Head of FX Strategy
Summary: The US dollar is neither here nor there as the market awaits US-China trade talks and a sense of what the Fed has planned for its balance sheet operations and US jobs data held up well enough in September to avoid an immediate sense that the Fed is set to slash rates. The action at the moment is in sterling and the Scandies, where the latter are scraping near or at new lows.
Somehow, markets cobbled together a rally overnight that was entirely erased as of this writing, as we await the outcome of US-China trade talks later this week. The market seems hopeful that the talks will move toward a détente or better, with China perhaps promising to purchase large amounts of US goods (agricultural goods are the hot button issue for Trump) while the US side may adjust its tariff schedule. But we see it as highly unlikely that a more comprehensive deal is in the works, as China will never agree to the oversight the US side as proposed in the past and the difficult issue of technology transfer. Just yesterday, the US announced the blacklisting of eight companies accused of participating in human rights abuses in Xinjiang with surveillance technologies. This kind of news is hardly a promising prelude to talks and China has vowed to respond to the blacklisting.
On a more popular level, there is also the story of a US NBA (professional basketball) team’s general manager tweeting something in support of Hong Kong protesters, which has unleashed a robust Chinese response and could risks escalating the US-China showdown further down on the level of populist politics. As well, we have to consider that Trump is under explosive pressure on all fronts politically and could prove far less willing to agree to a deal than the markets or the Chinese negotiators believe, if he feels he can win on the populist front by scuttling talks and successfully transfer the blame for collateral damage in markets on the Powell Fed and the impeachment efforts.
Sterling has been creeping lower and lower in recent sessions as the market fears that Boris Johnson is willing to see a constitutional showdown with Parliament over a no-Deal Brexit if he can’t get enough from the EU side to agree to a deal, while the EU side may be hoping that Parliament can win that confrontation, that it can get another delay via Parliament or with a caving Boris Johnson and that it eventually perhaps has a different negotiation partner after UK elections later this year (or even a reversal of Brexit in the event of a second referendum). It is clear from the detailed rejection that the EU gave to Boris Johnson’s latest proposal that the two sides remain far apart. All the while, the UK recession is here and now and likely set to worsen.
The Turkish lira dropped sharply yesterday as the market was concerned that Turkish incursions into Syria and against Kurdish forces there could unleash a President Trump response, as the US president has been sending conflicting signals on US policy in the region. Trump tweeted, in a way it seems only he can: "As I have stated strongly before, and just to reiterate, if Turkey does anything that I, in my great and unmatched wisdom, consider to be off limits, I will totally destroy and obliterate the Economy of Turkey (I’ve done before!)."
EURNOK has pulled above 10.00 again despite a fairly supportive backdrop of buoyant risk appetite in recent sessions. Weak oil prices are weighing here, but so too is the general concern on the global economic outlook, perhaps concerns that Norway’s fossil fuels output are not a 30- or 50-year cash cow for the country, but perhaps half of that or less if climate policy across Europe sees a radical shift. A further squeeze higher is the overweening risk if global risk sentiment takes another dive similar in scale to the recent one – perhaps on disappointing or indifferent US-China talks or a weak beginning to earnings season. There may be the complacent assumption out there that 10.00 is a ceiling after every approach (this is the third major foray near the level since late 2017), such that if significant separation with that level is achieved, an ugly squeeze could be as those short volatility – or unhedged – are forced to pile on to the move.
The G-10 rundown
USD – the Friday US jobs data failed to confirm the weakness in other data, extending the suspense on when the Fed will slash rates more aggressively. Meanwhile, the market awaits the direction of US-China trade talks and the October 30 FOMC meeting, where the Fed will need to lay out its intentions for balance sheet operations.
EUR – the euro gaining some support, perhaps, by the general sense that the ECB is at the end of its road policy wise, but would make more of a point on a solid close above 1.1000 in EURUSD and really needs to bull up through 1.1075-1.1100 to get something started technically.
JPY – Japan’s leading indicators looking very ugly as the market frets the economic damage from the sales tax hike and suspects that the BoJ is warming up for more policy action at its meeting at the end of the month, though we fail to see where the BoJ thinks it can gain leverage over the situation..
GBP – will Johnson cave on his “no extension” vow or will he provoke a constitutional crisis with Parliament by trying to allow a No Deal to unfold? His negotiating position with the EU seems so far from what the latter finds acceptable to believe that a Deal rabbit can be pulled from the hat before the end of the month.
CHF – the Swiss franc tried to get interesting recently as the EURCHF rally didn’t fit with the general backdrop – but this never developed and the pair is stuck in limbo, with the franc perhaps finding a bid at the margin on Brexit concerns ratcheting higher again.
AUD – the AUDUSD is dead in the water ahead of US-China trade talks. Watching the Australia Oct. Consumer Confidence reading tonight with interest, as confidence readings are most closely correlated with the labour market, the RBA’s chief area of concern.
CAD – so far we have seen zero follow through higher in USDCAD after the recent snapback rally as the pair has failed to break the top of the range. Heavier Canadian data calendar through the end of this week, including Friday’s jobs report.
NZD – scoping out levels for re-entry in long AUDNZD positions – real value doesn’t show up until 1.0600 or even a bit lower (200-day moving average currently just below 1.0550) unless we see isolated negative NZ developments.
SEK and NOK – the Scandies looking doubly weak because the backdrop has been otherwise nominally supportive over the last couple of sessions. Both countries report September CPI levels on Thursday.
Upcoming Economic Calendar Highlights (all times GMT)
- 0900 – Norway Norges Bank’s Governor Olsen to Speak
- 0930 – ECB’s Lane and others to Speak
- 1215 – Canada Sep. Housing Starts
- 1230 – US Sep. PPI
- 1735 – US Fed’s Evans (Voter) to Speak
- 2330 – Australia Oct. Westpac Consumer Confidence
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