Wrong Response by Trump to China’s Countermeasures Threat Could Blow Up Trade Deal

There’s a breaking story out of Asia early Wednesday that could blow up into something major later in the day if U.S. President Trump decides to exacerbate the issue. The current price action in the financial markets indicates a sense of caution may be developing in the financial markets with safe-haven assets – Treasury bonds, Japanese Yen and gold turning higher, while demand for risky assets is edging lower.

According to reports, China is threatening to take countermeasures against the U.S. in response to a bill that favors the Hong Kong protesters, the Chinese Foreign Ministry said Wednesday.

That is a pretty bold threat to make while the United States and China are trying to finalize the first phase of a partial trade deal agreed upon on Friday. It’s also closely similar to the threat China made against the National Basketball Association (NBA) before it caved to pressure from the Chinese government last week after an NBA team official made comments supporting the Hong Kong protesters.

The Background

Three bills were approved in the House of Representatives Wednesday evening, one supporting the right of individuals to protest, another allowing for the U.S. to check on Beijing’s influence over the territory and a third aimed at preventing U.S. weapons from being used by police against protesters.

China’s Response

“If the relevant act were to become law, it wouldn’t only harm China’s interests and China-U.S. relations, but would also seriously damage U.S. interests,” said Geng Shuang, China’s Foreign Ministry spokesperson, in a statement on the body’s website. “China will definitely take strong countermeasures in response to the wrong decisions by the U.S. side to defend its sovereignty, security and development interests.”

Geng said while China was working to restore law and order in Hong Kong, U.S. lawmakers were “disregarding and distorting facts,” by turning criminal acts and violence against police into issues of “human rights or democracy.”

“That is a stark double standard. It fully exposes the shocking hypocrisy of some in the U.S. on human rights and democracy and their malicious intention to undermine Hong Kong’s prosperity and stability to contain China’s development,” said Geng, who urged the U.S. to “stop meddling.”

Trump’s Problem

Last week, CNN reported, Trump, in a call with Chinese President Xi Jinping, promised that the U.S. would stay quiet on the Hong Kong protests while the two countries continued to negotiate a possible end to the ongoing trade war.

Early Wednesday, traders are taking precautionary positions in response to the comments from China’s Foreign Ministry Spokesperson. Bonds, gold and Japanese Yen are being bought and stocks in the U.S. and Europe are being sold.

What traders could be waiting for is Trump’s response. Will he defy his promise to Chinese President Xi Jinping, or will he remain silent?  It’s highly unusual for Trump to remain silent for too long especially when a foreign country threatens the U.S. with “strong countermeasures.”

Traders should keep an eye on this story because it could develop into something major during the trading session. Somewhere, somehow, somebody in the press may try to push Trump’s button’s to get a response, and if they push the wrong one, Trump could say something to shake up the financial markets.

Trump certainly knows how to pick his battles. He’s usually quick to respond to comments from CEO’s, coaches, athletes, politicians and celebrities. However, if he doesn’t speak up, he’ll show the world that he just gave in to pressure from China, the country he keeps saying is weaker than the United States.

Asian Stocks Climb as US Banks’ Earnings Boost Equities

Gains in riskier assets are coming at the expense of safe havens, with Gold now trading below $1485, 10-year US Treasury yields surging past 1.77 percent before easing, while USDJPY touched the 108.86, its strongest level since the start of August.

Even with the gains in equities, some measure of caution is still warranted, as investors cannot rule out a sudden spike in US-China trade tensions or Brexit risks. While riskier assets are enjoying their time in the sun, they could see a rapid unwinding if any of these risks return to the fore.

Brexit deal optimism keeps Pound elevated

The Pound grazed the 1.28 mark against the US Dollar for the first time since May before moderating, as investors hold out hope that a Brexit deal can be secured with the EU in a matter of days. Sterling has strengthened against all G10 and Asian currencies so far this week.

Should the Brexit deal be approved at the upcoming EU leaders’ summit, that could prompt GBPUSD to claim more upside towards 1.30. The Brexit deal however, is expected to face a sterner political test in Westminster, where previous versions of a deal have failed. Should this Brexit deal fall short in overcoming any of its political hurdles this week, Sterling could then quickly tumble towards 1.22.

UK Prime Minister Boris Johnson may then be forced to ask for a Brexit extension, and in so doing, merely kick the Brexit can down the road once more and string the Pound along its volatile path for longer.

US retail sales data could shift Dollar, Fed rate cut expectations

With the Dollar Index (DXY) now trading around the lower 98 levels, DXY’s next move could be triggered by the upcoming September US retail sales data. Investors have been relying on US consumers to keep the momentum in growth intact, seeing as the US manufacturing sector has been feeling the strains from global trade tensions.

Should the retail sales print come in below market forecasts of 0.3 percent, that could prompt some softness in the Greenback as markets ramp up expectations for more Fed policy easing in 2019. At the time of writing, the Fed funds futures point to a 72.9 percent chance of a 25-basis point cut at the end of this month, followed by a 55.4 percent chance of the Fed leaving its benchmark interest rates unchanged in December.

The Dollar could moderate further if the risk-on mode is sustained following a “limited” US-China trade deal. US President Donald Trump may be forced to dilute his hardline stance in order to seal more policy wins in the lead up to the 2020 Presidential elections. Such a scenario could erode support for the Greenback, as global economic conditions and risk appetite draw relief from easing trade tensions.

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Where Next for Oil After Its Double Reversal?

In yesterday’s Alert, we wrote the following:

Crude oil moved higher last week, especially on Thursday and Friday. This rally was in tune with the clear buy signals from the CCI and Stochastic indicators. While crude oil pulled back in today’s pre-market upswing, it’s unlikely that the rally is completely over at this time. Why? Because of two factors: one that we covered previously, and one that we didn’t cover so far.

The thing that we already discussed is the upside target based on the 38.2% Fibonacci retracement. It was not reached yet. Consequently, the price most likely has further to run.

The thing that we didn’t mention previously is the fact that crude oil just invalidated the breakdown below the rising dashed support line that’s based on the December 2018 and the August 2019 lows. Invalidations of breakdowns are bullish on their own. That’s yet another reason to expect the profits on the current crude oil long position to increase further.

The above generally remains up-to-date. The price of crude oil declined today and then rose back up and at the moment, our long positions are about $1.50 in the black. The question is whether we run for the hills because of this week’s decline, or do we wait for the price target to be reached.

The latter still appears to be the better idea. Applying the Fibonacci retracements to the October rally shows that today’s low formed almost exactly at the 61.8% Fibonacci retracement level. That’s the classic way for any asset to correct its preceding move and then to resume the trend. The short-term trend remains up, which means that the odds are that our target area will be reached.

One concerning matter is the situation in the USD Index. In the very recent past – the last several days – the USD Index and crude oil moved in the opposite ways. Thursday’s and Friday’s upswing in crude oil corresponded to declining USD. And the USD Index seems to be bottoming.

Then again, the relationship may be very short-lived and crude oil might be able to rally despite USD’s rally for a few days, anyway. After all, the USD Index is up at the moment of writing these words, and crude oil is almost done correcting its initial downswing.

Consequently, in our view, the current long position is justified from the risk-reward point of view.

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Oil Trading Alerts to also benefit from the trading action we describe – the moment it happens. Check more of our free articles on our website – just drop by and have a look. We encourage you to sign up for our daily newsletter, too – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Gold & Silver Trading Alerts. Sign up for the free newsletter today!

Thank you.

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Two-Weeks Before Fed Meeting, Policymakers Remain Divided Over Rate Cut

It’s not too early to start thinking about the U.S. Federal Reserve’s next move on interest rates. With two weeks to go until their next monetary policy meeting on October 29-30, U.S. central bank policymakers appear unconvinced phase one of a partial U.S.-China trade deal is enough to dismiss the policy uncertainty that has weighed on U.S. economic growth for months.

