EM’s weakest links continued to firm yesterday on a combination of profit taking and position squaring ahead of today major risk events with the beleaguered ARS leading the pack ringing in close to 3 % gain, while MXN and ZAR rallied more humbly.
But outside of this good news, the markets are looking incredibly fragile with USD/JPY falling below 110.60 on a combination of lower US yields and a touch of risk aversion as both equity and oil markets wobbled.
But USD/JPY was then summarily smacked at the NY closing bell as the markets turned attention to escalating trade tension between Japan and the US after a wire report suggested Trump feels he can win that one! Now, who doesn’t like a little noise in USD/JPY to start the day! However, the market does have a proclivity to fade these so chasing downside risk could be little more than a fool’s errand. Regardless, price action must be respected, and the next ” tell ” will be from the US 10-year yields which are trading with a softer bias in the wake of Fed Williams comment which was interpreted by the market as a tad dovish. As well, the Tokyo open, as the local equity market support will be crucial for any recovery in risk and USD/JPY.
Fed member Williams brought out the doves as the market latched on to his comments. “The fact that wages haven’t grown a lot faster is a sign that this economy still has room to run… we don’t feel the need to raise interest rates more quickly than otherwise.” But frankly, isn’t this what the market is pricing in??
None the less from my shaky seat, these comments will put added focus on tonight US employment report with an outweighed focal point, the average hourly earnings.
Overall, however, it feels like interbank traders have taken to the sidelines with the comment period on the proposed USD200bn in Chinese tariffs ending today.
Oil Markets
Oil markets continue to trade with a softer bias, although prompt WTI did catch a fleeting knee-jerk bid on the Energy Information Administration inventory report headline after reporting a decent draw. However, gasoline inventories completely missed the market’s expectation with a build of 1.84mn versus a draw of 1.37mn expected and WTI was summarily hammered close the key $ 67. But we’re still a mile away from August lows suggesting bid on dips strategy remain in vogue as the long-term buy and hold traders stay focused on Iran sanctions, Chinese refineries unquenchable demand and a slightly improving sentiment in EM markets.
But the long strategy does come down the ” 64 million-dollar question” how much oil will be removed from 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.
Gold Market
The retracement in the USD gives both precious and base metals some momentum Gold short positions covered back above key resistance of $1200 and with the markets slightly dovish lean from Fed Williams, dare I say gold might hold that bid leading up to today’s critical Non-Farm Payroll report.
ETF holdings in both gold and silver were up marginally but in the absence of demand from large funds does on zero haven appeal, which does suggest Golds near term fare remain entirely based on the movements of the USD.
Asia Equities
Global equities are a potpourri of sorts morning with Asia markets feeling the pain the Hang Seng buckle under the weight from escalating trade tension. But traders will be looking to trade the Tokyo open after newswires suggested Japan is in Trumps Tariffs crosshairs. Sentiment on the Osaka exchange could very well set the tone in Asia this morning.
G-10 Currency
After completely overestimating volatility this week, I’m honestly left with more question than answers when it comes G-10 currencies.
Frankly, nothing seems to be working out as planned. Aussie remains supported and the markets to fade USDCAD moved lower, catching more than a few long and wrong at this juncture, doing little more than chasing the markets, in this endless cycle of rinse and repeat. But on the bright side, there’s always next week.
Australian Dollar
Entering tonight’s NFP report, positioning feels very much neutral outside of the Aussie which has attracted a plethora of short sellers, suggesting that unless there’s a surprising move below .7175 AUD/USD today, traders will likely pare back shorts ahead of tonight’s jobs report which could lend support. But of course, eyes will be on risk market and Japan-US trade, headlines, also, the Section 301 noise.
The markets interpreted Wilkens speech as a bit hawkish with the loonie rally to 1.3140 level. But there nothing in the statement to suggest a faster acceleration of interest rate normalisation is in the offing.
The Ringgit is finding a modicum of support from July trade figures that beat all expectations as higher oil prices remain the Ringgits lifeline in these turbulent times significantly improving Malaysia’s terms of trade. And support the notion that the Ringgit will be relatively insulated from external factor being the primary oil exporter
Besides, the local unit is getting a fillip from the bounce in other EM currencies with the weakest links in the EM currency chain have a positive overnight session.
However, what remains entirely interesting about the Ringgit it the full range of year-end estimates which does suggest trading the Ringgit will become incredibly active once the US-China trade news leaves the headlines.