Head of FX Strategy, Saxo Bank Group
Summary: US markets closed in an ugly mood yesterday, with fresh lows for the cycle in major equity markets. But overnight, US President Trump bragged that he will make a “great” US-China trade deal.
All the while, USDCNY continues to pressure at the highs of the range as the market holds its breath. The very last thing that China will want to do is for the world to perceive in any way, shape or form that Donald J. Trump has twisted their arm and forced them to sign a deal that suggests any hint of a whiff of a loss of face. That’s just how hopeful I am that Mr. Trump’s off-hand comment bears any promise.
Germany’s Chancellor Angela Merkel announced that she would not run for party leadership this December and would not seek another term or any other political office at the 2021 German election. This after the Hesse election saw a sharp fall in the CDU’s results and where the nation’s two traditionally largest parties failed to clear 50% in the results – similar to the results in Bavaria. This is not a major catalyst for the short term, but when the political environment heats up over Italy’s budget and other existential concerns, it doesn’t help when the bloc’s largest economy has a lame-duck leader with no popular mandate. Germany does not have a tradition of snap elections, though they are theoretically possible and 2021 looks very far away indeed.
The Brazilian election quickly yielded to a buy the rumour, sell the fact dynamic as the BRL weakened sharply all day long yesterday after gapping higher at the open in the wake of Bolsonaro’s clear victory at the weekend. The tough work of dealing with high crime rates, social strife, an over-generous and regressive pension system and a struggling economy now begins. The easy part of any possible future BRL rally may be well behind us.
The Mexican peso plunged steeply yesterday in the wake of a referendum (only 1% participation!) that saw an expensive new Mexico City airport project rejected mid-construction. Incoming president Obrador said he would cancel the project based on the referendum result, claiming corruption hung over the project and promising to use the money for improving other airport facilities. The peso is weak on this as investors fear that Obrador could also step in and interfere with existing and future large energy projects after his predecessor opened up energy projects to foreign investment for the first time since 1938.
Chart: USD vs CNH and AUD
AUDUSD tried to rally again overnight on the “news” that Trump believes in the potential to sign a trade deal with China, but AUDUSD bulls will likely need support from the CNY, as it appears from the recent price action that the AUDUSD trade has become a proxy for China’s intentions for the renminbi. Here USDAUD is shown vs the gray-blue USDCNH for perspective.
USD – the US dollar seems to bounce back from every dip – also against the yen as US yields failed to push lower and have rebounded smartly again overnight.
JPY – bond yields notably stuck in the mud yesterday even during a rather intense period of equity market carnage – making it difficult for the yen to rally. Equity markets have bounced back allowing bond yields to rebound sharply and denting the JPY’s prospects for a rally, and USDJPY is even turning tactically bullish if it can clear 113.00.
EUR – the single currency adrift with little conviction here, even as Italy’s yields moved sharply lower as the Italian government suggests ways to potential reduce the deficit due to the timing of the implementation of its plan, rather than presenting the idea that it is backing down. A firmer move lower in Italian yields and positive data catalysts needed for a more positive euro-stance – in the meantime, headline risks still two-way.
GBP – sterling crawling slowly lower as Brexit headline fatigue reaches new extremes, although the autumn budget statement yesterday from Chancellor Hammond looks supportive, with tax cuts and raised spending crystallizing the move away from austerity – GBP supportive at the margin.
CHF – the EU existential worries not aggravated by Merkel’s announcement and stable and even rising bond yields despite wobbly equity markets are not franc-supportive. Most interest at the moment in whether USDCHF can take the 1.0050 area that has held it back.
AUD – the Aussie trying to gin up enthusiasm for Trump’s China trade deal talk, but this could prove premature at best and the direction of USDCNY likely to quickly re-establish control in the meantime. Overnight Sep. Building Approvals data suggesting a housing market in rapid retreat.
CAD – USDCAD pulls to highest daily close in several weeks before dipping a bit on the US-China trade deal “news” overnight. That USDCAD chart is a mess until/unless we clear 1.3200 or well below 1.300 again and US-Canada rate spreads have been locked in a range for months.
NZD – the kiwi getting the upper hand against the Aussie again as the try above the 1.0850 pivot area failed. Employment and earnings data for Q3 the next data point of note for New Zealand.
SEK – Sweden again fails to form a new government and the market again fails to see this as a catalyst for a view. New elections unlikely to change the gridlock – it’s more about the state of the EU economy and risk appetite (especially linked to EU existential worries) for the krona.
NOK – EURNOK edging up to close at its highest level in weeks. A Chinese yuan devaluation, or float, would be seen as deflationary and could hit the oil price as China is far and away the world’s largest importer. Still, only looking for a EURNOK range trade at worst for now.
Upcoming Economic Calendar Highlights (all times GMT)
0800 – Spain Oct. Flash CPI
0855 – Germany Oct. Unemployment Change and Claims
1000 – Eurozone Oct. Confidence Surveys
1000 – Eurozone Q3 GDP estimate
1300 – Germany Oct. Flash CPI
1300 – US Aug. S&P CoreLogic Home Price Index
1330 – ECB’s Praet to Speak
1400 – US Oct. Conference Board Consumer Confidence
1400 – Mexico Q3 GDP
2145 – New Zealand Sep. Building Permits
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