At the same time, Federal Reserve decision-makers remain far from united behind additional rate cuts beyond the two cuts they made in July and September with unemployment at a 50-year low and consumer spending strong.

On Tuesday, it was San Francisco Fed President Mary Daly and St. Louis Federal Reserve President James Bullard’s turn to voice their opinions about the direction of interest rates.

Off-Setting Views

On Tuesday, Daly told reporters after a speech at the Lost Angeles World Affairs Council & Town Hall, “Right now, I see the economy in a good place, and policy accommodation in a good place.”

However, businesses retain an overarching sense of uncertainty, Daly said, even though “the gusting (of headwinds) seems to have gone down a little bit on the news of some progress on Brexit, some progress on trade negotiations between the U.S. and China.”

Current weak inflation levels, and a three-year inflation outlook among U.S. consumers falling to its lowest level on record, has caught her eye.

On Tuesday, a report showed the inflation outlook among U.S. consumers remained muted in September, rising slightly over the near-term but falling to the lowest level on record over a three-year time frame since the New York Federal Reserve began its monthly survey of consumer expectations in 2013.

Although Daly expressed some concerns over low inflation, she still expects it to rise back to the Fed’s 2% target, and believes the Fed’s two rate cuts so far this year, in July and September, will help sustain the longest U.S. expansion in history.

“In terms of what to do going forward, I would like to see additional data, because the economy is in a really good place right now,” Daly said.

Speaking in London, Bullard painted a gloomier picture. Like Daly, he sees what he called continued “trade regime uncertainty” as a key risk to the U.S. economy. However, he also put more emphasis on continued weak inflation and slowing global growth.

Unlike Daly, who sees Fed policy as currently “slightly accommodative”, Bullard said on Tuesday in his view policy may be “too restrictive”.

As a result, the Fed “may choose to provide additional accommodation going forward, but decisions will be made on a meeting-by-meeting basis,” Bullard said.

Fed Still Divided

Two weeks before the Fed’s interest rate decision, and policymakers still haven’t budged from their September meeting positions.

One group like Fed Chair Jerome Powell believes the outlook is generally positive. Another believes the U.S. economy needs even easier policy to avoid sinking into a recession. Still a third group believes the Fed has gone far enough or even a little too far in trying to revitalize the economy. Their biggest fear is a too-easy policy could lead to financial instability if investors take on too much risk and asset values get stretched.

As of Tuesday’s close, investors expect Fed policymakers to reduce rates when they meet October 29-30. According to the CME FedWatch Tool, the latest probability of a 25-basis point Federal Open Market Committee (FOMC) rate cut is 75.4%.

The focus ahead of the next Fed meeting will be on U.S. economic data. This week, the key report is Retail Sales. Next week, it’s Durable Goods. On October 29, the Conference Board releases its Consumer Confidence report. On October 30 while the Fed is meeting, a report on Advance GDP will be released.

Unfortunately, Fed members won’t have the chance at this meeting to react to data on Personal Spending and the Core PCE Price Index.

Additionally, ISM Manufacturing, which last month posted its second consecutive contraction, will be released on November 1 along with the October Non-Farm Payrolls report.

This could be a problem for Fed members because some may favor another rate cut in anticipation of a weak ISM Manufacturing report, and some may pass on a rate cut due to expectations of a solid jobs report.

Brexit and Economic Data Put the GBP and USD in Focus

Earlier in the Day:

It was a relatively busy day on the economic calendar through the Asian session this morning.

New Zealand 3rd quarter inflation figures provided the Kiwi Dollar with direction early in the session.

Outside of the stats, positive updates on Brexit and U.S corporate earnings failed to support risk sentiment early on.

For the Kiwi Dollar

The annual rate of inflation eased from 1.7% to 1.5% in the 3rd quarter, while coming in ahead of a forecast of 1.4%. Quarter-on-quarter, consumer prices rose by 0.7%, following a 0.6% rise in the 2nd quarter. Economists had forecast a 0.6% increase.

According to NZ Stats,

  • Higher prices for rents and cigarettes and tobacco supported the 1.5% increase in the CPI, year-on-year.
  • The increase was partially offset by falling prices for vegetables, petrol, and telecommunications equipment.
  • Quarter-on-quarter, the 0.7% rise in consumer prices came off the back of price rises for local authority rates and payments, vegetables, and meat and poultry.
  • Falling prices for fruit, petrol, and new cars were negatives for the quarter.

The Kiwi Dollar moved from $0.62858 to $0.063125 upon release of the figures. At the time of writing, the Kiwi Dollar was down by 0.21% to $0.6281.

Elsewhere

At the time of writing, The Japanese Yen was up by 0.14% to ¥108.71 against the U.S Dollar, while the Aussie Dollar was down by 0.21% to $0.6739.

The Day Ahead:

For the EUR

It’s a relatively busy day ahead on the economic calendar. Finalized Italian and Eurozone inflation figures for September are due out later this morning, along with the Eurozone’s August trade figures.

Barring material deviation from prelims, the Eurozone’s trade data will likely have the greatest influence on the EUR.

Outside of the numbers, Brexit will continue to have an impact throughout the day.

At the time of writing, the EUR was down by 0.02% to $1.1031.

For the Pound

It’s a relatively busy day ahead on the data front. September inflation figures are due out later this morning.

We can expect the Pound to show greatest sensitivity to the annual rate of inflation and the Input Producer Price Index figures.

Direction for the Pound will ultimately come from Brexit updates, however. With the EU Summit now just 4-days away, time is rapidly running out.

Positive updates from the EU and the Brexiteers delivered more upside for the Pound at the start of the week. Expect plenty of volatility and a reversal should negative updates begin to filter through, however.

At the time of writing, the Pound was down by 0.28% to $1.2751.

Across the Pond

It’s a relatively busy day ahead on the economic calendar. September retail sales figures are due out later today, along with August business inventory numbers.

Retail sales will have the greatest influence on the day. Consumer spending remains a key contributor and barometer to the U.S economy. Any unexpected slide in spending and expect the markets to balk as recession chatter continues to do the rounds.

On the geopolitical front, demand for the Dollar could rise should progress on Brexit negotiations hit a wall. Chatter from the Oval Office also needs monitoring throughout the day.

The Dollar Spot Index was up by 0.02% to 98.312 at the time of writing.

For the Loonie

It’s a busier day on the economic calendar, with September inflation figures due out later today. Expect the Loonie to react to today’s figures, with support likely to kick in should inflationary pressures build. The monthly movement in consumer prices will likely have the greatest impact.

With the BoC holding steady on the monetary policy front, inflation will need to hold steady at best.

The Loonie was down by 0.04% at C$1.3204, against the U.S Dollar, at the time of writing.

US Stock Market Overview – Stock Rally Driven by Healthcare and Robust Bank Earnings

Stock prices moved higher on Tuesday as riskier assets gained traction. As stock prices move higher, US yields move in tandem. The higher yields reflect the market’s belief that a trade agreement could occur. Better than expected earnings were released on Tuesday in the banking sector which buoys the US stock market, raising yields and pushing gold lower. Most sectors were higher, driven by healthcare, and technology shares, consumer staples, and utilities bucked the trend. Financials were also a robust performer following stronger than expected earnings.

Banks Beat the Street

In the banking sector, shares of JPMorgan Chase, rose 3.25% after the bank reported better than expected financial results. The company continued to see strength in both its consumer and investment-bank businesses. JPMorgan reported a profit of $9.08 billion, or $2.68 a share. Expectations had been for earnings of $2.45 a share. A year earlier, the bank reported a profit of $8.38 billion, or $2.34 per share. Revenue from non-lending operations at the bank jumped 13% to $15.11 billion. In the bank’s consumer unit, revenue rose 7% to $14.26 billion and in the corporate and investment bank it rose 6% to $9.34 billion.

