Chief Macro Strategist
Summary: Signs are popping up that hopes for a US-China trade deal are overdone, nonetheless, the market remains in maximum complacency after a somewhat shaky Asian session. More liquidity operations from the Fed this week and a heavy treasury auction calendar are among the highlights for a heavy USD focus this week, while the euro is under pressure on the flash September PMI surveys.
Friday saw a rather negative session after China announced a cancellation of a planned trade delegation trip to Montana and Nebraska, sparking concerns that the US-China trade negotiations are on the wrong track. Rumours have swirled that China is looking for a partial deal and a punt on the more contentious issues, while the US side is only interested in a comprehensive agreement. China’s announcement came about an hour after Trump said on Friday that he isn’t interested in a “partial deal”.
Asian markets stumbled out of the gate to start the week and South Korea reported a drop in exports in September of a stunning -21.8%, led by a drop in semiconductor shipments. The mood darkened again in early European trading hours as the French and especially Germany flash September PMI surveys from Markit rolled in, with Germany’s Manufacturing PMI survey coming in at a staggering, worst for the cycle 41.4.
Wolf Richter over at wolfstreet.com wrote an excellent post describing what is going on at the Fed with its repo operations, which actually hearken back to its approach to managing liquidity issues prior to 2008 – however, the size now is far greater than anything back then save for a single spike after the September 11, 2001 terror attacks. The USD outlook and how the market adjusts to these new liquidity operations looks pivotal this week after the FOMC meeting failed to produce immediate takeaways. The Fed is set to do 2-week repos starting with one tomorrow and we also have a heavy calendar for Treasury issuance this week.
Liquidity needs will only rise from here with the rise in US budget deficits and will spike further in a recession scenario or in the event of general market disruptions. Will the Fed be happy to continue to expand these operations ad infinitum? Eventually this ends up as QE, but in the meantime, I’m not at all sure that the market’s complacency on this issue is justified, nor do I get the sense that the Fed has shown itself to be on the ball and set to get ahead of the curve on bringing further policy easing or overwhelming liquidity provision.
Chart: EURUSD
EURUSD traders of both stripes have suffered during the recent, churning price action around the 1.1000 level as neither the sense that this is the last blast of easing from the Draghi ECB, nor the fairly hawkish FOMC meeting have been able to drive a notable directional move. The USD looks firm to start the week and a very ugly Germany Manufacturing PMI reading for September sets a negative tone for the euro this morning. A solid hold below 1.1000 could set up a run to at least 1.0800 for the pair.
The G-10 rundown
USD – USD pressuring to the upside here, and we use the cycle lows in AUDUSD and the 1.1000 area in EURUSD as proxies for the general USD outlook.
EUR – very ugly PMI data out of Germany this morning (managing a new low for the cycle at 41.4 for the flash Sep. manufacturing PMI) this morning putting new pressure on the euro, and recent Germany comments on lack of interest in fiscal not helping at the margin.
JPY – the yen staying anonymous in the background lately, but could be set to firm against high yielders if market complacency on USD liquidity issues proves ill founded.
GBP – Thomas Cook collapse not a nice headline for the UK, but sterling near the highs against the euro here, even if 1.2500 was too high for GBPUSD as we await the Supreme Court decision on Boris Johnson’s proroguing of Parliament.
CHF – the weak flash PMI’s out of Europe this morning taking EURCHF sharply lower and recent German signals on lack of interest in fiscal stimulus also applying pressure – a test of the lows and below 1.0800 a risk here for EURCHF as SNB intervention is no doubt set to rise.
AUD – looking for how AUDUSD behaves in a test of the lows scenario, with added vulnerability for the Aussie on any further signs that US-China trade negotiation hopes are foundering.
CAD – upside danger in USDCAD on a close well above 1.3300 as the market’s confidence that the Fed is addressing the USD liquidity issue sufficiently may be poorly placed.
NZD – an important week for the little kiwi as the RBNZ is set to announce rates on Wednesday and we may need a dovish surprise to drive further relative NZD weakness as rate spreads versus Australia have stalled around 0 basis points at the short end of the curve.
SEK – weak EU PMI’s are bad news for SEK and EURSEK looks set to test the highs for the cycle if the market continues to sour on the outlook for Europe.
NOK – EURNOK ripping higher into 10.00 on the weak EU news, which tends to multiply through the Scandies. It’s impressive to see the price action despite last week’s hike, admittedly a dovish hike.
Upcoming Economic Calendar Highlights (all times GMT)
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)