A more upbeat tape seen in US equities, with the S&P 500 closing +0.8% (84% of stocks higher on the day), coincided with a five-basis point tightening of US high yield credit spreads and sanguine moves across the US treasury curve, have opened up the prospect of a positive close to the week here in Asia.
Notably, the ASX 200, while likely to open on a fairly flat footing, holds the technical foundations for a more convincing break-out of the 6200-6300 range it found itself in since early July. So, watch the open in Australia as it could tell a lot about semantics and a move through 6330 and a higher high would be bullish and suggest the index could be establishing a new trading range. The bulls will also point out that on 15.8x forward earnings the Aussie index is by no means at alarming levels and has scope to push into 16x to 16.5x before greater vulnerabilities materialise.
(ASX 200 fundamentals. Green – Consensus 12m EPS estimates, white – Consensus 12m P/E)
(source: Bloomberg)
The Nikkei 225 and Hang Seng both look likely to open between 0.5% and 1% higher and while the mainland Chinese equity markets could follow suit, its hard to get too excited about the ‘low level’ trade talks taking place next week (22 and 23 August) between the Vice Commerce Minister Wang and a US group led by David Malpass, former undersecretary for international affairs at the Department of the Treasury. As we have seen from various market moves overnight, some have taking this meeting as a cue to add risk to portfolios, but market participants should question this stance and ask whether we are really going to get a breakthrough in the trade tensions from these players? It certainly seems unlikely, and the US are still highly likely to place $200b of tariffs on Chinese imports in September and we are then back to square one.
Perhaps the bigger focal point next week will prove to be the Jackson Hole Symposium on Friday, with Jerome Powell set to deliver a speech on ‘Monetary Policy in a Changing Economy’. This forum has been the stage for some dramatic shifts in US monetary policy in years gone by, but whether there is the concern yet for Mr Powell to deviate from the fairly upbeat script seems unlikely – at this stage, that is.
Certainly, the Fed chair will be comforted to a degree that Donald Trump has had a change of heart on recent USD strength, tweeting overnight that ‘money is pouring in our cherished DOLLAR like rarely before’. One questions if this reversal of language around the exchange rate is the contrarian signal the USD bears have been waiting for!
Staying in China, we continue to watch moves in the CNY and CNH after Chinese authorities put in measures to affect liquidity in the offshore (CNH) market, which was again aimed at those holding CNH short positions and again making shorting the yuan more expensive. This was characterised by a 500bp spike (the largest one-day move since January 2016) in 12-month CNH funding. USDCNH has collapsed 1.2%, which doesn’t sound like a lot for those trading any G10 and EM cross, but this is the biggest move lower since 4 January 2017. Again, the question is whether this is sustainable and while we are certainly likely to see better two-way flows in CNH from here, it is hard to see a collapse in the pair – but the prospect of a consolidation moves in the next week or two seems elevated.
The move lower in USDCNH put a modest bid in precious metals as well as AUDUSD and NZDUSD, which were the two outperformers in G10 on the day. AUDUSD traded to a session high of $0.7287, just above the 5-day exponential average (EMA) at $0.7275, before traders faded the move a touch. The longer price can hold below the former multi-week range low of $0.7311 (see Bloomberg chart below) the greater the probability the market will look to take this pair into the December 2016 lows of $0.7160, although we will need to see USDCNH find better buyers again.
(AUDUSD daily chart)

We have seen two key pieces of Australian economic data this week in the form of Q2 wages and July employment, but neither would have altered the RBA’s thinking, and we can see the Aussie rates market and front of the treasury curve fairly well anchored. The event risk continues to roll in with RBA governor Lowe due to deliver the RBAs Semi-annual testimony at 09:30AEST and Luci Ellis due to speak at 17:30AEST. Neither seem likely to affect market pricing too greatly, although the RBA can mark-to-market, aggregate and communicate all the cross-currents taking place in the capital markets, with evolving concerns on how liquidity is affecting emerging markets and the potential feedback loop in economics.
EURUSD caught a bid pushing into $1.1409, and while US data was on the soft side, with a terrible Philadelphia Fed manufacturing report and uninspiring housing starts and building permits, this wasn’t the trigger for USD weakness. That said, sellers have emerged into the five-day EMA at $1.1390, and until EURUSD can close above this average, the prospect of lower levels is still the base-case. Happy to re-assess should we see price close above the 5-day EMA and subsequently we can see a move through the 13 August high of $1.1433. One to watch.
Published by Chris Weston, Head of Research, Pepperstone