Citi also beat on the top and bottom line. Citi reported earnings of $1.97 per share versus expectations that the company would earn $1.95 per share. Revenue came in at $18.6 billion versus expectations that the firm would post revenue of $18.545 billion. Fixed-income trading posted revenue of  $3.211 billion versus expectations of $3.09 billion. Net interest margin came in at 2.56% versus 2.66% forecast.

Not all the banks beat. Goldman Sachs disappointed. The company said that profit slumped 26% to $1.88 billion, or $4.79 a share, below the $4.81 expected. Revenue fell 6% to $8.32 billion, slightly above the $8.31 billion expected, on lower results in the firm’s investing and lending and investment banking divisions.

Healthcare Rallies on J&J Earnings

Healthcare was the best performing sector in the S&P 500 index following robust financial results from Johnson & Johnson. The company reported earnings per share $2.12 versus $2.01 expected. Revenue came in at $20.73 versus $20.07 billion expected. J&J also raised its full-year guidance and now sees earnings of $8.62 to $8.67 per share, with revenue in the range of $81.8 billion to $82.3 billion. Prior to the report, analysts were expecting full-year earnings guidance of $8.53 to $8.63 a share on revenue of $82.4 billion to $83.2 billion.

U.S. Dollar Index Futures (DX) Technical Analysis – Brexit Optimism, Strong Sterling Weighing on Dollar Index

The U.S. Dollar is trading slightly lower against a basket of major currencies after posting a wicked two-sided trade early Tuesday. The early session rally was fueled by increasing demand for risky assets as U.S. Treasury yields rose and equity markets soared on the back of upbeat comments over Brexit and better-than-expected U.S. earnings reports.

At 16:11 GMT, December U.S. Dollar Index futures are trading 98.015, down 0.155 or -0.16%.

The upbeat comments over Brexit, however, were a double-sided sword, however, with a surge in the British Pound helping to drive the index lower. The Euro also inched higher against the dollar. However, losses may have been limited by a drop in demand for the safe-haven Japanese Yen and Swiss Franc. The dollar also lost ground to the commodity-linked Canadian Dollar.

Dollar index traders are primarily focused on the British Pound after optimistic comments on Brexit from European negotiator Michel Barnier were backed up by reports that a draft legal text over the United Kingdom’s divorce from the European Union was being drawn up.

U.S. Dollar Index
Daily December U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum has been trending lower since the formation of the closing price reversal top at 99.305 on October 1.

The main trend will change to down on a trade through 97.560. A move through 99.305 will negate the closing price reversal top and signal a resumption of the uptrend.

The minor trend is down. This move confirms the shift in momentum to the downside. A trade through 98.955 will change the minor trend to up.

The short-term range is 96.960 to 99.305. Its retracement zone at 98.135 to 97.855 is currently being tested. This zone provided support on Friday when the selling stopped at 97.885. Trader reaction to this retracement zone will likely determine the near-term direction of the index.

On the upside, 50% resistance levels come in at 98.435 to 58.595. On the downside, the major 50% support level is 97.140.

Daily Swing Chart Technical Forecast

Based on the early price action and the current price at 98.015, the direction of the December U.S. Dollar Index the rest of the session on Tuesday is likely to be determined by trader reaction to the 50% level at 98.135.

Bearish Scenario

A sustained move under 98.135 will indicate the presence of sellers. This could trigger a further break into Friday’s low at 97.885, followed by the Fibonacci level at 97.855. This is a potential trigger point for an acceleration to the downside with 97.560 the next likely downside target.

Bullish Scenario

Overcoming the 50% level at 98.135 and sustaining the move will signal the presence of buyers. If this creates enough upside momentum then look for an extension of the rally into the 50% level at 98.435.

Brexit and Economic Data Keep the GBP and the EUR in Focus

Earlier in the Day:

It was a relatively busy day on the economic calendar through the Asian session this morning.

China’s September inflation figures provided direction ahead of finalized August industrial production figures out of Japan due out later this morning

In the early part of the day, the RBA also released its meeting minutes from last Tuesday’s meeting.

On the geopolitical front, sentiment towards the latest on the U.S – China trade talks and Brexit also influenced early on.

For the Aussie Dollar

Following last week’s rate cut, the RBA meeting minutes had limited influence on the Aussie Dollar. Salient points from the October Minutes included:

  • Risks to the global growth outlook remained tilted to the downside.
  • Businesses scaled back investment plans as a result of the technology and trade disputes between the U.S and China.
  • Further monetary policy easing was delivered to support employment and income growth and greater confidence that inflation would be consistent with the medium-term target.
  • Members noted that the unemployment and inflation outcomes were likely to fall short of forecasts in the near-term.
  • Subdued wage growth also suggested that spare capacity remained in the economy.
  • In spite of strong employment growth, however, the spare capacity remained, with employment growth expected to slow.
  • While lower interest rates could affect confidence, it would also support household cash flows and spending.
  • It was also noted that members were prepared to ease monetary policy further if needed.

The Aussie Dollar moved from $0.67694 to $0.067703 upon release of the minutes that preceded China’s inflation figures.

From China

The annual rate of inflation picked up from 2.8% to 3.0%, coming in ahead of a forecast of 2.9%. Month-on-month, consumer prices rose by 0.9%, coming in ahead of a forecasted and August 0.7%.

Wholesale fell further in September, however, with wholesale prices falling by -1.2% compared with September 2018. While in line with forecasts, the pace of deflation picked up from August’s 0.8%.

The Aussie Dollar moved from $0.67865 to $0.67849 upon release of the figures. At the time of writing, the Aussie Dollar was flat at $0.6775.

Elsewhere

At the time of writing, The Japanese Yen was up by 0.09% to ¥108.30 against the U.S Dollar, while the Kiwi Dollar was up by 0.11% to $0.6306.

The Day Ahead:

For the EUR

It’s a relatively busy day ahead on the economic calendar. Germany and the Eurozone’s ZEW economic condition figures are due out later this morning.

French finalized September inflation figures and Germany’s ZEW current conditions figures will likely have a muted impact on the EUR.

Outside of the numbers, we can expect direction to also come from Brexit as the Brexit clock ticks away.

At the time of writing, the EUR was up by 0.04% to $1.1031.

For the Pound

It’s a busy day ahead on the data front. August earnings and unemployment figures are due out along with September’s claimant count numbers.

We can expect the Pound to show greatest sensitivity to the wage growth and claimant count figures. Any unexpected rise in the unemployment rate, coupled with larger than anticipated increase in claimant counts would weigh heavily, however.

While we expect the stats to influence, Brexit will continue to be the key driver. A further pullback from Friday’s recent high should be expected should little progress be made on a deal.

At the time of writing, the Pound was up by 0.06% to $1.2616.

Across the Pond

It’s a relatively quiet day ahead on the economic calendar. October’s NY Empire State Manufacturing Index figures are due out later today.

With tariffs still in place, any further deterioration in manufacturing sector conditions would be negative.

Chatter from the Oval Office would require monitoring, however. There’s also Brexit to factor in, with any negative news considered Dollar positive.

The Dollar Spot Index was down by 0.04% to 98.417 at the time of writing.

For the Loonie

It’s a quiet day on the economic calendar. There are no material stats out of Canada to provide the Loonie with direction.

The lack of stats will leave the Loonie in the hands of crude oil prices later in the day.

The Loonie was up by 0.02% at C$1.3232, against the U.S Dollar, at the time of writing.

U.S. Dollar Index Futures (DX) Technical Analysis – Safe-Haven Buying Boosts Greenback

The U.S. Dollar returned to its role as a safe-haven currency on Monday as optimism over “phase one” of the partial trade deal reached on Friday between the United States and China faded.

The greenback is posting gains versus the Euro, British Pound and Canadian Dollar, while losing ground to the Japanese Yen and Swiss Franc after Bloomberg News reported that China wants more talks as soon as the end of October to hammer out the details of the phase one deal.

