- GBP took a beating on Friday after PM May's speech.
- The currency pair created a gravestone doji on the weekly chart, signaling bullish exhaustion.
- Talk of a snap election is ‘for the birds’, Brexit minister said.
The GBP/USD fell more than 200 pips to a low of 1.3055 on Friday after PM Theresa May said the Brexit negotiations have reached a standstill.
The sharp decline ended up creating a gravestone doji on the weekly chart - a candlestick pattern which indicates that last week began with optimism but ended on a pessimistic note. Essentially, the gravestone doji is signaling bullish exhaustion.
The bears may feel emboldened if the pair finds acceptance under the last week's low of 1.3055, while a move above 1.3277 (last week's high) would strengthen the bull grip.
That said, Brexit newsflow will likely decide which way the Pound will go. The snap election plans came to light over the weekend, courtesy of Brexit deadlock, however, UK Secretary Dominic Raab has ruled out November snap election.
The British pound may also come under pressure if September CBI industrial trends survey data, scheduled for release at 10:00 GMT, shows a big drop in manufacturing orders.
GBP/USD Technical Levels
Resistance: 1.3098 (Sept. 19 low), 1.3150 (200-day MA), 1.3277 (Fri's high)
Support: 1.3055 (Fri's low), 1.30 (psychological support), 1.2979 (50-day MA)
As noted by Reuters, the UKIP, or UK Independence Party, the grassroots political upstart that hopes to steer Britain head-first into a hard-Brexit scenario as the self-styled 'People's Army' of independent conservatives that hearken to the US libertarian movement, is struggling to remain relevant as larger forces take over the Brexit narrative, leaving the spunky political party that is big on slogans but light on details is facing a fracturing from within, implying that the UKIP's time may be short.
Half of UKIP's base sees themselves fading out of relevance as the party's political support and influence evaporate in the UK, while the other half look to defect into Prime Minister Theresa May's own Conservative party in an effort to usurp the seat of power and install a political ally that has more in common with their Eurosceptic viewpoint.
A lack of clarity at the helm of UKIP sees more divisive ideas about the party's future allowed to float to the top, according to Reuters:
Party leader Gerard Batten says that level of support would give UKIP influence again, forcing nervous lawmakers from larger parties to confront the threat of losing votes to eurosceptics. “If there were a snap election in October we could cause havoc in marginal seats on 7 percent ... ‘Remainers’, we know where your constituencies are and we are coming for you,” Batten said in his conference speech. But the party is also looking to drum up support from the far right by becoming more critical of Islam. That has unnerved many - including talismanic former leader Nigel Farage, who split opinion at a UKIP dinner in Birmingham when he voiced concern it could prevent the party regaining mainstream appeal. - Reuters
- The EUR/USD fell on Friday, tracking the 10-year spread between the US and Germany (DE) yield differential.
- The wider yield differentials and potential risk aversion in equities could cap upside in the EUR/USD ahead of the Fed.
The EUR/USD created an inverted hammer on Friday, as the weaker-than-expected September Eurozone PMI readings pushed the US-German yield differentials to new highs.
For instance, the spread between the two-year US treasury yield and German two-year bund yield rose to 336 basis points, the highest since 1988. Further, the 10-year yield spread rose to a new 29-year high of 261 basis points.
The yield differentials could widen further in the EUR-negative manner if the German Zew surveys, scheduled for release at 08:00 GMT, disappoint expectations.
The common currency may also come under pressure if the European and US equities respond negatively to a decision by China to scrap trade talks with the US.
At press time, the currency pair is trading at 1.1740.
EUR/USD Technical Levels
Resistance: 1.1785 (Thursday's high), 1.1803 (Friday's high), 1.1852 (June 14 high)
Support: 1.1720 (5-day moving average), 1.1681 (200-hour moving average), 1.1660 (100-day moving average)
Comments from China's Unipec, the trading arm of state oil major Sinopec, are crossing the wires via Reuters:
- China will have to reduce Iranian oil imports, but the volume has not been decided
- Crude oil t $60-$80/barrel is normal
- China-US trade war tensions to be temporary
- The GBP/JPY's pullback from the highs of 149.70 seems to have run out of steam at the 200-hour moving average (MA) support.
- The bullish divergence of the relative strength index (RSI) and the bull cross on the MACD, as seen in the hourly chart, indicates scope for a re-test of 5-day moving average (MA), currently located at 147.78.
Spot Rate: 147.27
Trend: Mildly bullish
R1: 147.61 (23.6% Fib R of Friday's drop)
R2: 147.78 (5-day moving average)
R3: 147.94 (100-hour moving average)
S1: 147.15 (Aug. 1 high)
S2: 146.97 (10-day moving average)
S3: 145.96 (38.2% Fib R 138.90/149.72)
The Trump administration is planning to launch a major "administration-wide," which will include the White House (led by senior officials on the National Security Council), Treasury, Commerce and Defense broadside against China, according to axios.com.
"We're not just going to let Russia be the bogeyman," one White House official told axios' Jonathan Swan. "It's Russia and China."
- Spot gold dropped heavily on Friday and has been trading with a bearish tendency in thin holiday Asian markets at the start of the week.
- Spot gold is currently trading at $1,196.37 vs a high of $1,199.68 and low of $1,195.98.
- DXY to gain some strength into the FOMC to pressure Gold.
The dollar could find some support and demand into the FOMC this week while the price of the precious metal was trodden on by bears that took their cues from the trade war angst that has heated up over the past few sessions, supporting the greenback. However, that didn't stop Wall Street and the benchmarks continuing with their impressive performance, underscoring optimism about the U.S. economy. However, as we move through the week, things will fire up on the scheduled FOMC while ears will be left on the ground for any implications resulting from the Chinese not playing dancing to Trump's song in the tariff war.
