Well, that was an astonishing end to Q3 as we herald in what is certainly shaping up to be a bumpy ride in the markets for Q4. While the eerily familiar themes will continue to dominate, US-China trade, NAFTA, Brexit and Italian budget which will confront traders at every twist and turn. But as US lawmakers rush to make final preparations ahead of what is shaping up to be a fierce midterm election run, headline risks will abound.
China markets will shutter for the Golden Week Holidays during the first week of the month. But focus is in PMI data nonetheless.
Not an overly busy docket next week, but on the data front, the granddaddy of them all, Nonfarm Payrolls, will be released next Friday and as usual the primary focus is on US wages, and how quickly they expanded in September could have a significant impact on the projected course of US interest rates. Recall in August wage growth accelerated the fastest since June 2009, and if the average hourly wages prints north of .4 % expectation, and given the USD has gained the upper hand again, it could drive a stake through dollar bears hearts. Indeed a make or break report for USD’s near-term momentum.
On the Central Bank front, the RBA will announce their interest rate decision but absent inflation suggests the RBA’s half glass full approach to monetary policy continues but as usual there will be more focus on the policy statement.
Local EM traders will focus on the RBI rate decision. Given the RBI recent defend the rupee at all cost stance, its widely expected the RBI will match the latest Fed hike.
Local eyes are on Singapore PMI data as the market is positioned for a rebound after last month manufacturing forecast fell to the lowest level since June 2017 as exports plummeted.
Oil Markets
Everyone is telling me my views are far too unabashedly bullish, but from my seat until sizable supply is offered up by OPEC and with pandemic market chatter raging about the $100 per barrel market, its hard not to be blatantly bullish.
Brent crude oil finished the quarter in a spectacular note on Friday as concern over the potential impact of US sanctions on Iranian exports continued to mount on a report that at least one Chinese refiner was cutting back on purchases. WTI prices followed Brent higher.
Gold Markets
After falling to a fresh one-month low water mark as the USD was bullying around the euro, gold bounced off the intraday lows.B ut frankly, the gold market is so oversold that we should expect consolidation to set in before the next leg lower. We’re in the domain of the gold bears who have August $1160 lows in their crosshairs.
Currencies to keep an eye on this week:
Euro
EUR continues to leak lower as Italy’s government has shattered the budget and challenged the EU’s mandate. BTPs have driven a good chunk of the move lower. The euro was holding on the 1.1600 handles by a thread, but the less -than -vigorous Eurozone September Core CPI came in lower than expected at 0.9%YoY (1.1% estimated, 1.0% prior) which sprung the 1.1600 trap door triggering a wave of stop losses as that fundamental and psychological level ceded.
Indeed, music to euro bears ears as the ECB will be in no mood to signal a quicker pace of interest normalisation anytime soon. And with the Fed laying their cards on the table and guiding the markets to a December rate hike. While markets pulled off the intraday lows, the keep it simple pragmatic approach to this trade suggests the dollar remains in favor as US growth and positive USD differentials will stay supportive.
Japanese Yen
For all the right macro reason spot USDJPY is looking to break higher, and if the Nikkei and US 10-year yields continue to track higher, there is no reason the markets shouldn’t take out 114 next week given the dollar is completely under-owned vs the JPY.
There are some chunky structural long EURJPY and a lot of underlying derivatives that add up to the same view but have different path dependency. These positions are clearly at risk during this Italy induced panic as we leak near yet another psychological support level EURJPY 131. But the market pressure points are probably more towards EURJPY 130 level, so we could assume these positions will remain safe with USDJPY marching higher.
The British Pound
It's a mess and the markets are fraying beyond the fringe as signs of stress related to a potential No-Deal Brexit remains a significant possibility. Unfortunately, vols in GBP have rallied significantly of late, so buying the downside insurance to protect against a Hard Brexit fallout is rather expensive.
Cable is stuck in a broader range still getting knocked around by various Brexit headlines. It’s impossible to filter out the political nose so best to remain cautious on GBP as it’s tough to predict next rate move. There were a few hawkish tidbits from Haldane and Ramsden this week albeit with caveats that the Brexit outcome is a smooth one.
The Australian Dollar
Much more focus on the US rates outlook in the wake of the FOMC, and this plays into the USD ‘s hand short term. I think the markets are tricky as USD moves are entirely data dependent over the next few weeks. While the RBA rate decision is on tap, there will be an outsized focus on next weeks NFP but more toward wage growth component as by all account the US job growth is rocking, but the Feds are looking for that elusive inflation spark. But this is where I temper my bearish Aussie expectations. With commodity prices going higher, this will undoubtedly be a boon for commodity-linked currencies so against a lot of forecasts I see the Aussie moving higher on that narrative alone.
The Canadian Dollar
Canadian GDP was a beat at 2.4%YoY vs 2.2% forecast, showing a healthy bounce back in July after June weakness. It suggests upside risk to Q3 growth. And with BoC Poloz sounding very neutral and data dependent, CAD was able to hold onto gains. But ultimately CAD upside will be capped until trade talks between the US and Canada progress meaningfully. But 1.2700 on a NAFTA 2 signing looks possible given surging oil prices and a higher chance for a BoC rate hike on the GDP beat.
Lessons Learned
The big lesson learned last week was analyzing the knee jerk reaction to Wednesday's FOMC meeting which caused a rally across the US yield curve and temporarily weakened the USD only for the move to be reversed out when Fed chair Powell explained that both policy and financial conditions are still accommodative. Jay Powell is a breath of fresh air, and by removing accommodative, he’s signalling that forward guidance should be removed as rates move toward normal, and that dot plot projections should be taken with a grain of salt as FOMC policy will be dependent on incoming data.