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24 September 2018. Markets Weekly Analysis

°Global stock markets rallied as investors shrugged off trade tensions
°European Union officials were reported to be holding a Brexit Summit on 17-18 November, at which they aim to agree on a formal Brexit arrangement before the transition period begins in March next year
°In the coming week, the US Federal Reserve is widely expected to lift the federal funds rate by 25 basis points to 2.00-2.25%
Macro Data
For the US next week, the Federal Open Market Committee (FOMC) is widely expected to lift the fed funds target range by 25 bps to 2.00-2.25%. Policymakers have signalled a gradual pace of rate hikes amid healthy payroll gains, robust activity, and steady inflation.
Following the underwhelming CPI print, PCE core for August is expected to edge lower to 2.2% yoy, from 2.3% previously.
Turning to housing, the S&P Case-Shiller 20-City composite of home prices is forecast to dip 0.2% mom in the three months to July. This will modestly cool the annual pace to 6.2% yoy (+6.31% yoy prior) amid increasing affordability concerns and tight inventory of existing homes. Meanwhile, new home sales are expected to grow 0.6% mom to 631,000, with the recent trend slowing for the same reasons. Pending home sales are out later in the week and are predicted to edge 0.2% mom lower.
The Conference Board consumer confidence index is expected to stay at euphoric territory, cooling just 1.9 points to 131.5 in August.
Durable goods orders are anticipated to advance 1.7% mom in August, boosted by a bounce in commercial jet orders. The core non-defense capital goods ex-aircraft measure is envisaged to increase by 0.4% mom, downshifting after four months of solid gains.
Germany’s Ifo Business Climate Index is expected to stabilise at around the 103 level in September. This follows a large rebound in the index in August, following significant declines in early 2018, as the overall eurozone economic environment stabilised and the EU negotiated a ceasefire in trade tensions with the US.
The flash estimate for eurozone inflation in September is expected to edge up slightly August’s prints, with both headline and core inflation rising 0.1 percentage points to 2.1% and 1.1% yoy respectively. This would return the headline number to July’s rate, which is the highest since December 2012. Core inflation pressures remain muted for the time being, however.
Emerging markets Japan’s jobless rate is expected to stabilize at 2.5% in August, as survey-based signals (the employment component of the Economy Watchers Survey and EPA consumer confidence survey, as well as the manufacturing PMI) during the month were little changed, although mostly edging down slightly.
Japan industrial production for August is expected to rebound by 1.5% mom, after three straight months of losses, although concerns about US-China trade tensions will continue to weigh on exporters.
Market moves
US stock markets started the week off lower, as President Trump announced a 10% tariff on USD200 billion worth of Chinese imports starting on 24th September. However stocks recouped their losses amid fading trade war concerns and a strong rally in technology shares. Overall, the S&P 500 Index gained 0.8%. Canada’s S&P/TSX Composite Index also rallied this week, up 1.3% on investor hopes of a NAFTA deal.
European equities tracked US stocks to end the week higher, with investor sentiment lifted by news that China is planning to cut tariffs on non-US imports from the majority of its trading partners, possibly as soon as next month. The regional EURO STOXX 50 Index rallied 2.6%. All other national bourses also rose this week: Spain’s IBEX 35 gained 2.4%, France’s CAC 40 rose 2.6% and UK’s FTSE 100 rose 1.0%.
Asian stock markets excluding India, posted weekly gains, led by Chinese and Japanese stocks, amid signs of easing trade tensions and taking a positive lead from US equities. Japan’s Nikkei 225 and China’s Shanghai Composite rose 3.4% and 4.3%, respectively. Indian stocks ended the week lower, dragged down by financials shares on Friday.
