FX Update: Market celebrating Fed punch bowl, trade deal hopes

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  Friday saw markets closing in a celebratory mood on hopes that the US and China are headed toward some kind of trade deal and as the Fed is expected to continue providing liquidity and will cut rates at the Wednesday FOMC meeting, even with US equities near or at all time highs.


The mood Friday went from flat to aggressively positive as news emerged that the US and China may be working toward a “phase one” trade deal, one that could include promises from the Chinese side of maintaining currency stability to remove the US labelling the country as a currency manipulator. It is hard to imagine more complacent market conditions, but these could yet extend further if we get the Friday press conference some sources suggest will happen with chief Chinese negotiator Liu He and US Treasury Secretary Mnuchin in attendance. At the same time, there are strong risks that the terms of the deal could prove too narrow to merit the market’s enthusiasm and weak US data could yet spoil the party as well.

The other background factor supporting risk appetite is the Fed’s easing stance even as US equity markets are bulling up near all time highs, an unprecedented situation. How the Fed ties itself into knots in framing why it is doing what it is doing will be a spectacle to behold at this Wednesday’s meeting, but the Fed has largely lost control of policy and the market thinks that this is a good thing, assuming that the Fed will at every turn simply up liquidity operations to avoid losing control of key policy rates, while in turn losing control of its balance sheet. Luke Gromen (@LukeGromen on Twitter) has described what the Fed is doing as providing “credit easing” for the government to prevent Trump’s massive deficits from driving funding rates massively higher. The only question from here is whether the market thinks that this is Fed behaviour that can scale infinitely in response to a major credit crunch, especially one driven by real risk of a US recession. Cue the incoming data…

Chart: EURUSD
The EURUSD consolidation was quite shallow relative to the prior rally, not even achieving the 38.2% Fibo a bit lower than Friday’s lows. This week, with its FOMC meeting and important US data on Friday, looks important for establishing whether a turn higher continues to unfold. Tactically, we have only neutralized downside risks with the latest rally. To establish a more determined turn in the  chart, we need a move well clear of 1.1200 and eventually even 1.1400 needed to suggest the lows are in. To the downside, the bulls’ hopes will begin to wane if the price action dips back below 1.1000.

Source: Saxo Group

The G-10 rundown

USD – critical test of the market’s complacent assumptions around the Fed policy outlook on Wednesday and at any time this week on headlines linked to the US-China trade deal issue. The focus switches quickly to incoming economic data on Friday and beyond with the latest jobs and earnings numbers and  ISM Manufacturing (next Tuesday’s ISM Non-manufacturing  more important than the latter.)

EUR – Germany politics are a risk to the notion that we will see a straightforward path to fiscal stimulus and fiscal unity – the FT reminds us this morning that Brexit will already mean that Germany’s contribution to the EU budget will double next year. And in an election in the former East German state of Thuringia, 31% voted for the hard left Die Linke, with 23.4% voting for the anti-immigration AfD party, outpacing Merkel’s CFD at 21.8%

JPY – the Bank of Japan has nothing effective to reach for and may not come up with much in its policy review promised for this Thursday’s meeting, in the meantime, the backdrop Is about as JPY-unfriendly as possible, but we are increasingly contrarian on further JPY weakness from here – long JPY upside volatility one way to trade for a change of mood.

GBP – sterling sideways as we await clarification on the length of the Brexit extension, with the momentum in the news pointing to a Jan 31 extension as Macron may finally be giving way on this point. Labour is holding out on voting in favour of Dec 12 elections, claiming there must be an iron-clad guarantee to remove the risk of a No Deal Brexit.

CHF – the franc struggling near key EURCHF resistance with the backdrop about as supportive as possible for a rally, given widespread complacency and struggling safe haven bonds.

AUD – less enthusiasm for AUD than one would have thought on increased hopes for a US-China trade deal – and AUDUSD has yet to clear the 0.6900 area hurdle, much less the bigger level up into 0.6950-0.7000.

CAD – this Wednesday’s Bank of Canada an important signal for USDCAD on the degree to which the BoC is comfortable with maintaining the developed world’s highest policy rate. The 1.3000 level in USDCAD critical from here.

NZD – AUDNZD looks more buoyant again after surviving a test of support. Certainly, any further removal of concern on the outlook for China, for example from even a relatively narrow US-China trade deal, could provide more support for AUD than NZD.

SEK – the message from the Riksbank last week both hawkish (get back to zero) and dovish (stay there forever), so we need more support in the form of fiscal, an improvement in the global and EU economic outlook, etc. to get a more determined SEK rally and driver EURSEK down below 10.60.

NOK – the NOK weakness even more notable now as the backdrop could hardly be more supportive. Next test is likely over year end and whether seasonality is a key driver here.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Sep. Advance Goods Trade Balance
  • 1430 -  US Dallas Fed Oct. Manufacturing Activity
  • 1500 – ECB President Draghi to Speak

 

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.