The Chinese have refused to attend trade talks
The Chinese have refused to attend trade talks that were scheduled for this week and that risks retaliation from the White House that may impose tariffs across the remaining Chinese imports. Earlier in the month, President Trump said that he was ready to impose tariffs on 100% of goods if Beijing did not change its trade practices - It’s time to take a stand on China,” Trump said in an interview late Thursday with Fox News. “We have no choice. It’s been a long time. They’re hurting us.”
However, China plans to retaliate on the US’s $200 billion tariffs round by slapping levies on $60 billion of American goods and marking a steady march toward a long-term competition between the two nations. On Friday, China demanded the US withdraw penalties it placed on a defence agency and its director for purchasing Russian weapons in violation of American sanctions or “bear the consequences,” which is the latest round of shots fired and we await to hear Washington's response this week.
- The week ahead: week will kick off with RBNZ and FOMC - Nomura
As noted by Omkar Godbole, an analyst at FXStreet, "Gold is stuck in a narrow range and could suffer a downside break if the Fed stresses on overshooting the neutral interest rate."
- Gold Price Forecast: Range play intact, focus on Fed's forward guidance
"Essentially, gold has created a big bearish outside-day candle today, still, the immediate bias remains neutral, the technical chart indicates. "
"A break below the channel support could be considered a sign the corrective rally has ended and could yield a re-test of the August low of $1,160."
- Week Ahead Commodity Report: Gold, Silver & Crude Oil Price Forecast (Video)
The global economy could face a “relapse” of the crisis that rocked the world a decade ago and more importantly, there would not be enough "medicine" available to treat the problem this time, the Bank f International Settlements (BIS) warned in its annual report on Sunday.
Key quotes by BIS Chief Economist Claudio Borio (Source: Asia Times)
The recovery after the 2007-2008 global financial crisis had been “highly unbalanced,” with emerging economies especially under pressure.
The unconventional policies implemented by central banks had helped boost economic activity, “but some side effects were inevitable.”
The ongoing crisis in Turkey and Argentine are “withdrawal symptoms” resulting from the central banks lowering the dosage.
US and Canadian negotiators could hold informal talks on the sidelines of the U.N. General Assembly meeting in the next few days, Canadian Prime Minister Justin Trudeau said on Sunday.
Senior officials from both countries who have been taking part in the talks are due to be in New York on Monday and Tuesday, according to Reuters News.
- The AUD/JPY gapped lower in Asia, courtesy of the risk-off developments over the weekend.
- The pair is back attempting a break above the 200-day MA
The early morning surge in the Japanese yen was short-lived.
At press time, the AUD/JPY is looking to scale the 200-day MA of 81.92, having gapped lower at 81.62 earlier today, courtesy of the risk-off events over the weekend. To start with, China called off trade talks with the US and won't be sending vice-premier to Washinton, according to the Wall Street Journal.
Further, US sanctioned Chinese military agency and its director for buying Russian military equipment, forcing the world's second-largest economy to cancel military talks with Washington.
As a result, JPY opened higher across the board. However, the anti-risk Japanese currency has erased early gains, possibly due to a drop a 0.30 percent decline in the offshore yuan exchange rate (CNH). It is worth noting that JPY and other Asian currencies tend to closely follow the action in the Chinese currency.
Also, the early decline was short-lived, seemingly due to decreased prospects of further escalation of the trade war between two biggest economies of the world. Moreover, risk assets cheered China's watered-down response to new US tariffs last week.
Technically speaking, the bias remains bullish, although Friday's doji candle calls for caution. A break above 82.36 (Friday's high) will signal a continuation of the rally from the Sept. 7 low of 78.68.
Resistance: 81.92 (200-day MA), 82.36 (Friday's high), 82.80 (Aug. 8 high)
Support: 81.62 (session low), 81.70 (5-day MA), 81.32 (50-day MA)
- The Aussie heads into the new trading week in a precarious technical stance, with Monday kicking off with a sharp downside gap for the AUD/USD after weekend headlines reported that China has snubbed the idea of any more trade talks with the US.
- The AUD peaked just north of the 0.7300 major handle last week, and buyers will be hoping that broader market sentiment holds steady long enough for another run at 0.73.
AUD/USD Chart, 1-Hour
|Current week change||0.15%|
|Previous week high||0.7304|
|Current week low||0.7260|
|Support 1||0.7236 (21-day EMA)|
|Support 2||0.7228 (200-hour EMA)|
|Support 3||0.7085 (2018 current low)|
|Resistance 1||0.7291 (50-day EMA)|
|Resistance 2||0.7381 (August 21st swing high)|
|Resistance 3||0.7499 (200-day EMA)|
The Ready Reckoner, which quantifies the impact that recent data will have on the RBNZ's model, quantified in terms of changes to the model's Official Cash Rate forecast, was released by analysts at Westpac Banking Corporation.
"The Ready Reckoner is meant to be a pure read on the balance of recent data, and is not a prediction of the RBNZ’s actions. At present, the RBNZ appears to be in a state of flux, adjusting to the new dual mandate and to the new Governor's views. Consequently the Ready Reckoner, with its pure read on the data, may be not be the best guide as to how the RBNZ's tone will evolve. Still, the Ready Reckoner is useful for tracking what recent data will mean to the RBNZ.
Near-term inflation: +5bp
September quarter inflation is now forecast at 0.7%, compared to the RBNZ's forecast in the August MPS of 0.4%. However, the difference is down to rising petrol prices, which have less impact on the Ready Reckoner.
June quarter GDP was 1.0%, compared to the RBNZ's forecast of 0.5%.