US Treasury yields rose and prices fell for a fourth consecutive week with much of the weakness occurring on Tuesday, as US-China trade tensions forced investors to assess the outlook for inflation. Overall, two-year Treasury yields rose 2 bps to 2.80% and 10-year yields rose 7 bps to 3.06%. Canadian government bond yields also rose, with 10-year bond yields adding 9 bps to 2.43% amid better than expected manufacturing sales and retail sales ex auto releases for July.
Core European government bond yields edged up (prices fell) this week amid increased supply in the region including bond auctions from Germany, France and Spain. Benchmark German 10-year yields closed up 1 bp to 0.46%, while UK equivalents underperformed (10-year yields rose 2 bps to 1.55%) amid higher than expected CPI and retails sales data for August. In contrast, 10-year Italian bonds rose (yields fell 15 bps to 2.83%) as investor focus remained on the progress over budget talks.
The British pound ended flat against the US dollar this week, supported by stronger than expected retail sales data. However, sterling later pared back some of these gains on Friday following reports that UK Prime Minister Theresa May rejected the EU’s Brexit offer around the Irish border. The euro also gained (+1.1%) against the greenback.
EM Asian currencies appreciated against a generally weaker USD this week, amid improved risk sentiment. However, the Japanese yen weakened on reduced demand for safe assets.
Crude oil prices rose this week, with big gains occurring on both Tuesday and Wednesday. The support came from reports that Saudi Arabia would be comfortable letting Brent oil prices rose above USD80 a barrel, and that US’s crude inventories declined last week. WTI rose 3.0% to USD70.8 a barrel and Brent oil prices rose 0.9% to USD78.8 a barrel.
Gold prices rose this week (+0.5% to USD 1,199 per troy ounce) on a softer US dollar.
Regards Anyone.
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Currency (FX) Report 24 September 2018

The Euro-zone flash September PMI manufacturing reading declined to 53.3 from 54.6 and significantly below consensus expectations of 54.4. The services index advanced to 54.7 from 54.4, but the data overall hampered Euro sentiment.  There was mixed US PMI data as the manufacturing sector strengthened to a 4-month high of 55.6 from 54.7. In contrast, the services-sector index dipped to an 18-month low of 52.9 from 54.8 amid some evidence that shutdowns ahead of Hurricane Florence curbed activity. Cost pressures increased with the sharpest pace in services-sector output prices for nine years. Unease surrounding the risk of increased costs was amplified by the potential impact from tariffs on US imports from China, especially with numerous corporate warnings over cost pressures. Increased inflation pressure would maintain pressure for further Federal Reserve rate hikes, although there would also be potential unease surrounding US corporate earnings and medium-term US fundamentals. On a shorter-term basis, overall yield spreads underpinned the dollar.  The Euro was also hampered by a fresh bout of pessimism surrounding Brexit talks which undermined confidence in European currencies and the dollar retreated to just below 1.1750 after failing to break above the 1.1800 level. ECB council member Nowotny stated that he would like to speed up policy normalisation, although he is on the hawkish end of the spectrum and the majority is likely to be more cautious with the Euro trading slightly lower on Monday.
The dollar maintained a strong tone against the yen ahead of Friday’s New York open amid firm sentiment surrounding risk appetite, although there was resistance on approach to the 113.00 area. US yields declined slightly from 4-month highs after the US data releases which curbed the potential for fresh dollar buying and the dollar retreated to the 112.50 area.  CFTC data continued to record a substantial short yen position, maintaining potential headwinds for the US currency. US-China tensions remained an important focus with China stating that planned mid-level talks with the US had been cancelled while Trump’s rhetoric remained generally hawkish which maintained concerns over further escalation in the dispute. Overall market reaction was limited as several Asian markets including China and Japan were closed for holidays. The dollar was little changed and held just above 112.50 as overall yield spreads helped underpin US demand.
