Politics menace markets yet again; dollar recovers
The US Dollar has mounted a spirited recovery amid firming Fed rate hike prospects over the past two weeks. The currency is now trading within a hair two-month highs against an average of its major G10 FX counterparts. The probability of a December rate hike implied in Fed Funds futures now stands at 78.5 percent having been just 22 percent a month ago.
The week ahead offers plenty of fodder for continued speculation. Minutes from September’s FOMC meeting will help clarify policymakers’ thinking but a wealth of commentary since the sitdown has already established a clearly hawkish bias. That stance is by no means unanimous, but the driving core of the rate-setting committee seems to buy the case for on-coming reflation and the resulting need to tighten.
That seems to put single out September’s CPI report as the pivotal bit of event risk on the docket. The headline inflation rate is seen rising to 2.3 percent, the highest in six months. Steady improvement in US economic news-flow relative to forecasts since mid-June and September’s explosive jump in wage growth (2.9 percent onyear, the highest since May 2009) open the door for an upside surprise.
With that said, the treat that politics will distract investors from economic fundamentals remains ever-present. Negotiators from the US, Canada and Mexico will convene for the fourth round of talks to reforming NAFTA. US President Trump has mused about the process’ likely failure. It is unclear whether this was tactical posturing, performance art for the domestic audience, or genuine opposition.
Trump is also due to give a speech on the fate US policy toward Iran. Suspicion is swelling that the address will precede a move to “decertify” an Obama-era accord with Tehran exchanging sanctions relief for the reduction of Iran’s nuclear capabilities. If this proves to be the case, Congress would have 60 days to fast-track re-imposing sanctions, which would probably see the agreement fall apart entirely.
To the extent that incoming headlines make markets genuinely concerned about the economic fallout from a breakdown of NAFTA and/or from tearing up the Iran nuclear deal, resulting risk aversion might cool Fed rate hike bets. Conclusively negative outcomes are unlikely even in the worst case scenario however: trade negotiations may stretch on and Congress may not re-establish previously relaxed sanctions.
In fact, if the political landscape turns truly dire and produces aggressively risk-off dynamics, there is an argument to be made for US Dollar gains as the benchmark unit reclaims its haven appeal. On balance, this suggests that - despite some noteworthy potential pitfalls - the path of least resistance for the greenback continues to favor the upside.
GBP/USD is continuing to slide and it’s hard to see an end to its current weakness. Rebel members of her ruling Conservative Party are challenging UK Prime Minister Theresa May’s leadership; the fifth round of Brexit talks begins in Brussels Monday with the two sides as far apart as ever; the economic data have been weak; and the pair has broken down through several key support levels on the chart.
That all suggest further depreciation to come, particularly as the US Dollar remains strong. However, as the chart below shows, GBP/USD is approaching oversold territory, sending out a warning signal.
Even though U.S. employment narrowed 33K in September, a deeper look at the NFP report showed household earnings increasing for the third consecutive month, with the Labor Force Participation widening to 63.1%, the highest reading since March 2014, as discouraged worked returned to the labor pool. The ongoing improvements in labor market dynamics are likely to keep the Federal Open Market Committee (FOMC) on track to deliver three rate-hikes in 2017 especially as New York Fed President William Dudley, a permanent voting-member on the committee, argues ‘it is still appropriate to continue to remove monetary policy accommodation gradually.’
As a result, the FOMC Minutes may spark fresh monthly highs in USD/JPY as a growing number of Fed officials look to further normalize monetary policy over the coming months, and the pair may continue to broadly track changes in U.S. Treasury Yields as the Bank of Japan (BoJ) sticks to its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control. Moreover, the U.S. data prints on tap for the week ahead may also prop up dollaryen as the Consumer Price Index (CPI) is projected to increase for the fourth straight month in September, while Retail Sales are expected to rebound 1.4% during the same period.
Keep in mind, the broader outlook for USD/JPY remains confined by the range-bound price action from earlier this year, with the Relative Strength Index (RSI) also bound by the bearish formation carried over from May.
Yes, the Reserve Bank of Australia left interest rates alone at their 1.50% record low, as had been universally expected. But its accompanying statement did not look like that of a central bank in any hurry to take any monetary-tightening action. It also included another spot of worrying aloud at the harmful effects of a too-strong currency.
Then came some baleful economic data in the form of a surprising slide in August retail sales. As far as currency trade went this more than eclipsed some much perkier trade numbers released at the same time. Finally, there was RBA board member Ian Harper. He told The Wall Street Journal that further interest-rate cuts could not be ruled out should consumption levels show signs of fading out.
Now of course you might think that Mr. Harper was being a little tricky here. No central banker ever rules out policy moves unless it must and one piece of weak data need not presage consumption Armageddon. Moreover, other RBA officials including the governor have suggested that current market pricing looks broadly correct. It predicts that the next move will in fact be a rise, if not until well into 2018.