Exchange rate: +5bp
The TWI has consistently been trading about 1% lower than the RBNZ's August MPS forecast. We assume that about half of this will be treated as a portfolio shock by the RBNZ, and about half will be assumed due to NZ factors (the latter half has no impact on the Ready Reckoner).
Export prices: -10bp
Dairy auction prices have fallen well below the RBNZ's assumed level of around $3000 per tonne.
Fixed mortgage rates: +5bp
Average advertised fixed mortgage rates have fallen by amounts that vary across the yield curve - 7 basis points for six months, up to 40 basis points for four and five years.
Total change: +20bp"
Ahead of this week's RBNZ, analysts at TD Securities explained that upbeat recent activity via exports, retail card sales, housing and strong GDP are mitigated by trade risks, low CPI and dismal business sentiment.
"Unanimous consensus expects the OCR to remain at 1.75% and the Governor to muse that the OCR could move “up or down” as per the Aug MPS. Dropping “we expect to keep the OCR at this level ... into 2020” is an unlikely hawkish twist."
"Tier 1 indicator for the RBNZ and the day before the OCR Review. Confidence (prior -50) and own activity (prior +4) are 2008 recession levels. While Q2 GDP was strong, negative investment and employment intentions suggest a H2 slump, and so a recovery would be hawkish for the NZD. Inflation expectations on target at 2.2%, but the RBNZ is looking elsewhere just now."
All 18 economists polled by Reuters expect the Reserve Bank of New Zealand (RBNZ) to hold its cash rate at 1.75 percent when it reviews monetary policy on Thursday.
Further, the majority of economists expect the central bank to hold rates at 1.75 percent - where it has been for nearly two years - until the end of the third quarter of 2019.
Meanwhile, six of the 18 economists expect at least one rate hike by the end of 2019.
Analysts at Nomura offered a preview of the key events for the week ahead.
United States | Data preview
The September FOMC meeting is in focus this week.
Case-Shiller home price index (Tuesday): After rising firmly for almost two years, the Case-Shiller home price index for major cities (composite 20-city) cooled in recent months. The slowdown coincided with easing of existing home sales over past several months. While the strong labor market likely remained supportive for demand, worsening home affordability, partly driven by higher mortgage rates and prices, are likely exerting some downward pressure. Overall, we expect steady increases in August Case-Shiller composite 20-city index
Conference Board’s consumer confidence (Tuesday): We expect a healthy reading of 133.0 for Conference Board’s consumer confidence index for September, mostly unchanged from August. The University of Michigan survey indicated continued optimism with improvement in buying plans for autos and household durable goods. The strong labor market has remained supportive for consumer confidence despite escalating trade tensions. Conference Board report for September will likely follow this trend. That said, the recent escalation of US-China trade tensions could have a material impact on consumer sentiment in the following month as many consumers goods are targeted by the finalized list of $200bn imports from China subject to 10% tariffs.New home sales (Wednesday): We expect new home sales to decline 3.0% m-o-m to 608k saar in August, following soft readings for housing starts. Permits for new singlefamily housing declined sharply in August, suggesting weaker sales activity in the month. Although m-o-m readings can be volatile due to a relatively small sample size, we expect only modest improvement in the underlying pace of new home sales as inventory remains low. Slower sales activity so far in Q3 will likely lower residential investment
FOMC meeting (Wednesday): At this point, it would be a significant surprise if the FOMC did not raise interest rates at the upcoming September meeting. The economy has remained strong, supported by substantial fiscal stimulus. Recent FOMC minutes and participant comments all point to another step in removing accommodative policy. On policy rate expectations in Summary of Economic Projections, we do not expect any changes to the FOMC’s median policy rate forecasts at the September meeting for 2018- 20. The FOMC will likely continue to forecast a total of four hikes in 2018, one more after the expected hike at the September meeting, three hikes in 2019 and one hike in 2020. However, the September Summary of Economic Projections (SEP) will be extended by one year, through 2021. We expect the Committee’s median rate forecast for 2021 to remain at 3.375%, unchanged from the median forecast for 2020. While we do not expect many participants to revise their longer-run policy rate forecast, we expect the median longer-run forecast to rise to 3.0% for a technical reason. The current median forecast of 2.875% for the long-run policy rate is the average of two participant’s forecasts due to an even number of submissions. Richard Clarida’s confirmation in lateAugust as Vice Chair adds an additional longer-run dot and will likely raise the median by 12.5bp to 3.0%. However, it is important to note that this is unlikely to signal a shift in the Committee’s thinking around the longer-run rate.
Initial jobless claims (Thursday): Low initial and continuing jobless claims remain consistent with labor market strength. However, potential business disruptions from Hurricane Florence on the southeast coast could result in temporary spikes in claims in coming weeks.
Advance goods trade balance (Thursday): We expect a deficit of $69.0bn for the advance estimate of goods trade balance for August, following $72.0bn deficit in July. Incoming container shipment data at US ports suggest that goods exports likely rebounded in August after recent declines, while goods imports likely slowed.
Durable goods orders (Thursday): We expect a healthy 0.6% m-o-m increase in extransportation durable goods orders for August, following a modest 0.1% in July. The new orders index in the ISM manufacturing survey improved strongly. August industrial production report indicated that the output of ex-transportation durable goods rose at a solid pace. Our forecast, if realized, would be consistent with the solid momentum in the industrial sector, boosted by strong domestic demand. For volatile transportation components, we expect a sharp rebound in August after a slowdown in July. New orders for nondefense aircraft and parts likely jumped strongly following a sharp pullback in the previous month. Altogether, we expect a 2.5% m-o-m increase in aggregate durable goods orders.
