It’s the USD that interest us most this morning, as the rate of change is moving into the top of its range, and it’s attracting just as much attention from the US President, as it is momentum-focused traders.
(USD index weekly chart)
JPY the place to be on open
At this stage, we can key off the FX open, where the USD has weakened 0.3% against the JPY, but this is not the USD finding fault, as the greenback is up against the higher beta AUD and NZD, and finding buyers against the CNH. We watch with interest, once again, at the CNY fix (11:15aest), and should the PBoC break rank and weaken the CNY by more than the street then we could see a negative move in risk as we head into the Asia lunch session.
The move into the JPY a likely reflection that Trump’s 15% tariffs have formally kicked in on around $110b of Chinese exports (to the US), and we’ve seen China come back placing tariffs up on $75b of US exports, and one questions if there was an element of the market expecting the implementation of tariffs to be put on ice, given the positive noises from both camps of late. It seems not.
The news flow from Hong Kong would not have gone unnoticed, and we watch to see if there is an increased response from the Chinese authorities. A Chinese manufacturing PMI print of 49.5 (vs expectations of 49.6) has also been a consideration for AUD and NZD sellers here, where we see NZDJPY and AUDJPY lower by 0.6% and 0.3% respectively. It won’t surprise then the S&P 500 and NASDAQ futures have re-opened and currently sit 0.6% and 1.0% lower respectively and this suggests when the likes of Aussie SPI futures re-open that they will do so about 40-50 points lower.
EURUSD moves in focus
Despite a whole barrage of ECB speakers last week, including somewhat hawkish commentary from Knot, Lautenschlager and Weidmann, throwing some uncertainty into the” kitchen sink” approach expected from the bank at the 12 September ECB meeting. The focus has been specifically on the break of 1.10 in EURUSD, and certainly, it was significant enough to garner the attention of Trump, who said the EUR is dropping “like crazy, giving them a big export and manufacturing advantage”. Let’s see how things stand on Wednesday when ECB chief economist Lane speaks in London (21:00aest), and he could really move the dial in a market which currently places a 47.7% probability that the ECB’s deposit rate is taken to -60bp and 52.3% to -50bp. The argument, like it is in many other nations, seems to be a growing call on fiscal policy as a support driver for economic fragility.
The fact Trump said the USD is the “strongest in history”, highlights the weight he puts on the trade-weighted USD, which sits at 130.66, and at an all-time high. We trade the USD index (DXY) though and whether we are looking at the feel and structure on the daily or weekly timeframe the set-up looks so bullish. The interesting aspect is, that while we will likely to see a better feel to this week’s US ISM manufacturing print, amid robust payrolls data, on Friday we saw a huge drop off in Friday’s University of Michigan consumer sentiment report, with around a third of respondents highlighting concerns around trade tariffs. If the soft data goes lower, then the Fed will try and get ahead of the curve. Let’s hear what NY Fed president Williams and Chair Powell make of the data this week, with keynote speeches due.
USD intervention grows a touch
However, with the USD strong and Trump making more noises on his disdain here. The question is, at what stage do we genuinely start to consider US Treasury intervention? The US really is the missing link to higher FX volatility, and if the US Treasury team, perhaps alongside the Fed, intervene then we can start talking currency wars with increased conviction, and this is where gold and silver go wild. And, not just because these metals are a clear hedge against negative real or nominal rates, but would stick out as a currency in its own right, with EM FX also working well in this environment.
We are not there yet, and the first port of call would be Steven Mnuchin putting intervention on the radar to scare off speculators. But for now, we look at the trigger points, and a trade-weighted USD 3-5% higher, with an increased rate of change, or, a USD index above 100,00 and eyeing a test of the January 2017 highs of 103.82 would raise FX vols. These levels would suggest we see a EURUSD into 1.0500, with USDCNY into 7.25 and that would not go down well at the White House.
EURUSD is tracking a few pips higher this morning, but, for now, the pair is holding the 1.10 handle and the 1 August low of 1.1027. The technical traders are focused on the 1.0960 area, representing trend support drawn from November 2017 low, and a move through here would only encourage the market to increase short exposures.
Trading the range in the S&P 500
The futures open will offer insights, and the lack of any inspiring news flow over the weekend offers no real bullish catalysts in a market which saw the S&P 500 close unchanged, with the market, yet again finding sellers into 2940/5 zone. The 2945 to 2822 range is clear and defined, and when this breaks, it will get great attention.
US Treasury’s found small buyers in the front-end, and 10s and 30s unchanged at 1.49% and 1.96% respectively, but we expect a stronger move lower on the re-open. The 2s 10s curve remains inverted, and that suggests staying cautious, even if we are coming into a seasonally strong period for risk, with the S&P 500 historically working well in the period up to 19 September, where we tend to fade the strength into options exportation, with gamma sellers and corporate buy-back blackout a driver.
(S&P500 seasonals – the last 10 years blended into one)
US crude 2.8% at $55.10 and sits 43rd percentile of the $60.94 to $50.52 range its established since late May, but futures have reopened 0.9% lower. and despite the S&P 500 energy sector closing +0.08%, one suspects Asian energy stocks will fare a little worse. With an open in the ASX 200 closer to 6550, Aussie traders also have a whole barrage of domestic data to navigate through this week. Tomorrow’s RBA meeting is the clear risk, although the market puts little weight on a cut (its priced at 13%), the AUD could still have a move if the bank removes “if needed” from the “ease monetary policy further if needed” in the last paragraph. A break of 67c would be big.
Published by Chris Weston, Head of Research, Pepperstone