The Bull

Friday 16

November, 2018 8:47 PM



The Daily Fix - Inter-Market Analysis and Macro Insights

The Daily Fix - Inter-Market Analysis and Macro Insights

We can effectively draw a line under the US trading session, given the early close for Labor Day in the likes of S&P 500, crude and Treasury futures.

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04.09.2018 10:06 AM

We can effectively draw a line under the US trading session, given the early close for Labor Day in the likes of S&P 500, crude and Treasury futures.

It's no surprise then that we have seen relatively tight ranges in many G10 currency pairs, with the USD index trading a range of 95.22 to 95.00, EURUSD oscillating between $1.1628 to $1.1588 and USDJPY between ¥111.19 to ¥110.85.

There has been little impetus to move these crosses around, although we have seen some good buying in SEK and NOK, with both countries hitting the market with PMI data. GBP has been the notable underperformer, with GBPUSD trading down to $1.2855 and closing through the short-term uptrend it has formed since 15 August, and this bear flag pattern has been noted.

Support has kicked in at the 29 August low of $1.2849 and the 20-day moving average, so a close through these support levels, and I would trade this pair from the short side. At a fundamental level, economics remains shaky with UK manufacturing PMI printing a 25-month low, however, politics is the dominant theme here and today see the return of Parliament. We also hear from the UK’s Brexit negotiator, Dominic Raab, where the balance of probability is that he will again sound optimistic on proceedings.

We also get to hear from BoE Chief Mark Carney, who testifies before lawmakers at 22:15aest, amid increased speculation about his future at the helm of the central bank and whether he rolls over his tenure when it comes to an end in June 2019.

As a side note, I am still sitting on a long GBPAUD bias, and while this cross has come off its highs of A$1.8040, I am happy to remain in the trade as long a price holds the 30 August lows of A$1.7811.

The new week starts here, and we can see S&P 500 futures re-opening 0.2% higher, which, in turn, should support the Asia equity open. There remains a focus on headlines around the impending decision to place tariffs on a further $200b of China’s exports, although this is largely discounted into EM markets, as well as the likes of AUD. US-Canada relations is also of interest, with Trump tweeting overnight, ‘there is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere with these negotiations or I will simply terminate NAFTA entirely & we will be far better off”.

Turning to the session ahead and we ramp up play with a key focus on Australian economics, which starts with the Q2 Balance of Payments (BoP) released at 11:30aest (consensus sits at -$11b). Economists will be closely watching the contribution net exports provides to Wednesdays Q2 GDP report, and as things stand there is an asymmetrical risk to the consensus call of 2.8% yoy. Yesterday’s retail sales were somewhat discouraging, but other business indicators gave us some hope, with a 2% lift in company profits, while inventories grew at 0.6% and maybe a small headwind to economic growth.

As always as part of the BoP, net exports (as a percentage of GDP) are detailed to the market and are expected to provide a 10-basis point contribution to the growth numbers, and this should be the strong influence on the outcome of the GDP print.

Aussie GDP prints don’t tend to promote huge volatility in a currency, but if we look at AUDUSD overnight implied volatility, it has moved a touch higher this morning, giving us an implied move from the current spot price (now $0.7210) of 40-points (in either direction). This also incorporates the US ISM manufacturing report (due at 00:00aest), which is expected to grow at a slightly slower pace, with the index expected to come in at 57.6. We also get the RBA statement at 14:30aest, with the governor Phillip Lowe, set to speak at 19:00aest. Here the rates market takes centre stage, although there seems little to alter the markets sanguine pricing here, with eight basis points of hikes priced into the 30-day rates curve through to end-2019.

Positioning could play a more significant part as the world is running a sizeable, but not extreme, short AUD position into this release. On the whole, the data flow will sit reasonably comfortably with the RBA, as will the AUD (trade-weighted), which sits near the year-to-date lows and both factors would give the hawks some food-for-thought. However, if we again look at probabilities, it seems tough to justify a noticeable change in the statement, with an election just around the corner and with signs of fragility appearing in the Sydney housing market.

In a world focused on fixed income yield curves and the debate that the flattening of late is different from prior case studies, it’s interesting to see that Aussie 3-month yields are a touch higher than 3-year yields, and this inversion is inspiring AUD bears. Good selling in the front-end yield (such as the Aussie 3-year Treasury) today will be the cue for AUD short to cover. That said, as the options market is suggesting moves shouldn’t be overly pronounced today.

Published by Chris Weston, Head of Research, Pepperstone
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