Q2 GDP, third estimate (Thursday): Incoming data since the release of the BEA’s second estimate of Q2 GDP have been solid. The data on business equipment and nonresidential structures investment, government spending, and net exports have been stronger than the BEA’s assumptions. However, residential investment was likely modestly weaker than its assumptions. Altogether, we expect the BEA to revise up the Q2 real GDP estimate by 0.3pp to 4.5% q-o-q saar in its final report.
Pending home sales (Thursday): Existing home sales remain constrained by lower turnover in the market as rising home prices and higher mortgage rates affect both supply and demand. Likewise, pending home sales, which tend to lead existing home sales, will likely show signs of moderation in August.
Personal income and spending (Friday): We expect a stable 0.4% m-o-m increase in personal income in August. For personal spending, we also forecast a steady 0.4% increase, consistent with healthy momentum in household spending growth. Retail sales report for August suggests consumer spending on durable goods such as motor vehicles and furniture declined in the month, but spending on gasoline and certain nondurable goods likely rose firmly and offset weaker spending on durable goods. Moreover, spending on services likely increased at a steady pace. Looking ahead, we expect the recent tax cuts and the healthy labor market to remain supportive for personal consumption growth in the near term.
PCE deflators (Friday): Reflecting CPI and PPI data for August, our forecast for core PCE inflation for the month stands at +0.0% (+0.038%) m-o-m, which would drive down its y-o-y change to 1.9% (1.919%) from 2.0% (1.984%), previously. On the relevant components of PPI, inflation of hospital service prices remained moderate, rising only 0.1% m-o-m (on a non-seasonally adjusted basis) in August, while physicians’ services prices increased steadily by 0.5% in the month. In addition, scheduled passenger air transportation prices declined. Financial service prices of PPI did not move substantially. Altogether, we estimate the aggregate contribution to the m-o-m core PCE inflation from relevant PPI components is +0.03pp (3bp) in August, up from +0.01pp (1bp) in the previous month. However, the estimated contribution from CPI data declined in August from July, mostly due to lower core goods prices. Overall, we expect core PCE price index to increase only modestly by +0.038% m-o-m (rounded to no change) in August, which would drive down its y-o-y change to 1.9% (1.919%) from 2.0% (1.984%), previously.
Chicago PMI (Friday): We think Chicago PMI likely declined to 62.5 in September from 63.6. Early manufacturing surveys for September sent mixed signals. The Empire State manufacturing survey headline index fell sharply by 6.6pp to 19.0, but the Philly Fed manufacturing survey index for September jumped 11.0pp to 22.9 in September. We think Chicago PMI could reflect some of the concerns over an escalation in trade tensions between the US and China.
University of Michigan consumer sentiment (Friday): University of Michigan consumer sentiment index rose to 100.8 (highest since March 2018), beating market expectations of 96.6. The improvement appears to have been driven by household financial gains, which were cited by 56% of respondents, close to record high readings of 57% in March 2018 and February 1998. The concerns over trade appear to have persisted, mentioned by about one-third of all consumers. Given much of the recently announced list of $200bn goods from China subject to US tariffs include a large share of consumer goods, any additional color on consumers’ reaction to the recent news would be of interest.
Euro area | Data preview
The week ahead Germany and euro area September HICP data will be in focus next week
Germany Ifo Business Climate, Aug (Monday): We expect the Ifo Business Climate Survey to decrease to 101.7 in September from 103.8 in August. We forecast current conditions and expectations to drop 105.2 and 98.0 in September from 106.4 and 101.2 in August, respectively, as PMI survey data for September decreased from the previous month with a sharp drop in the manufacturing index. An escalation of the trade dispute between the US and China has raised concerns about manufacturing sector activity.
UK CBI industrial trends survey, Sep (Monday): Over the past three months the total orders balance of this survey has averaged +10% versus its long-run average of -18%. Export orders have been broadly stable at just under +10% for the past six months – which is not the story we’ve heard from the PMIs (recall the August PMI export orders index collapsed from 53.0 to 47.4). Indeed this is a story we have witnessed globally in recent months. We would not be surprised to see that being reflected in the CBI survey.
UK CBI distributive trades survey, Sep (Tuesday): According to this survey measure retail sales have performed well over the summer months, probably aided by the hot weather and the World Cup. The ONS also reported an uptick in its official data (the annual rate of growth of sales volumes stood at 3.7% in July). While low interest rates, falling unemployment and rising wages are supportive of consumption it will be interesting to see whether there is any autumn payback from the summer’s rebound.
Germany and euro area flash HICP, Sep (Thursday - Friday): We expect the first reading of German HICP inflation to remain at 1.9% y-o-y in September, unchanged from August. For September core inflation, we expect a fall to 0.9% y-o-y from 1.1% in August. Though energy prices should drive up headline inflation, we believe a drop in the volatile components should weigh on the core HICP. At the euro area level, we forecast the first reading of HICP inflation to increase to 2.1% y-o-y in September, compared with 2.0% in August thanks to support from rising energy prices. We expect core HICP inflation to remain at 1.0% y-o-y in September, unchanged from August (because of our forecast for large rises in core inflation in smaller euro area countries offsetting Germany’s expected fall).
UK GDP, Q2 final (Friday): The ONS moved over the summer to publishing monthly estimates of GDP (on or around the 10th of each month). However, it continues to publish separately the ‘quarterly national accounts’ which is what this estimate of GDP is part of. All of the data since the start of 2017 are potentially up for revision in this release. Also look out for data on the saving ratio, real household disposable income and firms’ profits.
UK Current account, Q2 (Friday): There are four component parts to the current account. First, the goods balance (which we know was £2.7bn further in the red in Q2 vs. Q1) and second the services balance (which recorded a similar surplus to Q1). The third component is the incomes balance which is the most important part that we don’t yet know. Faster world growth than that of the UK suggests an improvement in this balance as the UK repatriates fewer profits to overseas holders of UK assets than vice versa. And finally we assume the transfers balance remains around its recent average of £5bn in Q2. In sum that leaves the current account deficit broadly unchanged at £17bn.