Also underpinning demand for safe-haven currencies was a comment from U.S. Treasury Secretary Mnuchin. He said on Monday that an additional round of tariffs on Chinese imports will likely be imposed if a trade deal with China has not been reached by the time they are set to start, but added that he expected the agreement to go through.

At 16:50 GMT, December U.S. Dollar Index futures are trading 98.240, up 0.240 or +0.26%.

U.S. Dollar Index
Daily December U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum has been trending lower since the formation of the closing price reversal top at 99.305 on October 1.

The minor trend is down. This confirms the shift in momentum.

The main range is 96.960 to 99.305. Its retracement zone at 98.135 to 97.855 is currently being tested. It stopped the selling at 97.885 on Friday. This zone is also controlling the near-term direction of the index.

The first resistance is a 50% level at 98.435, followed by a second 50% level at 98.595.

Daily Swing Chart Technical Forecast

Based on the early price action, the direction of the December U.S. Dollar Index into the close on Monday is likely to be determined by trader reaction to the 50% level at 98.135.

Bullish Scenario

A sustained move over 98.135 will indicate the presence of buyers. If volume increases on the move then look for a potential surge into the next 50% level at 98.435.

Bearish Scenario

A sustained move under 98.135 will signal the presence of sellers. If selling volume surges then look for a move into 97.885 to 97.855.

Side Notes

Volume is well-below average on Monday because of the Columbus Day holiday. The Treasury market is closed as well as some banks. However, the major stock indexes are open. Nonetheless, the trade is extremely light.

A Light Economic Calendar Puts the GBP and Brexit in the Limelight

Earlier in the Day:

It was a relatively quiet day on the economic calendar through the Asian session this morning.

China’s September trade figures provided direction at the start of the week.

On the geopolitical front, the Asian equity markets responded to the positive updates on Brexit and trade negotiations.

In the FX markets, however, the mood was less bullish. Existing punitive tariffs remain that suggest more doom and gloom before any pickup in economic activity.

From China

The U.S Dollar trade surplus widened from $34.84bn to $39.65bn in September. Economists had forecast a narrowing to $33.30bn.

  • Year-on-year, exports fell by 3.2%, which was worse than a forecasted 3.0% fall. In August, exports had fallen by 1.0%.
  • Imports fell by 8.5%, year-on-year, in September, which was worse than a forecasted fall of 5.2%. Imports had fallen by 5.6% in August.

The Aussie Dollar moved from $0.67760 to $0.67861 upon release of the figures. At the time of writing, the Aussie Dollar was down by 0.15% to $0.6784.

While the trade surplus widened, a slide in imports suggests waning demand that could spell trouble in the months ahead.

Elsewhere

At the time of writing, The Japanese Yen was down by 0.03% to ¥108.32 against the U.S Dollar, while the Kiwi Dollar was down by 0.49% to $0.6306.

The Day Ahead:

For the EUR

It’s a relatively quiet day ahead on the economic calendar. The Eurozone’s August industrial production figures are due out of the Eurozone.

Following an unexpected pickup Germany, forecasts are EUR positive.

Outside of the numbers, we can expect direction to also come from Brexit and any chatter on trade.

At the time of writing, the EUR was down by 0.13% to $1.1028.

For the Pound

It’s a quiet day ahead on the data front. There are no material stats due out of the UK to provide the Pound with direction.

The lack of stats will leave the Pound in the hands of Brexit chatter throughout the day. The EU Summit is now within sight and Boris Johnson has just days to finalize a deal with the EU.

Expect Pound sensitivity to Brexit chatter to remain heightened at the start of the week.

At the time of writing, the Pound was down by 0.59% to $1.2593. A lack of progress from the weekend weighed on the Pound early on.

Across the Pond

It’s also a quiet day ahead on the economic calendar. There are no material stats to provide the Greenback with direction on the day.

The lack of stats will leave geopolitics in focus. Any further easing in geopolitical risk would be considered Dollar negative.

The Dollar Spot Index was up by 0.14% to 98.436 at the time of writing. Support kicked in early as trade talks failed to lead to a removal of existing tariffs.

For the Loonie

It’s a quiet day on the economic calendar. There are no material stats out of Canada to provide the Loonie with direction.

We can expect market risk sentiment through the day to influence. Trade data out of China and no suggestion of the removal of existing tariffs were negatives early on.

The Loonie was down by 0.05% at C$1.3209, against the U.S Dollar, at the time of writing.

Phase One: Too Much Uncertainty to Call It a ‘Good Deal’

It’s tough to say whether investors liked the first phase of the trade deal between the United States and China announced on Friday because of what was contained in the details, or because something was finally accomplished after months of waiting.

I have to admit, I didn’t think anything would be accomplished at the two-day meeting because I became caught up in the headlines throughout the week that seemed to be leaning toward the negative side. However, I quickly came to my senses on Thursday night when I saw the five indicator markets – Treasurys, Gold, U.S. Dollar, Japanese Yen, S&P 500 Index – starting to make noticeable moves.

When Treasurys, Gold, U.S. Dollar and Japanese Yen all started moving in the same direction, I knew something was up because this was unusual. It was especially odd seeing gold and the dollar both breaking sharply. These are the markets that investors were using to hedge risk. So when they all started to break, I sensed investors were trimming positions against the worst outcome of the trade talks.

Trump’s Flip-Flop Source of Tension

President Trump was actually the source of most of the recent tension in the markets.

On September 20, he signaled that he would consider an interim trade deal with China, even though he would not prefer it.

The president told reporters he would like to ink a full agreement with the world’s second largest economy. However, he left the door open to striking a limited deal with Beijing.

“If we’re not going to do the deal, let’s get it done,” he told reporters. “A lot of people are talking about it, I see a lot of analysts are saying an interim deal – meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.”

Later that day, a White House official then said the U.S. is “absolutely not” considering such a deal.

A few days later on September 24, Trump said he will not accept a “bad deal” in trade talks with China. “Hopefully we can reach an agreement that will be beneficial for both countries. But as I have made very clear I will not accept a bad deal for the American people.”

But Did Trump Make a Bad Interim Trade Deal?

No interim deal, check. Bad deal, check. Morgan Stanley says President Trump’s partial deal with China is an “uncertain” arrangement at best and there does not appear to be a viable path to reduce existing tariffs at the moment.

Without a durable dispute settlement mechanism in place, another round of tariff increases cannot be ruled out, according to Morgan Stanley.

“There is not yet a viable path to existing tariffs declining, and tariff escalation remains a meaningful risk,” the bank said in a note. “Thus, we do not yet expect a meaningful rebound in corporate behavior that would drive global growth expectations higher.”

Evercore wrote in a note, “Trump’s statement that ‘We are near the end of the trade war’ is not plausible to us. We do not expect tariff cuts in 2020 – but are ready to be favorably surprised. And as long as such punitive tariffs remain, we would describe US-China economic relations as bad, not good.”

JP Morgan said the first phase of the deal is a positive development after months of trade escalation, but that the outcome is not a surprise for the market. It expects that US-China tension could escalate again, especially during the 2020 presidential election.

“Investors had high hopes for some form of mini-deal in the weeks before the meeting, and Friday’s announcement has at least been partially, if not fully, priced in” the firm wrote.

Near-Term Expectations

Trader focus over the near-term should be on one or all of the following markets – Treasurys, Gold, U.S. Dollar, Japanese Yen and S&P 500 Index. If it proves to be too much then watch Treasury yields.

There is still risk to the economy because the initial series of tariffs still exist. Once traders trim their hedges placed in anticipation of the October 15 tariffs that have now been suspended, yields should flatten and traders will start pricing in the possibility of a Fed rate cut.

Traders aren’t changing sentiment, per se. They are just making adjustments to the suspension of the October 15 tariffs so don’t expect too much more downside action in gold, the U.S. Dollar and Japanese Yen. All should find support at or near their September 11 levels, the day Trump announced the October 15 tariffs.