Political developments dominated Sterling trading during Friday with weaker sentiment following the Salzburg Summit and initial rumours of a major statement by Prime Minister May. The UK currency gradually lost ground and then dipped sharply as May stated that Brexit talks were at an impasse and also called on the EU to make concessions. In very choppy trading Sterling declined sharply to lows below 1.3070 against the dollar while the Euro strengthened to highs near 0.9000 with the UK currency registering the sharpest daily decline since early 2017 as fears over failure to reach a Brexit deal intensified. CFTC data recorded a further increase in net short, speculative positions to the highest level since May 2017, maintaining the potential for a sharp positioning squeeze if there are positive political developments.  Uncertainty remained a key factor, especially with doubts surrounding Labour Party policies on any second referendum with Sterling unable to regain ground on Monday as markets waited for further developments. The wave of media comments and speculation continuing to hamper Sterling backing as it traded around 1.3070 with markets also waiting for EU rhetoric.
The Swiss franc was resilient on Friday as the Euro retreated to the 1.1260 area after failing to hold above 1.1300. The dollar did make headway, although it was unable to regain the 0.9600 level. Fresh market unease surrounding Brexit talks had some impact in underpinning the Swiss currency and helped offset the underlying negative influence of adverse yield spreads. Global equity markets held steady with no significant adverse reaction to the US-China tensions and the franc was slightly weaker amid expectations that the National Bank would resist gains.
Regards Anyone
Posted in Fx Market

G10 FX Week 23-29 Sept. 2018

Having seen risky assets survive the latest escalation in the US-China trade war, investors have rushed to cut long USD/short EM positions. And we’ve seen some substantial rallies in commodities too. However, were it not for the adjustment of long dollar positioning, we doubt markets would be looking so rosy. We’re cautious on risk in the week ahead.
EUR: Big events, limited spillover
The Federal Reserve’s rate hike next week on Wednesday is all but a done deal. Rather the focus will be on any potential shift in the FOMC bias. In this respect, the key thing to watch would be any reference to the risks stemming from trade wars / emerging markets slowdown (as this would be dollar negative). Yet, we expect the FOMC to remain focused on the domestic situation and continue pointing to further tightening ahead. Also, note that two new hawkish FOMC members will be submitting to dots which should reiterate the current signal from the dotted diagram of three hikes next year. Overall, the interest rate forecast, GDP and CPI profiles should remain unchanged, meaning a fairly limited reaction in USD.  2Q GDP could be revised marginally higher, but this is unlikely to be enough to prompt a materially higher USD as two rate hikes are already priced in for this year and another two for 2019.
In the Eurozone, we should see modest improvement in core inflation, rising to 1.1% on the back of labour market improvements and second-round effects of higher oil prices, with headline CPI staying at 2%. This shouldn’t change the ECB current autopilot (with quantitative easing signalled to end by end of the year and the first depo hike to be delivered after summer 2018). Rather the EUR/USD price action should remain driven by technical positioning and stop losses next week. We look for EUR/USD to range trade around 1.1700 – and want to see how it trades on Tuesday/Wednesday when the Italian populist government submits its 2019 budget.
JPY: Pure Fed play
USD/JPY has notably withstood the broad capitulation of long dollar positioning – and it’s easy to see why. The large early year US tax cut and aggressive repatriation of overseas earnings is helping US growth and the stock market. So the US risk environment looks very good indeed. US rates are also breaking to new cycle highs and on balance we see this week’s Fed risks as dollar positive. The relatively flat yield curve and more expensive USD hedging costs are keeping USD/JPY bid.
The Bank of Japan story remains on the back-burner, although Wednesday will see a press conference from BoJ Governor Haruhiko Kuroda as the latest BoJ minutes are released. We’ll see the latest figures for industrial production – expected to pick up after a soft summer. So far the fall out from the global trade war hasn’t been acute in Japan. Indeed BoJ statements continue to refer to a ‘virtuous circle’. However, we should keep our eyes peeled for signs of declining export volumes and industrial production – warning of much slower trade growth into 2019.
GBP: Chequers mate!