Japan | Data preview
The week ahead We expect September Tokyo-area core CPI to be unchanged from August, with the disappearance of the boost from hotel charges offset by a boost from energy prices.
September Tokyo-area core CPI (all items, less fresh food) (Friday): We forecast Tokyo-area core CPI inflation for September to come in at 0.9% y-o-y, unchanged from the August figure. We expect the BOJ’s version of core core CPI inflation, which excludes fresh food and energy prices, to come in at 0.5%, from 0.6% in August. The Tokyo-area CPI inflation rate in August was boosted by 0.14 percentage points (pp) m-o-m by hotel charges, which is a volatile category. We expect this boost to have disappeared in September, but its loss to be offset by higher prices for energy-related items. As such, we expect core CPI inflation to be the same as in August.
August industrial production (Friday): In the survey of manufacturers’ production forecasts carried out on 10 August, the production forecast for August adjusted for forecast error by the Ministry of Economy, Trade & Industry, was 1.2% m-o-m. Trade statistics for August show a 6.6% y-o-y rise in exports (nominal), which are highly correlated with industrial production, higher than the consensus forecast (Bloomberg survey median) of 5.2% growth, suggesting that growth in exports in late August was stronger than expected. We expect industrial production in August to exceed the figure in the survey of production forecasts.
August Labour Force Survey (Friday): We forecast an August unemployment rate of 2.5%, unchanged from July. The job openings-to-applicants ratio, which tends to lead the unemployment rate, rose 0.01 m-o-m to 1.63x in July, but we believe the correlation between the two data sets to have been weak recently. We forecast the job openings-to-applicants ratio for August to come in at 1.64x, from 1.63x in July. The new job openings-to-applicants ratio, a leading indicator of the job openings-to-applicants ratio, fell by 0.05 m-o-m in July, but the six-month trailing moving average continued its gradual rise, up 0.01 to 2.38x. We believe labour supply-demand remained tight.
Asia | Data preview
The week ahead Growth momentum is expected to slow further in China, while central banks in Indonesia and the Philippines look set to raise rates.
China: We believe overall growth momentum lost more steam this month as suggested by high-frequency data. Coal consumption growth by six major power plants has slowed so far this September by more than the historical average over 2013-17. We expect the official PMI to tick 0.1 point lower, to 51.2 in September, and the Caixin PMI by 0.2 points to 50.4 as it includes more small enterprises, which are under stress, in its sample.
- USD/JPY captures a bid on Friday's close despite Brexit related flows.
- US yields consolidating around highs support the bullish case although much depends on FOMC/US GDP this week.
US risks are strong on the back of a large early year US tax cut and aggressive repatriation of overseas earnings which is helping US growth and the stock market - Subsequently, USD/JPY has avoided the broad capitulation in the greenback. However, USD/JPY bulls did not manage to get over the line on Friday due to flows related to Brexit risk that knocked the socks off the GBP/JPY cross, dropping from 149.69 to test 147.00 that held. Subsequently, USD/JPY's drop from 112.87 targetted the 21-D SMA down at 112.44. USD/JPY ended NY at 112.59 and within a day's range of 112.50/78. The move has taken the pair well back inside of the range that has resulted in a head fake on the break of the rising wedge's resistance.
FOMC/BoJ and trade risks
On balance, the FOMC all boils down to their median forecast and dots. However, the event may not have too much impact if there are concerns about trade wars and a slow down in EMs while the domestic outlook is positive and the dots will show further tightening ahead. If the interest rate forecast, growth outlook and CPI projections remain unchanged, markets might wish to revive the twin deficit concerns again and punish the dollar for it. Also, the U.S.-Japan trade talks and Trump/Abe's summit is on the 26th where their meeting will be held on the sidelines of Abe’s visit to New York to attend a United Nations General Assembly. We also get the press conference from BoJ Governor Haruhiko Kuroda as the latest BoJ minutes are released on Wednesday.
- Valeria Bednarik, chief analyst at FXStreet explained that the pair retains a positive stance according to technical readings, although if risk aversion persists, seems unlikely that the pair could extend its gains:
"In the daily chart, it remains above moving averages, while technical indicators lack directional strength but remain well into positive territory. Shorter term, and according to the 4 hours chart, the risk is also leaned to the upside, as technical indicators are trying to bounce from around their midlines while moving averages maintain their upward slopes well below the current level. August high at 112.14 is the immediate support, while the pair could regain its upward momentum only above 113.17, July's monthly high."
- OPEC shutters the book on potentially helping US President Trump keep oil prices down.
- The next OPEC meeting isn't set until early December, where the discussion docket will again not include a production hike.
Crude oil prices opened up Monday on the bullish side after Saudi Arabia announced that OPEC is unlikely to be following US President Donald Trump's wishes the crude cartel "do something" about rising oil prices, and increasing the oil mafia's output targets anytime soon.
OPEC watching for supply glut in the future
OPEC, being led by Saudi Arabia, have announced that while they are keeping a concerned eye on oil prices, they will not be looking to increase their internal production limits for the time being as the conglomerate expects global supply in the oil markets to once again outstrip demand beginning in 2019, and the slow-moving consortium, which is already not managing to hit their overall production caps, is leaving the US' President Trump to deal with rising oil prices which he has had an extremely heavy hand in, with US sanctions on Iran set to begin in November and the US administration looking to see Iran completely locked out of global oil supply markets.
WTI levels to watch
Monday's run-up at the market open saw WTI tick into 70.60 per barrel, and prices are currently sifting close by, near the 71.50 level as energies traders keep barrel costs elevated thanks to OPEC's insistence that it has no interest in chasing down prices on behalf of Donald Trump.