The Week Ahead – Brexit, Earnings, Stats and the IMF and EU Summit in Focus

On the Macro

For the Dollar:

It’s a busier week ahead on the economic calendar.

NY Empire State Manufacturing figures for October get the week going on Tuesday. The focus will then shift to September retail sales figures due out on Wednesday.

With a heavy reliance on consumer spending, the numbers will need to be in line with forecasts to provide Dollar support.

On a busy Thursday, September building permit and housing start figures are due out along with October’s Philly FED Manufacturing numbers.

September industrial production and the weekly jobless claims figures are also due out.

With no material stats due out on Friday, Wednesday’s retail sales and Thursday’s Philly FED numbers will have the greatest impact.

Outside of the stats, trade war chatter will continue to be a factor, as will any further talk of impeachment.

The Dollar Spot Index ended the week down by 0.55% to $98.301.

For the EUR:

It’s also a relatively quiet week ahead on the economic data front.

Industrial production figures on Monday and German and Eurozone economic sentiment figures on Tuesday will influence early in the week.

The Eurozone’s September inflation and industrial production figures due out on Wednesday will also provide direction.

We would expect finalized inflation figures out of France and Italy to have a muted impact on the EUR, however.

With no material stats due out in the latter part of the week, geopolitical risk will remain in focus.

Any talk of U.S tariffs on EU goods and chatter on Brexit ahead of the 19th October EU Summit will also need considering.

The EUR/USD ended the week up by 0.58% to $1.1042.

For the Pound:

It’s another busy week ahead on the economic calendar.

Key stats include employment figures due out on Tuesday, inflation figures on Wednesday and retail sales numbers on Thursday.

On the data front, claimant counts, inflation and retail sales figures will be the key drivers in the week.

On the Brexit front, there would be more upside for the Pound should Johnson finalize a deal ahead of next weekend’s EU Summit.

The GBP/USD ended the week up by 2.73% to $1.2668.

For the Loonie:

It’s a relatively busy week ahead on the data front.

Key stats include September inflation figures due out on Wednesday and August manufacturing sales numbers due out on Thursday.

On the data front, we would expect the inflation figures to be the key driver in the week.

From elsewhere, trade data, industrial production and 3rd quarter GDP numbers out of China will also influence.

The Loonie ended the week up by 0.83% to C$1.3203 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s another relatively quiet week ahead.

Key stats are limited to September’s employment numbers due out on Thursday.

On the monetary policy front, the RBA minutes are due out on Tuesday and could pressure the Aussie Dollar should there be suggestions of more rate cuts to come.

From elsewhere, economic data out of China on Monday and Friday will also influence.

The Aussie Dollar ended the week up by 0.34% to $0.6794.

For the Japanese Yen:

It’s a relatively quiet week ahead on the economic calendar.

Key stats are finalized industrial production figures due out on Tuesday and inflation and trade data on Friday.

We would expect the stats to have a relatively muted impact on the Yen, however.

Geopolitics and economic data out of the U.S and China will likely have the greatest impact in the week.

The Japanese Yen ended the week down by 1.26% to ¥108.29 against the U.S Dollar.

For the Kiwi Dollar:

Stats are on the quieter side in the week ahead.

Economic data is limited to 3rd quarter inflation figures that are due out on Wednesday. We can expect the Kiwi to be particularly sensitive to the numbers.

From elsewhere, stats from China will also influence in the week.

The Kiwi Dollar ended the week up by 0.27% to $0.6337.

Out of China:

It’s a busy week on the economic data front. Economic data includes trade data due out on Monday and inflation figures on Tuesday.

The focus will then shift to a busy Friday. Stats on Friday include fixed asset investment, industrial production and 3rd quarter GDP numbers.

We expect trade data, industrial production, and the GDP numbers to have the greatest impact on market risk sentiment.

The impact of any weak numbers could be buffered, however, by any further positive chatter on trade.

The Yuan ended the week up by 0.83% to CNY7.0892 against the Greenback.

Geo-Politics

Impeachment: With the U.S and China making progress on trade, impeachment chatter could return in the week ahead.

Trade Wars: 15th October U.S tariffs on Chinese goods have been postponed as progress was made last week. For real progress to be made, however, the U.S would need to remove existing tariffs that continue to hurt the Chinese economy. Expect more chatter in the week, which will influence risk sentiment.

UK Politics: Brexit talks continue, with a deal now needed to support further the Pound ahead of the EU Summit. Any suggestions that the latest proposal is inadequate and expect the Pound to slide.

The Rest

Earnings:  It’s a big week ahead, with U.S banks Citi, Goldman, JPMorgan, and Wells Fargo announcing.

EU Summit: It is make or break for Boris Johnson and the Brexiteers. Will there finally be an agreement for the British PM to take back to parliament?

IMF Annual Meeting: Chatter on the global economy and what can be done to drive growth will influence. Will there be any agreements to ramp up fiscal spending to offset the effects of the ongoing U.S – China trade war?

The Weekly Wrap – Progress on Brexit and Trade Delivered in the Week

The Stats

It was a quieter week on the economic calendar in the week ending 11th October.

A total of 44 stats were monitored throughout the week, following 74 stats from the week prior.

Of the 44 stats, 17 came in ahead forecasts, with 22 economic indicators coming up short of forecast. 5 stats were in line with forecasts in the week.

Looking at the numbers, 19 of the stats reflected an upward trend from previous figures. Of the remaining 25, 20 stats reflected a deterioration from previous.

While the economic data was skewed to the negative, the Dollar struggled in the week, as demand for the dollar eased off the back of positive updates from trade talks and Brexit.

The U.S Dollar Index (“DXY”) fell by 0.55% to end the week at $98.301.

Out of the U.S

It was a relatively quiet week on the economic data front. Wholesale inflation figures on Tuesday and September inflation figures on Thursday provided direction early in the week.

wholesale and consumer prices were on the softer side in September, pinning back the greenback.

On Friday, positive Michigan’s consumer expectations and sentiment figures failed to support the Greenback.

Off less influence in the week, were JOLTs job openings, initial jobless claims and import and export price index figures.

Outside of the stats, the FOMC meeting minutes revealed some debate on when to end the current rate path. Rising concerns over the economic outlook suggested that more cuts could be on the way.

The reality was, however, that just 7 of 17 FOMC members foresaw a further rate cut before the year-end.

Downside for the Dollar ultimately came from an easing in geopolitical risk, with most of the damage coming at the end of the week.

In the equity markets, a Friday rebound pulled the majors into the green for the week. The Dow and S&P500 ended the week up by 0.91% and 0.62% respectively, with the NASDAQ up 0.93%.

Out of the UK

It was a busy week on the economic calendar.

Key stats included GDP, industrial and manufacturing production and trade data on Thursday.

While production was on the slide, quarter-on-quarter GDP numbers continued to show the UK economy dodging a recession. The numbers were ultimately Pound positive.

Of less influence in the week were housing sector figures, labor productivity, and retail sales numbers.

While the stats were supportive of the Pound, the upside ultimately came from Brexit news.

Progress towards a possible trade deal, ahead of next week’s EU Summit, drove demand for the Pound.

The Pound ended the week up by 2.73% to $1.2668.

For the FTSE100, a stronger Pound failed to pressure the 100, with the index rising by 1.28%.

Out of the Eurozone

It was particularly quiet week on the economic data front.

Germany’s factory orders and trade data provided little support in the week, with factory orders falling again and the trade deficit narrowing.

On the positive, however, was an unexpected rise in industrial production.

At the end of the week, finalized September inflation figures out of Germany and Spain had a muted impact on the EUR.

On the monetary policy front, the ECB monetary policy meeting minutes also left the EUR unscathed.

The upside in the week ultimately came from positive updates on Brexit and progress on the U.S – China trade talks.

For the week, the EUR rose by 0.58% to $1.1042.

For the European major indexes, the DAX30 rallied by 4.15%, with the EuroStoxx600 and CAC40 up by 3.23% and 3.00% respectively.