Early week GBP optimism gave way to abject pessimism as it became clear that EU leaders hadn’t budged an inch in their stance on Brexit. Prime minister Theresa May delivered a very blunt speech on Friday, where the phrase ‘no deal is better than a bad deal’ made a re-appearance. We doubt the tone lifts over the coming week, where PM May will continue to adopt a hard-line ahead of a Tory party conference which begins on 30th September. While we still feel a deal will be agreed, developments in Salzburg this week suggest negotiations will run right up to the wire – which potentially means late December since UK parliament would need a meaningful vote by 21st January 2019.
Away from politics, we’ll see a variety of Bank of England speakers this week including Mark Carney and Andy Haldane. The market struggles to see one full 25bp rate hike over the next twelve months and it’s easy to see why. On the data front, we’ll just see some CBI retail data and the 2Q18 current account data. This has narrowed a lot since Brexit, and our models suggest this has contributed to a slightly stronger fair value reading for GBP. That actually means GBP is even more under-valued at current levels
CHF: The safe haven
The safe haven attractiveness of the franc remains in place. While the main driver behind the lower EUR/CHF in recent months was the political situation in Italy, this is now replaced by the Brexit uncertainty, with the CHF inversely matching the latest GBP selloff. As per above, we don’t look for the situation to improve next week ahead of the Conservative party conference, suggesting that the downside pressure on EUR/CHF is set to continue. We expect to see EUR/CHF break below the 1.1200 level next week.
On the domestic data front, it’s a very calm week after last week’s Swiss national bank meeting. The usual focus is on the Sight deposit data due Monday and the September KOF leading indicator due Friday. however, all these data points should be secondary to the Brexit related sentiment.
CAD: Still no progress on NAFTA
We look for NAFTA negotiations to continue and while the bar for a deal between the US and Canada happening next week remains very high, we don’t expect CAD negative news as the expectations for an immediate resolution aren’t very high. This means that USD/CAD should remain driven by the general risk appetite where we look for a largely neutral environment following the risk rally this week.
On the domestic data front, we look a minor uptick of 0.1% month on month in July’s GDP print and a rise in July retail sales, from the -0.2% MoM downfall in June. None of this should have a material impact on Loonie following the surprisingly high July CPI print last month which led to a meaningful re-pricing of the market outlook for the Bank of Canada.
AUD: Copper bottomed
The commodity complex is enjoying a resurgence, including an 8% rally in copper over the last week. The AUD has gone along for the ride and is challenging a big technical level at 0.7300 – which defines the bear trend since January. Long dollar positioning is probably the biggest friend for AUD/USD right now – although, on paper, the coming week presents many headwinds for AUD/USD. President Trump’s $200bn of tariffs against China go into effect on Monday. Presumably, China retaliates immediately, and Washington threatens to slap tariffs on the remaining US imports from China. And dollar rates look firm to higher. The story as we see it, then, is whether 0.7300 holds or a short squeeze triggers a move to the 0.7360/80 area. We marginally prefer the former
Locally the data calendar is light, with just private sector credit growth released. Money markets show a pretty flat AUD curve out to one year, with 50bp of hikes in year two. It’s hard to see that changing too much in the near term –  but growing headwinds to global activity suggest those expectations could be cut.
NZD Bear market bounce
NZD/USD is enjoying one of its periodic bounces, largely on the back of liquidation of stretched long dollar positions. We struggle to see more of a re-assessment of the global environment at present, given no let-up in the trade war and no signs the Fed is prepared to slow the pace of tightening. We think this correction probably runs out of track in the 0.6725 area.
The Reserve Bank of New Zealand has a meeting this week, and it looks likely it’ll stick to the script of no rate change for two years with a symmetrical bias around a 1.75% policy rate. Both business and consumer confidence look fragile, and with China growth slowing, the chances of a more positive turn seem low. We’d like to have much more clarity on both protectionism and Fed policy, before declaring a major cycle low in NZD/USD.
Regards All.
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