As always, the market will be most focused on the dot plot. Importantly, economic forecasts barely change between end-2018 and end-2020 in the June SEP, yet the median number of hikes is four during this two-year period.
- "That reflects the widespread belief on the Committee that policy needs to return to neutral, and even potentially move somewhat higher as growth remains above potential, unemployment below NAIRU, and inflation above target in 2020. We continue to expect most of the 2019 and 2020 dots to suggest a tendency toward modestly outright restrictive policy relative to the longer-run dots."
- "The net addition of one new participant in September (add Clarida and SF Fed stand-in, lose Dudley) means the longer-run dot will move: right now the median dot is between 2.75 and 3%, as only 14 were submitted in June. (Bullard has refrained from submitting a longer-run dot for a while.) As noted above, we see a slightly better-than-even chance that the median will settle at 2.75% in September, although it is a very close call. Over time, we expect the median longer-run dot to settle at 3%. The outcomes here are fairly bimodal: dipping back down to 2.75% will be seen as modestly dovish for a market that has struggled to price the Fed hiking to its median longer-run dot; rising back to 3% would likely be seen as somewhat hawkish."
- "Our reading of the collection of speeches heading into the September meeting suggests to us that one or two 2018 dots could shift up from three hikes for this year to four. That reinforcement of the June median should primarily serve to reinforce the recent move higher in market pricing for the December meeting."
- "For 2019 it would only take one dot at the median to move lower to shift the median down to two hikes for 2019 from three currently. (At least four dots at the June median would have to rise to shift the median to four hikes for 2019.) We don’t see a strong case for the median dot in 2019 to change, but there is some chance it could drift lower — and markets would take a dovish view of that shift."
- "For 2020, we do not see a compelling case for any change to the median dot: it would take two moving up to get a higher median, and three moving down to get a lower median. Note that the 2020 dots will continue to show a sizable majority of Fed officials expect it will be appropriate to hike somewhat above neutral during this hiking cycle."
- "As discussed above, the outlook for the 2021 dots is less certain, and may not be all that market relevant given how far they are into the future. That said, our base case is for a similar median as the 2020 dots (perhaps with a tighter range or central tendency). If some number of Fed officials think it will be necessary to tighten further to cool an overheating economy, the 2021 median dot would be higher than the 2020 one; if some number think that earlier hikes already achieved that objective and policy itself needs to revert to neutral, the 2021 median dot would be lower than the 2020 one. We think the former is slightly more likely than the latter given the size of the gap between the unemployment rate and NAIRU in 2020 and the expectation that it will not close quickly in 2021."
- A quiet Monday sees Brexit headlines take front and center for the early week.
- A snap election in the UK could be incoming as PM May looks to shore up her political base.
The Guppy saw a bearish open to the new week, dropping into 146.98 in a week opening gap after weekend headlines over Brexit knocked investor confidence back mildly to kick off a quiet Monday session.
Brexit sees a new development
After the UK Prime Minister Theresa May's latest Brexit proposal, known as the Chequers plan, received a hard no from European Union leaders in Brussels, PM May's home team in Britain is preparing contingency plans to shore up support for the PM as hard-line Brexiteers within the UK's own parliament circles the prime minister's wagons, looking to wrestle control over trade talks away from the PM's office and place it in the hands of hard-headed Eurosceptics who would be all too happy to allow Britain to undergo a hard Brexit with no trade or border deals with the EU in place.
PM May's office is looking to head off a Tory challenge to current negotiations, and a snap election could be called for November in an attempt to head off any pro-leavers looking to take a shot at the PM's seat with a no-confidence vote, and the prospects of a sudden election call for the UK is seeing GBP bidders take moment to pause.
Monday is an alarmingly quiet showing for the GBP/JPY pairing, with Japanese markets off for yet another long weekend, and a lack of notable data on the economic calendar for Britain to kick off the new trading week, and traders will be keeping their eyes on political headlines for the early week.
GBP/JPY levels to watch
Te Guppy knocked back sharply last Friday, slipping back down from the 150.00 major handle to settle back in the neighborhood of the 200-day EMA, which could go on to support another run at highs as long as buyers manage to keep their fingers on the 147.00 key figure.
- NZD/USD is currently following the tracks of the Aussie whereby USD/CNH popped don the open today following reports that the Chinese are not looking to attend trade meetings with the US as tensions escalate.
- NZD/USD is trading at 0.6675, down from 0.7781 and has extended the dip from recent rally highs of 0.6699.
NZD/USD is on the cusp of a meaningful correction, but the fundamental case is highly contingent on external factors and the sustainability of the move that started from 0.6501 is questionable. The Chinese Yuan has been dictating direction while the dollar's relentless strength has also been scrutinized in recent sessions leading to re-positioning where risk sentiment has switched from cold to hot.
However, it appears that investors might be looking at the global economies outlook through rose-tinted glasses and somewhat complacent considering the number of systemic risks factors that are lurking around the corner. For instance, today marks that day that USD200bn of tariffs kick off in the US and USD110bn in China - the implications are that Trump retaliates to China's refusal to attend trade talk meetings this week by threatening to slap tariffs on the remaining US imports from China. Also, the usual suspects in EM (TRY, ZAR, RUB, BRL, INR) are all lower following last week's drift higher in the greenback and US rates look to be stablising, building foundations on 2.8% in the US ten year yields that have penetrated as high as 3.097% in recent sessions - which does not bode well for the EM-FX space.