Elsewhere

It was another positive week for the Aussie and Kiwi Dollars.

The Aussie Dollar rose by 0.34% to $0.6794, while the Kiwi Dollar gained 0.27% to $0.6337.

For the Aussie Dollar

It was a quiet week for the Aussie Dollar.

Economic data was limited to September’s business confidence and October consumer sentiment figures.

Both business and consumer confidence figures disappointed in the week, pinning back the Aussie Dollar.

Of less influence were home loan figures that continued to reflect improved housing sector conditions.

In spite of the negative bias on the stats, a Friday rally in the Aussie Dollar delivered the gains for the week. Positive updates on trade talks delivered the upside on the day.

For the Kiwi Dollar

The stats were, once more, skewed to the negative in the week.

September’s Business PMI held steady at 48.4, coming up short of a forecast of 49.0. Electronic card retail sales also came up short of forecasts, whilst up by 0.4% in September.

While the stats were skewed to the negative on Friday, a 0.27% gain on the day gave the Kiwi Dollar the upside for the week.

For the Loonie

Through the 1st half of the week, housing sector figures impressed, proving some support.

Employment figures on Friday were the key driver, however, with the unemployment rate falling from 5.7% to 5.5%. A 53k rise in employment, following an 81.1k increase in August, delivered on the day.

Positive updates from trade talks also delivered provided support late in the week, with WTI and Brent gaining 3.58% and 3.54% respectively.

The Loonie ended the week up by 0.83% to C$1.3203 against the Greenback.

For the Japanese Yen

It was a relatively quiet week on the data front. Stats were limited to August household spending figures that came in worse than forecasts.

While the stats were Yen negative, the downside from the Yen came from an easing in geopolitical risk.

Safe-haven demand waned as progress on Brexit negotiations and trade talks spurred demand for riskier assets.

For the week, the Japanese Yen fell by 1.26% to ¥108.29.

Out of China

It was a quiet week on the economic data front.

September’s service sector PMI, which reported slower sector growth, tested risk sentiment on Monday.

A lack of stats through the remainder of the week left updates from the U.S – China trade talks to influence risk sentiment.

The Yuan rose by 0.83% to CNY7.0892 against the Greenback.

Trade Talks and Brexit Negotiations to Remain the Key Drivers

Earlier in the Day:

It was a relatively quiet day on the economic calendar through the Asian session this morning.

The Kiwi Dollar was in action, with September’s Business PMI and electronic card retail sales providing direction early on.

On the geopolitical risk front,  it was risk-on as the markets responded to positive updates from the U.S – China trade talks. There were also positive updates on Brexit negotiations, adding to the positive sentiment early in the day.

For the Kiwi Dollar

The Business PMI held steady at 48.4 September, falling short of a forecast of 49.0, according to the latest PMI Survey.

Electronic card retail sales rose by 0.4%, month-on-month, in September, following a 1.2% rise in August. Economists had forecast a 0.5% increase.

According to NZ Stats,

  • A 0.8% jump in spending on groceries and liquor provided support in September.
  • Spending on durables, including electronics, hardware, furniture and appliances and in the hospitality industries also supported. Both sectors saw a 0.4% rise in spending.
  • Weighing in September was a 4% fall in spending on clothes and shoes.

The Kiwi Dollar moved from $0.63181 to $0.63194 upon release of the figures. At the time of writing, the Kiwi Dollar up by 0.05% to $0.6323.

Elsewhere

At the time of writing, The Japanese Yen was up by 0.01% to ¥107.97 against the U.S Dollar, with the Aussie Dollar was up by 0.16% to $0.6772.

The Day Ahead:

For the EUR

It’s a relatively quiet day ahead on the economic calendar. with German, French and Spanish finalized September inflation figures due out.

Barring a deviation from prelim figures, the stats will unlikely have a material impact on the EUR.

On the geopolitical front, it’s France’s imposed deadline for Britain to deliver a viable alternative to the Irish backstop. We can expect movement across the majors as news filters through. There is also the U.S – China trade war to factor in.

At the time of writing, the EUR was up by 0.09% to $1.1015.

For the Pound

It’s a quiet day ahead on the data front. There are no material stats due out of the UK to provide the Pound with direction.

The market focus on the day will be on Brexit as Boris Johnson’s time runs out on delivering proposals to the EU. We expect the Pound to be particularly sensitive to any updates over the course of the day.

At the time of writing, the Pound was down by 0.02% to $1.2440.

Across the Pond

It’s a relatively busy day ahead on the economic calendar. Key stats include U.S import and export price figures along with prelim consumer sentiment and expectation figures for October.

On the data front, we expect the Michigan consumer sentiment figures to have the greatest influence late in the day.

On the geopolitical front, it’s Friday, which has proven to be one of Trump’s favored day for tweeting. Following positive updates on Thursday, there could be further pick up in risk appetite should talks progress favorably.

The Dollar Spot Index was down by 0.02% to 98.686 at the time of writing.

For the Loonie

It’s a  relatively busy day on the economic calendar. Economic data includes September employment change figures and the September unemployment rate.

With economic data having been on the lighter side in the week, expect the Loonie to respond to the numbers.

Ahead of the stats, market sentiment towards the economic outlook and impact on crude oil prices will also provide direction.

The Loonie was down by 0.02% at C$1.3294, against the U.S Dollar, at the time of writing.

U.S. Dollar Index Futures (DX) Technical Analysis – Dollar and Treasury Yields Diverging

The U.S. Dollar is trading sharply lower against a basket of major currencies on Thursday despite a steep rise in U.S. Treasury yields. It’s safe to say at this time that the strong correlation between Treasury yields and the dollar has been broken, at least temporarily.

The index is being pressured by a stronger British Pound, which is up 1.94% against the U.S. Dollar. The Euro is up 0.31%. The Canadian Dollar is stronger by 0.30%. The safe haven Japanese Yen and Swiss Franc are down 0.42% and 0.08% respectively.

The Euro presents 57.6% of the index. The Japanese Yen 13.6%, The British Pound 11.9%. The Canadian Dollar 9.1% and the Swiss Franc 3.6%.

The dollar is on track for its biggest daily drop in five weeks after a Chinese state media report suggested China wants to reach an agreement with the United States to avoid any escalation in a protracted trade row, soothing investor concerns.

The news fueled appetite for trade-oriented currencies such as the Euro and the Australian dollar.

The British Pound rose sharply after positive comments on Brexit from the leaders of the Republic of Ireland and the U.K.

“The Prime Minister (Johnson) and Taoiseach (Varadkar) have had a detailed and constructive discussion,” the joint statement said.

“Both continue to believe that a deal is in everybody’s interest. They agreed that they could see a pathway to a possible deal.”

At 20:01 GMT, December U.S. Dollar Index futures are trading 98.410, down 0.405 or -0.41%.

U.S. Dollar Index
Daily December U.S. Dollar Index

Daily Technical Analysis

The main trend is up according to the daily swing chart. However, momentum has been trending lower since the formation of the closing price reversal top at 99.305 on October 1.

The minor trend is up. A trade through 98.300 will change the minor trend to down and reaffirm the shift in momentum.

The short-term range is 97.560 to 99.305. Its retracement zone at 98.435 to 98.230 is currently being tested. This zone stopped the selling at 98.300 on October 3.

The main retracement zone is 97.955 to 97.635. This zone is the next downside target and major support zone. This zone is controlling the longer-term direction of the index.

Daily Technical Forecast

Based on the current price at 98.410, the direction of the December U.S. Dollar Index into the close is likely to be determined by trader reaction to the price cluster at 98.435 to 98.430.

Holding above 98.435 will indicate that buyers are coming in to defend the uptrend.

Crossing to the bearish side of the downtrending Gann angle at 98.430 will indicate the selling is getting stronger with nearby targets coming in at 98.300 and 98.230.

