signal would be push down through 10.60 accompanied by EURUSD breakout and something fiscal in the air…
NOK – oil prices reversed sharply, capping the EURNOK rally. The sub-10.05 lows are the pivot for a more determined NOK rally.
Today’s Economic Calendar Highlights (all times GMT)
- 1230 – Euro Zone ECB Meeting Minutes
- 1330 – Canada Oct. ADP Payrolls
- 1330 – US Philadelphia Fed Survey
- 1330 – US Weekly Initial Jobless Claims
- 1340 – Bank of Canada’s Poloz to Speak
- 1500 – Euro Zone Nov. Consumer Confidence
- 1500 – US Oct. Existing Home Sales
- Time? – South Africa Interest Rate Announcement
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