RBNZ & FOMC expectations
Meanwhile, we have the RBNZ this week which is a tad more interesting following the nation's impressive GDP data that beat the Central Bank's forecast by some margin - June quarter GDP was 1.0%, compared to the RBNZ's forecast of 0.5%. However, analysts at TD Securities argued that "GDP are mitigated by trade risks, low CPI and dismal business sentiment. Unanimous consensus expects the OCR to remain at 1.75% and the Governor to muse that the OCR could move “up or down” as per the Aug MPS. Dropping “we expect to keep the OCR at this level ... into 2020” is an unlikely hawkish twist."
As far as the FOMC goes, its all about the median forecasts and dots. Analysts at Nomura offered their outlook for the Summary of Economic Projections which will be critical this week:
"On policy rate expectations in Summary of Economic Projections, we do not expect any changes to the FOMC’s median policy rate forecasts at the September meeting for 2018- 20. The FOMC will likely continue to forecast a total of four hikes in 2018, one more after the expected hike at the September meeting, three hikes in 2019 and one hike in 2020. However, the September Summary of Economic Projections (SEP) will be extended by one year, through 2021. We expect the Committee’s median rate forecast for 2021 to remain at 3.375%, unchanged from the median forecast for 2020. While we do not expect many participants to revise their longer-run policy rate forecast, we expect the median longer-run forecast to rise to 3.0% for a technical reason. The current median forecast of 2.875% for the long-run policy rate is the average of two participant’s forecasts due to an even number of submissions. Richard Clarida’s confirmation in lateAugust as Vice Chair adds an additional longer-run dot and will likely raise the median by 12.5bp to 3.0%. However, it is important to note that this is unlikely to signal a shift in the Committee’s thinking around the longer-run rate. For other aspects of September FOMC meeting,"
- FOMC's dot plot preview - TDS
Support is located at 0.6650 and resistance is located at 0.6720. The late August trend line resistance back at 0.6550 was left behind and the 2018 trend line has been pierced - The question now is whether this was just a head fake or the move can be sustained. On a meaningful continuation, 0.6840/50 comes into the picture and closes through 0.6720 opens up the runway for the bird to take flight. First, the pair needs to break 0.6711 as the 76.4% retracement of the daily downtrend from 0.7393. A drop back into the downside opens a continuation risk towards 0.6500 that would open up 0.6344 and 0.6306 on the wide.
Analysts at TD Securities explained that market sentiment was fairly neutral relative to the euphoric sessions in Asia and Europe, with US equities ending the day unchanged while the TSX eked out a 0.1% gain.
"Rates were likewise little changed on the day, with yields rising by ~1bp across the curve in Canada while the Treasuries steepened modestly.
Cable (-1.4%) was the big mover in G10 FX after PM May repeated that no deal is better than a bad deal after the EU rejected her Brexit plan, injecting more uncertainty into the process.
Elsewhere, the USD saw broad, albeit modest, gains against G10 currencies.
The RBNZ OCR is the main risk event for the coming week along with Wednesday's FOMC meeting
What We're Watching in Markets
This week's Fed meeting is the appetizer to the mid-term entree in Nov. Still, the break of the 1.1750 level is important for the EUR, suggesting we could see higher lows there moving forward.
A mix of higher global rates and equities is a bad mix for the JPY, though it is decoupling from cyclical drivers that point to 111.40. We fade breaks of 113.
In light of the persistence in recent non-core core price shocks, and still high inflation expectations, we have revised higher our outlook on inflation convergence in Mexico, and as a consequence our view on the easing cycle.
We now see easing beginning not in December, but in Q2 of 2018. We continue to remain constructive on the peso against the USD."
As reported by Bloomberg, JP Morgan analysts have noted that a robust US economy could lead President Donald Trump to overestimate his positive impact on the domestic US economy, which could see a "major miscalculation" made by the administration in the near future.
JPMorgan's analysis shows that despite the US administration being caught in continuing and ongoing trade and geopolitical tangles, the domestic US economy remains strong for the time being, but an over-step in the still-raging US-China trade war could see a sharp turnaround for US equities.
According a September report also by JPMorgan, the US is planning to bring yet another raft of tariffs to bear against China, this time for $267 billion, effectively placing a 10%+ tariff on all imports coming from China; a 25% tariffs on all Chinese imports in a year can easily knock 8% off of EPS projections for 2019, and the average of Wall Street companies' earnings per share could wipe the current US equities rally off of the map.
Elsewhere, second-degree economic effects from total import tariffs from China include hits to business confidence, supply chains, and financial borrowing and lending conditions, and an overstep by the US president's office in seeking all-out trade wars could see the massive US economy hobbled by restrictive trade measures in a relatively short amount of time.
“The deeper question is whether this week’s rallies are the beginning of an unmissable strategic opportunity (lasting six months or more, delivering at least 10% upside) or just a more tactical one (lasting another week or two, delivering about 5% upside)?,” the strategists wrote. “Across research teams, conviction is higher around the latter than the former.” - Bloomberg
In a market wrap, analysts at ANZ Bank New Zealand Limited explained that UK PM May’s comment that the EU and UK are “a long way apart on two issues” saw the FTSE 100 rise 1.7% with a view that BoE would need to remain accommodative.
"The US Flash manufacturing PMI came in a tad stronger than expected, with strong details (new orders, new export orders, output and backlog of orders up, and some evidence of inventory build in intermediate goods ahead of tariffs). It suggests manufacturing growth will remain elevated over the coming months. On the other hand the services PMI was unexpectedly weaker. Meanwhile European Flash PMIs were generally a little softer in September, while remaining well above 50, signalling expansion."
- USD/CNH pops and dents the bullish case for AUD/USD.
- AUD/USD drops back from the 0.73 handle and key 2018 resistance line in a flash.