However, taken with all of the above, and against a backdrop in which markets still think US monetary policy is getting tighter, then the Australian Dollar remains under a bit of pressure. And there’s little in terms of scheduled economic news this week which seems likely to shift the dial on this decisively in either direction.
Australian business and consumer confidence surveys are coming up, as are US retail sales and the minutes of the last Federal Reserve monetary conclave. However, these all seem likely to offer AUD/USD no more than momentary respite from a backdrop which is not conducive to the bulls.
So it’s a bearish call again this week, even if there’s no obvious reason for the current downward trend to accelerate markedly. It might also be worth keeping a weather eye out for RBA commentary. It seems that that does the Australian Dollar very little good right now.
Gold prices fell for the fourth consecutive week with the precious metal down nearly 0.5% to trade at 1271 ahead of the New York close on Friday. The losses come amid what seems to be an unstoppably rally in broader risk assets with the major U.S. equity indices up more than 1% on the week. Demand for gold has been soft with prices down nearly 7% off the September (yearly) highs before an NFP inspired late-week rally offered a brief reprieve to the recent downward pressure.
A surprise U.S. Non-Farm Payroll report on Friday showed the economy shedding some 33K jobs last month, missing expectations for a gain of 80K. However, a closer look at the data reveals underlying strength in the labor markets with labor force participation rising to its highest level since March of 2014 at 63.1%. Wage growth figures were also stronger-than-expected with average hourly earnings posting a 2.9% y/y gain - up from a previous upwardly revised 2.7% y/y. With the recent barrage of hurricanes largely accounting for the weak headline figure, the broader labor market outlook remains firm and keeps the FOMC on target for a December rate hike. Fed fund futures are now pricing in a 90% probability for a 25bps hike before the end of the year.
Gold prices fell for the fourth consecutive week with the precious metal down nearly 0.5% to trade at 1271 ahead of the New York close on Friday. The losses come amid what seems to be an unstoppably rally in broader risk assets with the major U.S. equity indices up more than 1% on the week. Demand for gold has been soft with prices down nearly 7% off the September (yearly) highs before an NFP inspired late-week rally offered a brief reprieve to the recent downward pressure.
A surprise U.S. Non-Farm Payroll report on Friday showed the economy shedding some 33K jobs last month, missing expectations for a gain of 80K. However, a closer look at the data reveals underlying strength in the labor markets with labor force participation rising to its highest level since March of 2014 at 63.1%. Wage growth figures were also stronger-than-expected with average hourly earnings posting a 2.9% y/y gain - up from a previous upwardly revised 2.7% y/y. With the recent barrage of hurricanes largely accounting for the weak headline figure, the broader labor market outlook remains firm and keeps the FOMC on target for a December rate hike. Fed fund futures are now pricing in a 90% probability for a 25bps hike before the end of the year.
Oil prices took a hit this week, and with Tropical Storm Nate brewing in the Gulf of Mexico, the potential for deeper losses remains. In West Texas Intermediate, price action continued its bearish decline after having run into a key area of resistance last week, while Brent Crude (UK Oil) put in the third bar of an evening star formation on the weekly chart, and this can open the door to deeper losses there, as well. Earlier in the week, the American Petroleum Institute (API) released crude inventory data reflecting a rather significant drawdown in crude oil inventories of -4.08 million barrels in the week prior; well beyond the expected draw of -466.1k. Normally, this would be a bullish factor for Crude as diminished supplies indicate the potential for higher prices; but, this was offset by an even larger build in gasoline inventories, highlighting the potential for further disruptions with Tropical Storm Nate threatening the Gulf of Mexico.
The logical question is why a tropical storm or a potential hurricane might negatively impact Oil prices. Many will observe rising gasoline prices during a similar types of crisis, so why might Oil prices be moving down while Gas prices are going up? We saw something similar show in latter-August around Hurricane Harvey when a large number of refinement operations in South Texas, around the Gulf of Mexico, were knocked offline. This highlighted that the Oil being extracted could not be refined into Gasoline, at least not at the same pace as prior; so supplies built-up as refiners battled to recover from the devastation of the hurricane’s impact. This building supply glut of Crude meant that prices moved-lower as markets wrestled with the prospect of an even bigger pictureslowdown. And in latter-August, we saw WTI fall below the $46-level as worries about the Hurricane’s impact continued to build.
But as the threat of continued disruptions around Harvey began to slowly dissipate in early-September, bulls began to return into WTI, and within a couple of weeks we were already back-over the $50 level. As that move continued through the second half of September, an interesting level of resistance began to show, and this is derived from a trend-line that originates all the way back in 1998-2001 that continues to carry some element of bearing in WTI prices. Last week saw four days of resistance build at the under-side of that trend-line, similar to what was seen in May of this year, before bears took-over to push prices back below $50/barrel.