It’s All Eyes on Washington as Trade Talks Resume Later Today

Earlier in the Day:

It was a relatively quiet day on the economic calendar through the Asian session this morning.

The Aussie Dollar was in action, with October consumer confidence and August home loan figures providing direction early on.

On the geopolitical risk front, news of China being supportive of a trade agreement failed to spur demand for riskier assets. Trade tensions have been on the rise and China’s support of an agreement comes with a caveat that no further tariffs are introduced.

With talks set to resume later today, some caution was to be expected…

For the Aussie Dollar

The Westpac Consumer Sentiment Index fell by 5.5% to 92.8 in October, reversing a 1.7% rise in September.

According to the Westpac report,

  • The slide came in spite of the RBA’s latest rate cut, which will be of concern when considering the reliance on consumer spending.
  • Global events, including deteriorating U.S – China trade relations, contributed to the weakest confidence since July 2015.
  • Looking at the numbers:
    • The sub-index for family finances vs a year ago fell by 4.9%, with finances for next 12-months down by 3.7%.
    • Economic conditions next 12-months slid by 6.0%, while economic conditions next 5-years slumped by 9.1%. The next 12-months sub-index was down 15.1% year-on-year, while the next 5-years was down by 6.4%.
    • The time to buy a major household item sub-index fell by 4.2% following last month’s 2.8% decline.
    • On the labor market front, the Unemployment Expectations Index fell by 1.3%, while up by 7.3% year-on-year.
    • The Time to buy a dwelling index fell by 5.4%, whilst rising by 13.7% over the year. By contrast, the House Price Expectations Index rose by 5.9%.

The Aussie Dollar moved from $0.67150 to $0.67141 upon release of the figures that preceded the home loan numbers.

Home loans rose by 1.8% in August, following on from a 5% jump in July, according to the ABS. Economists had forecast a rise of 3.6%.

The Aussie Dollar moved from $0.67172 to $0.67165 upon release of the figures. At the time of writing, the Aussie Dollar was down by 0.10% to $0.6718.

Elsewhere

At the time of writing, The Japanese Yen was up by 0.16% to ¥107.31 against the U.S Dollar, while the Kiwi Dollar down by 0.0.06% to $0.6289.

The Day Ahead:

For the EUR

It’s a relatively quiet day ahead on the economic calendar, with German trade data due out of the Eurozone in the day ahead.

Following factory orders and industrial production figures from earlier in the week, the data would need to impress to support the EUR.

On the geopolitical front, Brexit will also be a factor along with any chatter on trade, as trade talks resume later today.

At the time of writing, the EUR was up by 0.10% to $1.0982.

For the Pound

It’s a busy day ahead on the data front. Economic data includes August industrial and manufacturing production, GDP numbers and trade data.

We would expect the manufacturing production and GDP figures to have the greatest influence on the day.

On the geopolitical front, Brexit will continue to be a key driver, however. With EU Summit just over a week away, we can expect the Pound to be particularly responsive to any updates from the EU or Westminster.

From earlier in the day, the UK’s RICS House Price Balance for September had a muted impact on the Pound.

According to the latest survey, the RICS House Price Balance Index rose from -4% to -2% in September.

At the time of writing, the Pound was up by 0.06% to $1.2213.

Across the Pond

It’s a relatively busy day ahead on the economic calendar, with inflation and initial jobless claims figures due out of the U.S later today.

While we can expect the Dollar to respond to the numbers, market sentiment towards the U.S and global economy and geopolitical risk will remain the key drivers.

Any pickup in inflationary pressure is unlikely to shift sentiment towards monetary policy near-term. FED members have become concerned over a likely softening in inflationary pressures. Consumer prices are forecast to rise by 0.2% in September, softer than a 0.3% rise in August.

Jobless claims figures will take a backseat on the day, barring an unexpected rise in claims. The Dollar would need initial weekly claims to hold at sub-230k levels to avoid a sell-off.

The Dollar Spot Index was down by 0.07% to 99.052 at the time of writing, with the overnight FOMC meeting minutes weighing early on.

For the Loonie

It’s a quiet day on the economic calendar. Economic data is limited to August house price figures. Barring particularly dire numbers, we would expect the numbers to have a muted impact on the Loonie.

On the day, the OPEC meeting’s influence on crude oil prices and sentiment towards the global economy will provide direction.

Economic data from the Eurozone and the U.S suggest that a further cut in OPEC output and supply is required.

The Loonie would need the hope of a near-term end to the U.S – China trade war and a cut in the supply crude oil to find support.

The Loonie was down by 0.07% at C$1.3342, against the U.S Dollar, at the time of writing.

Fed Minutes: Members Saw Increased Downside Risks to Economy

A quick read of the Fed minutes from its September meeting showed that some Federal Open Market Committee (FOMC) members expressed concern that the financial markets may be expecting more rate cuts than the central bank will deliver.

At its September 17-18 monetary policy meeting, the FOMC approved a quarter-point rate cut, putting the overnight funds rate in a target range of 1.75% to 2%.

The minutes also showed sharp divisions among members about the future path of policy, along with some worry that a market clamoring for easier monetary might be getting ahead of itself. The minutes said that “a few participants” at the September meeting said prices in futures markets “were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate.”

As of Wednesday’s close, traders were pricing a 93.5% chance of a rate cut at the end of October, following cuts in July and September. The financial markets are also predicting more reductions in 2020.

Because of the potential misunderstanding, “it might become necessary for the Committee to see a better alignment of market expectations regarding the policy rate path with policymakers’ own expectations for that path,” the minutes said.

Debate Over How Far to Extend Rate Cuts

At its September meeting, Federal Reserve officials began debating how far their current interest-rate cutting campaign should extend, even as they agreed to lower rates in response to growing risks to the U.S. economy.

“Participants generally judged that downside risks to the outlook for economic activity had increased somewhat since their July meeting, particularly those stemming from trade policy uncertainty and conditions abroad.”

Future Cuts and Policy Limits Discussed

Several policymakers wanted the FOMC’s statement to signal the limits of the policy easing that Chairman Jerome Powell characterized in July as a “mid-cycle adjustment.”

“Several participants suggested that the committee’s post-meeting statement should provide more clarity about when the recalibration of the level of the policy rate in response to trade uncertainty would likely come to an end,” the minutes said.

Risks to the Economy

At its last policy meeting, members repeatedly expressed concerns about the impact tariffs were having on business activity. They said that while they saw U.S. growth as generally solid, the forecast risks “were tilted to the downside.”

Several members also noted that statistical models designed to gauge the probability of a recession over the medium term had increased notably in recent months.

“Important factors in that assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed,” the minutes said.

“In addition, softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. The risks to the inflation projection were also viewed as having a downward skew, in part because of the downside risks to the forecast for economic activity,” the summary continued.

Officials also pointed out that “a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged” and members were also watching the yield curve inversion, a reliable indicator that a recession is ahead.

Dollar Continues Paring Early-October Losses Ahead of FOMC Minutes, September CPI

Unless either the FOMC minutes or the latest US inflation print over the next 24 hours drastically bolsters the case for a more dovish Fed, any DXY moderation this week is expected to be transitory, with the 98.65 and 98.40 support levels in focus over the near-term.

While much has happened on the global stage since the Fed lowered US interest rates by 25-basis points on September 18, investors are still trying to piece together clues that will help form a more conclusive outlook on US monetary policy. At the time of writing, the Fed funds futures point to two more 25-basis point cuts to the benchmark interest rates by the year end. Yet, the DXY is refusing to buckle under the weight of such dovish expectations, as investors continue supporting this safe haven currency amidst the deteriorating global economic conditions.

Pound weighed down by Dollar resilience, Brexit risks

The Pound remains subdued below the 1.225 lines against the US Dollar, as investors continue grappling with the likelihood of a no-deal Brexit by the end of this month. It remains to be seen whether UK Prime Minister Boris Johnson can actually seal a Brexit deal with the EU establishment ahead of the October 31 deadline, although such hopes are fading fast. With some three weeks left before the current deadline, investors still cannot yet completely rule out a no-deal Brexit, hence the downcast outlook for Sterling.