AUD/USD has slipped in the open on geopolitical angst and a pop in USD/CNH. Currently, the Aussie trades at 0.7267, down from 0.7290's close and it made a low of 0.7254. China has rejected to re-enter trade talks, and as the Finacial Times has reported, 'sino-US tensions escalated sharply at the weekend as China declined an invitation to explore further trade talks and summoned Washington’s ambassador to Beijing to protest over sanctions imposed on a Chinese military officer.'
AUD/USD has been testing the 0.73 key level but is pulling back aggressively at the start of the week raising prospects of further deterioration should the yuan continue to slide. USD/CNH has been making a firm bottom with a series of 4hr longer downside shadows on the candles that have accumulated around a familiar 4hr 200&100-SMAs with the support between 6.8240/8960.
6.8500/20 was a key upside near-term level that has given way with 6.8660 on the cards. AUD/USD, as a proxy to what goes down in China town, may find it difficult near on impossible to recover with any conviction amidst such heightened risks - "China announced on Saturday that it was pulling out of the trade talks scheduled with the US this week. The move was well-signalled and unsurprising after two earlier rounds were unproductive - USD200bn of tariffs kick off today in the US and USD110bn in China, and at this stage, it’s not clear what will halt the escalation," analysts at ANZ Bank New Zealand Limited (ANZ), also explained.
The week ahead will hold the FOMC
The week ahead will hold the FOMC and US GDP Q2 third estimates. However, analysts at Nomura explained that recent FOMC minutes and participant comments all point to another step in removing accommodative policy - "On policy rate expectations in Summary of Economic Projections, we do not expect any changes to the FOMC’s median policy rate forecasts at the September meeting."
Meanwhile, analysts at TD Securities explained also, that, on net, they see a dovish reaction as the Fed leaves the 19/20 dots unchanged, reveals the 2021 dots with the same median as 2020, and Clarida's new dot nudges the long-term lower - "Some hawkish balance should come from a few 2018 dots shifting higher to firm up a Dec hike, while 'accomodative' should remain in the statement, with the latter a closer call for a more dovish tweak."
Bulls were teed up for a break of the 0.73 handle and 2018 resistance trend line where a further squeeze would have targetted 0.7360/80 levels that guard the 0.7455/65 zones. However, the 0.7250/40 zone is key. This is made up of the confluence of 23.6% fib recent uptrend retracement, 15th 16th Aug consolidative highs/lows, 23rd Aug spinning top reversal, 19th Sep support, 200-4hr SMA, daily S2, weekly 38.2% fib. A break here opens 0.7221 38.2% fib of same uptrend (21-D SMA) and 0.7200 (10-DMA)/70 stop territory, targeting 0.7140.
Energy markets are likely to see price pressures on the rise at the outset of the new week in commodities, with Saudi Arabis delivering a shot across the bow of the US' President Donald Trump at the latest OPEC meeting, with the global oil mafia unlikely to begin lifting production caps in the near- to medium-term, a step in the complete opposite direction that was recently demanded by the US president via Twitter recently, who demanded that OPEC "do something" about oil prices, which see upside pressure mounting thanks to the US' planned sanctions against Iran due in November.
Saudi Arabia's oil minister expects oil supplies to once again outstrip demand sometime in 2019.
Saudi Arabia will do "whatever is necessary" to balance oil markets in the future.
OPEC production quotas aren't being met, odds of a limit increase in the near future are slim as countries struggle to hit the current ceiling.
As the latest round of US tariffs on China, a 10% levy targeting $200 billion in imported goods, comes into play starting at midnight Washington DC time, China is flat-out rejecting proposals for trade talks with the US.
The US Senate is set to impose further sanctions on China after Shanghai was found to be buying jets, missiles, and other weaponry from a Russian weapons exporter that landed on the US' no-fly list in sanctions against Russia, and the US is set to punish China for running business with the black-balled corporation. In relation, China has entrenched itself in the current stage of the US-Sino trade war, and turned down the possibility of negotiations between the two sides in the immediate future.
The move threatens to skewer risk appetite heading into the new week, as thin volumes at the Monday bell sees markets exposed to volatile jumps as the early birds flee from riskier assets on bearish headlines that are pointing towards continued trade angst in the weeks to come.
Market-moving headlines for the new trading week's open were few but pointed over the weekend, with snap election plans coming into the light for the UK's Prime Minister Theresa May following the rejection of her latest Brexit proposal by the EU, while the European Central Bank (ECB) is seeing some more hawkish language from within, and NAFTA renegotiations continue to go belly-up as the US, Canada, and Mexico wrangle for position in fractious talks.
UK snap election on the docket
As reported by the UK Sunday Times, PM Theresa May's home team has been working on a contingency plan that involves a snap election to be held in November in a bid to head off hard-line Brexiteers in the UK's Tory party who will be looking to wrestle control away from the PM and place it in the hands of the UK's parliament, which is heavily populated by Eurosceptics who threaten to derail the entire talks process and steer Britain directly into a no-deal or hard Brexit.
ECB should gear for faster normalization
Over the weekend, the ECB's Eeald Nowotny noted that price normalcy is being achieved within the Eurozone faster than previously expected, and although the ECB has set a pace of no movement on rates for well over a year looking forward, the hawkish Nowotny is questioning the logic behind that decision given the EU's economic situation, and the concern is that a too-dovish environment will begin to stifle economic growth looking forward and make the ECB's own job harder than it already is.
NAFTA talks beginning to look like not-NAFTA
The US and Canada are digging in their heels on both sides of the NAFTA line, and as the US and Mexico continue to come closer to reaching a full-on trade agreement, the bilateral watering down of NAFTA is almost complete, as forward progress continues to come to a grinding halt as Canada holds things up. US officials over the weekend stepped up their rhetoric, threatening to completely abandon talks with Canada if the dairy impasse continues, instead choosing to just focus on a non-NAFTA agreement with Mexico.
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