Focus Trades from SaxoStrats team

FX FOCUS

US REPORT ON CURRENCY MANIPULATION

The U.S. Treasury’s semi-annual report on currency manipulation is due on Tuesday Oct 15th.

However, is has been reported that Treasury staff are advising secretary Steve Mnuchin that China is not manipulating the RMB. If accepted by Mnuchin it would calm gittery FX markets however if rejected there may be volatility aplenty across EM FX pairs and CNH in particular.

Currency manipulation denotes persistent FX market intervention to prevent currency appreciation. PBOC is supporting currency acting against depreciation:

• Trade weighted basket only marginally below 2yr average
• Fixing stronger than mkt expectations
• Larger than expected drop in September FX reserves indicates propping up the currency (still have over 3trillion)

Trade your view with Saxo [FX Spot – USD/CNH]

USD:

• Latest big structural break higher in US bond yields suggest that we may have some further USD strength on the horizon. However, in the near-term, we may be getting some technical bounces on some currencies against the USD, chiefly the likes of the AUD & NZD that have been heavily sold over the last few weeks
• In particular buying puts on the likes of GBPAUD & GBPNZD could give a layer cake of tailwinds, if we get: 1. Disappointments on a Brexit agreement or negative headline that could cause sterling to collapse by 1-2% & / or 2. Mean-reversion & near-term bounce in the Australian Dollar & New Zealand Dollar. Note our Global Macro Strategist, KVP, is still structurally bearish both the Kiwi & Aussie… but feels they could still get a strong bounce especially against the like of CAD & JPY…
• TRADERS BULLISH THESE COULD LOOK TO TRADE NZDCAD, AUDCAD, AUDJPY & NZDJPY
• EURUSD continues to hoover around the pivotal 1.1500 lvl, yet we are slowly making lower lows & gaining more noise out of Italy in the euro-zone. Added to that, we got record blow-out numbers from the US last week, with ISM services coming in at 61.8 vs. the 58.0 that was expected, this surpassed the previous high in 2005. We also had solid non-farm payroll numbers (big revisions upwards), solid average hourly earnings +2.8% in-line & an unemployment rate at such low levels, that one would have to go back to 1969. The implications of all this, is going to be a Fed that is a lot more comfortable to continue hiking well into 2019. KVP thinks we could get one hike for every quarter of 2019 & its worth bearing in mind, that every Fed meeting next year has been structured to be a “live press-conference” meeting, rather than the traditional every-other meeting being a “live press-conference”.

Trade your view with Saxo [FX Spot – EUR/USD]

Gold / xau

• Whilst gold has been trying to consolidate around the $1200 levels, the fact that USD yields are breaking out higher to new highs in this hiking cycle, as well as a USD that is bid, suggests that we may soon be making new lows. The Backdrop of a US economy that seems to go from red hot to exceptionally red hot, is also very supportive for the USD, as are the global flows into US assets. We feel that the $1160 lows may be taken out sooner rather than later (Next Fed Hike meeting is Dec 19). Those looking for a bullish play could wait for a weekly close back above $1220 that would challenge the bearish skew
• One can express downside on gold either directly, or through 3-4 months long puts or put spreads.

Trade your view with Saxo [Gold Spot - XAU/USD]

EQUITIES FOCUS

Chinese developments:

• RRR cut which the PBOC describe as a policy swap with MLF to improve efficiency in interbank market. But the RRR cut released an extra 750bn in liquidity – off which one of the main demands for liquidity at the moment is local govt bond issuance – RRR bridge to fiscal stimulus highlights more easing than PBOC would like to admit.
• Global Times, state-backed Chinese tabloid noted ‘China must take strong stimulus measures to support growth’. Although easing bias has been in place previously, this has been called "fine tuning"
• China will act with the stimulus needed to provide marginal support for the market and economy. Hence our overweight focus on China.

Trade your view with Saxo [FTSE China A50 Index Oct 2018 futures – CNV8] + List of most traded Stock Connect names in table below

US Earnings

Plenty of big US companies reporting Q3 earnings over the next week. Check the table below for indicative timing to watch.

Weekly Most Traded A-shares*

* Source: Bloomberg