Euro’s bearish trend show scant signs of letting up

The Euro’s bearish trend in the second half of the year has already sent EURUSD towards the 1.09 mark, with the Dollar’s resilience ensuring that the Euro’s bias remains tilted towards the downside. Given Europe’s economic turmoil, being hit with more US tariffs at a time when Germany’s manufacturing is contracting, there’s scant cause to think that the Euro’s upside would be realized in the near-term.


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Clouds Gather Of The Trade Talks

It was a very disjointed 24 hours in global capital markets. Equity markets bounced higher when China retail resumed trading after a week-long holiday, but stocks finally ended up losing ground amid trade talk pessimism after a series escalating headlines raised severe doubts that little if anything will come of U.S.-China trade talks set to begin Thursday.

Chipmakers led the S&P 500 Index to a 1.6% loss, and Chinese companies that trade in New York sank to the lowest since mid-August as the Trump administration put visa bans on Chinese officials linked to the mass detention of Muslims in Xinjiang province.

Fed policy

Investors, however, took consolation in that the Federal Reserve will soon start growing its balance sheet again, partially in response to the recent surge to overnight lending rates in September. Overall, it’s a signal to a more-dovish Fed, which was expected and positioned for by the market.

But Chair Powell says that the three-month 157k average in payrolls is still above what the Fed considers to be the pace to keep unemployment stable versus new people entering the workforce. Suggesting the Feds are not getting bent out of sorts by a slowing in the headline payroll data, but it also suggests the Feds have benchmarked that if the three-month average were to fall below X, the Fed would likely transition from thinking of this as potentially a mid-cycle adjustment and more as a full cutting cycle. (X is believed to lie between 115-135 K headline)

Overall Chair Powell’s comments may not lead to a significant impulse for a weaker USD in the short or medium term. But given the shape of U.S. dollar forward curve, it is plausible if differentials continue to narrow throughout 2019. investors’ and corporate hedging behaviours could change which may result in a weaker USD

Brexit

As negotiations between the U.K. and E.U. flounder, it seems increasingly doubtful the two sides will reach a Brexit agreement. Financial markets will now turn to whether the Prime Minister will comply with the Benn Act and request an extension to Article 50 as the blame game look set to begin again.

Trade talks

With the recent U.S. trade war escalation headlines,  whether it’s on the human right front or even the war on capital, it suggests from President Trump perspective that at this stage of the election process a trade deal this week, will not offer up a significant enough policy victory that he needs to bolster his polling numbers against the gale-force economic and political headwinds he’s facing stateside. So, it’s back on the trade war offensive. Frankly, it’s incredible how my times the markets get sucked back into the trade war calm only to end up back in trade war purgatory.

Market skews

US-China talks, Brexit, economic data and Fed policy, are offering few positive investments skews but one dominant skew that is possibly emerging is that it’s getting increasingly more challenging to weave a convincing tale to remain anything but underweight in equity markets.

The good thing for risk markets is that investors who ” once bitten twice shy” were not pricing in a substantive deal instead wisely remained hedged as suggested by Gold-backed ETFs which are now sitting at an all-time high.

Oil markets

Oil prices remain driven by trade sentiment ahead of crucial US-China trade talks due to re-start this Thursday, but recent developments in the Middle East are starting to bring supply risks back into focus. And while the market remains untroubled regarding issues on the supply-side, the deadly protests continue in Iraq as Iran is reported to be extending its influence over a broad section of the population raising concerns about the stability of production from OPEC’s second-biggest producers. Cleary this will not go unnoticed by the U.S. administration. But since they are trying to put out economic and domestic political firestorms of their own, energies may have turned focus to internal concerns.

So, with global spare capacity arguably at a shallow level in the wake of the terrorist attack and geopolitical risks to supply rising, it might be enough to keep a temporary floor under oil prices.

However, with oil traders wearing global demand worries on their sleeve the skew could remain lower as the latest headlines are skewed trade risk-negative

Clearly, the last thing oil bulls need is for both sides to walk away from this week’s trade negotiation without at minimum hashing out a skinny deal.

Gold markets

Gold-backed ETFs are now at an all-time high after $3.9 bn of inflows in September.

Collectively, ETF holdings currently stand at 2,808 tonnes, the highest level ever recorded. And this could accelerate on trade war escalation and if the Pboc continues to unwind their European negative-yielding debt in favour of the yellow metal underlining its position as one of the leading central bank buyers of the precious metal.

It is virtually impossible to predict with any degree of certainty the short-term direction for Gold in these unsettled times. Although because of trade war unsettling nature, Gold prices could surge if these trade talks end on a contentious note.

Currency markets

The market is back on Yuan watch as the local traders have backed down expectations ahead of this week trade talks suggesting the 4.20 level is coming back into focus if the early September Yuan tumult holds. If this scenario does come to fruition, it could be flat out ugly for Asia risk markets. 

So just as the Yuan led ASEAN currencies higher yesterday, it will likely lead them lower this morning.

With headline risk busting at the seams, it will likely be another fast money trading session. So, buckle in as you will probably end up staring at your screen at some point over the next 24 hours asking yourself “why why why “did I hit that button!!

Downside USDJPY optionality has predictably started to pick up as risk aversion leaks into every pocket of the G-10 currency complex But demand is not that explosive relative to the surge of headline risk which could be a result of U.S. 10 Year Treasury bond yields sitting comfortably about 1.50 % suggesting interest rates differentials haven’t yet started to sufficiently factor negatively into the dollar downside risk equation. Instead, Yen is possibly trading on headline risk aversion alone.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

A Light Economic Calendar Puts Geopolitics in the Driving Seat

Earlier in the Day:

It was a particularly quiet day on the economic calendar through the Asian session this morning.

There were no material stats due out of Asia to provide the majors with the direction in the early part of the day.

A lack of stats left the majors in the hands of market risk sentiment and geopolitical risk.

On the geopolitical risk front, negative sentiment towards the resumption of U.S – China trade talks tested risk sentiment early on

For the Majors

The Japanese Yen was down by 0.07% to ¥107.16 against the U.S Dollar, while the Aussie Dollar was up by 0.18% to $0.6740. At the time of writing, the Kiwi Dollar up by 0.24% to $0.6313.

The Day Ahead:

For the EUR

It’s a particularly quiet day ahead on the economic calendar. With no material stats due out of the Eurozone in the day ahead.

A lack of stats will leave the EUR in the hands of Brexit chatter and market risk sentiment throughout the day.

Following softer nonfarm payroll numbers on Friday, JOLT job openings could spook the markets should quit rates slide in August.

At the time of writing, the EUR was up by 0.05% to $1.0962.

For the Pound

It’s also particularly quiet day ahead on the data front, with no material stats due out of the UK to provide the Pound with direction.

The lack of stats will leave Brexit and UK politics to provide direction on the day. Barring particularly good news on the deal front, any upside for the Pound would be limited.

At the time of writing, the Pound was down by 0.03% to $1.2215.

Across the Pond

It’s a relatively quiet day ahead on the economic calendar, August’s JOLTs job opening figures due out of the U.S later today.

Whilst the headline number will influence, following last week’s NFP numbers, expect quit rates to have a greater impact on the day.

A fall in openings, with a steady quit rate, would reflect stable labor market conditions that would support the Greenback.

On the geopolitical front, it’s all about the trade talks with China. Expect updates from Washington and Beijing to drive the Dollar.

The Dollar Spot Index was down by 0.03% to 99.103 at the time of writing.

For the Loonie

It’s a quiet day on the economic calendar. There are no material stats due out later today, leaving the Loonie in the hands of the weekly EIA numbers and sentiment towards the global economy.

The Loonie was up by 0.06% at C$1.3317, against the U.S Dollar, at the time of writing.