The US is Hiring, and the Dollar is King.
The highest year on year print for US Average Hourly Wages since 2009 contributed to the stronger close on the US Dollar Index Friday.
However, given the USD rally fell short of threatening numerous vital levels, and does suggest the overhang and uncertainty around trade war along with weekend positions squaring likely hampered participation. So, the follow-through activity on Monday in Asia could be telling.
There has been a lot of chatter in the markets that the Fed is going to pause after the next couple of hikes. But the strong run of US economic data says otherwise, and if you think the Feds are concerned about the EM rout and that possibly influencing their policy decision, Fed Williams indicated “that despite increased volatility, emerging markets were not a big risk to the US currently.” Indeed, the EM wobble was going to happen when global central banks moved to reduce quantitative easing definitively. Unfortunately, the toxic combination of trade wars, rising US interest rates, a stronger dollar along higher oil prices have brought that dateline considerably forward and have left more than a few investors holding the bag.
China exports to the US rose at a faster pace than last month as significant exporters were ramping up production and shipment to the US ahead of the US imposing 200 billion plus in tariffs. We can likely look through this number on the assumption that if Trump Tariff to go through China terms of trade with the US will buckle significantly
The week ahead will bring even more intense focus on global trade war, for no other reason President Trump has threatened to hit China with tariffs totalling USD267b billion and that gritty talks would resume with Japan and of course we are still in the lurch regarding the NAFTA trilateral agreement. But one thing that is abundantly clear, whatever shape this agreement will eventually be formed and moulded, North American free trade as we once knew it would be a thing of the past.
Oil Markets
Oil prices traded with a softer tone on Friday tugged lower by the stronger USD, sagging equity markets and the less market impacting effects Tropical Storm Gordon after skirting most oil and gas facilities. Which suggest there was a bit more Tropical Storm froth in the markets than many calculated. None the less, the markets recovered most of the earlier losses on dip buying from Oil bulls who are positioning for a Nov 4 spike in prices when the Iran sanctions are officially applied.
Inventory data will continue to factor next week and despite Cushing inventory impact playing a lesser roll these days. The WTI Oklahoma delivery inventories could climb significantly ahead of scheduled maintenance in the weeks ahead and place additional pressure on the prompt WTI contract.
Ultimately it comes down come down the ” 64 million-dollar question” how much oil exits the global supply chain due to Iran sanction. If the impact falls between the markets uppermost estimate, 1-1.5 million barrels, oil prices will ignite much higher given the frangible state of the supply and demand equation.
But its also necessary to keep an eye on EM developments as the knock-on effects from escalating trade wars could weigh on demand. Besides the currency depreciation’s impact, and likely slow down in global growth factoring in recent subsidy cuts that are happening across Asia and the Middle East, there could be a significant drop in demand for oil in EM if this trio of worst-case scenarios does play out.
Gold Markets
Gold prices became unhinged again on as the stung USD narrative emerged post-Nonfarm Payroll number which cemented a September rate hike and increased the certainly the Feds will move in December. But gold prices have remained gingerly supported above the critical 1190 levels on the prospects of escalating trade war and possible meltdown in global equity markets on a tariff war escalation beyond the initial 267 billion.
And while gold remains in oversold territory, it’s going to take a reversal of fortune for the US dollar to get prices moving higher, as such, bears stay in full control of the markets as Friday jobs data could see a stronger dollar open on Monday.
Currency Markets
Turkish Lira
And while there will be enough economic data and Fed speak next week to keep us preoccupied, in EM, however, the Turkish lira is likely going to be the most watched EM currency in the week ahead as expectations are soaring for the Turkish Central Bank to raise the interest rate. Market consensus was around 200-400 bps, but given the recent bloodletting, 500 or even 600 bps is not out to the question.
Australian Dollar
Despite the recovery in EM and risk somewhat stabilising notwithstanding the plethora of trade war headlines. The Australian dollar price action was incredibly telling and suggest real money flow was behind this move to .71 AUDUSD. Indeed, we could be in for more of the same on Monday based on familiar themes (Mortgage rate hikes, Dovish RBA and Commodities carnage) which could seed the Aussie extend losses down to .7050 given that the FX markets could play even more catch up with US Bond Yields given 10 Years UST lurched from 2.88 to 2.94. post-NFP. Overall the Aussie dollar remains one of the weakest links in the G-10 currency chain.
The Chinese Yuan
The long USDCNH should offer a good hedge against an escalation of a trade war as the easiest, and most poignant retaliation would be for the Pboc to guide the Yuan weaker. But this is probably the least attractive measure from a local investors perspective as it could indeed trigger waves of capital outflows and further dent sentiment on domestic equities. But Mainland is running out of retaliatory options. Either levy higher tariffs on the existing products or in the event of the President slaping tariff on as much as 500 billion in Chines goods; the currency play might be Chinas only choice.All thing equal, USDCNH should move higher. But with the front end of the CNH curve squeeze higher it’s essential to pay attention to funding cost on this trade.
The Canadian Dollar
The Loonie’s near-term fate rests in the hands of NAFTA negotiators.
On the economic front, Canada jobs report when taken in collation with the US print was a small negative, but there was little market impact suggesting the NAFTA remain the political hot potato in this trade.
Emerging Market Asia
EM Asia continues to trade very defensively, but with the jitters in Jakarta subsiding, traders are dipping there toes in the choppy waters, but for my perspective, it’s far too early to drop one’s guard and become overly complacent. Many of the existing narratives remain in play, trade war, stronger US dollar higher US interest rates, and the eventual reduction in global quantitative easing should continue to cloud sentiment.
Malaysian Ringgit
Tranquil day on the Malaysian front for the ringgit despite the wrath of negative trade headlines. For the most part, foreign participation remains low as smart money takes to the sidelines ahead of a possible escalation in a trade war
Crypto Currencies
BTC continues to struggle after the fake news report that Goldman was pulling out of Bitcoin. While CFO Marty Chavez threw ice water on the story, BTC has only retraced a small portion of last weeks gap as Chavez was less sure of the specific timeline for Goldman to enter the space. As well the lingering effect of increased oversight and compliance that has been put into effect this year continues to weigh on new clients entering the marketplace.