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Still picking up the FOMC pieces and tying up a few loose ends

Still picking up the FOMC pieces and tying up a few loose ends

US markets 
Risk sentiment is buoyant this AM with US equities trading higher. The greenback advanced to a two-week high against G-10 while EM currencies are bucking that trend trading favourably despite yesterday’s Fed interest rate hike.

US Equities remain supported by Fed Chair positive view on the US economy, while the US rates underpin the dollar outlook. However, it’s the EURO which buckled when Italian budget concerns reared it’s vexed, and ugly head as political squabbling over country’s deficit targets raged while the EU budget deadline looms.

US Equities 

US equity markets were moving broadly higher through the US session with both Apple and Amazon reversing a week-long slide. Mind you; It hasn’t been a stellar week for the US markets with China pushing back trade talks, NAFTA discussion going nowhere accented with the natural paring back of risk ahead of the FOMC. But one thing that’s telling indeed is current price action, which sees investors continually coming back for more, it suggests the gushing US economy and on not trade wars, which continues to influence investor decision.

Oil Markets

While oil prices remain in bullish territory, there were a few emerging narratives that have tempered yesterdays huge Asia rally.

The DOE has pledged to deliver 11.0 million barrels of crude oil out of the SPR during October and November to cover some operational costs.

U.S. crude production hit a record 11.1 million barrels per day in the week ending Sept. 21, according to preliminary data from the Energy Information Administration, but of course, this may be subject to revision but indeed a very chunky production number

While Libya supplies have been extremely erratic, crude oil production has reportedly reached a five-year high of 1.28 million barrels this week.

And then finally, there’s been elevated market chatter suggesting that Saudi Arabia may quietly add some supply over the next few months, While the likely loss of Iranian supply may be the dominant market theme, OPEC production may be rising.

So, it’s in this context last weeks speculative inflows have categorically focused on Saudi effective spare capacity or the lack there off and less focus on Saudis contention they will raise output, but at what point? But let’s face it there still a lot of guesswork in play, as there typically is in the boisterous oil markets.

So in the meantime,  dips remain incredibly well supported as Iran sanction continues to underpin sentiment but as we’ve seen countless times in many cross-asset markets, once investors set sights on a glitzy target like 100 dollars per barrel. More often than not, caution is thrown to the wind as the fear of missing out takes over. Indeed, there’s a tinge of FOMO, to borrow a phrase from BTC trading, seeping into oil markets. But with Oil Fund Managers and traders alike comfortably seated in the bull camp until further notice, oil prices look poised to extend on this week’s gains.

Gold Markets

A reality check as spot gold is selling off today as the USD continues to strengthen. For the past three months, gold has traded more like a currency rather than a go-to safe have an asset. With the Euro tumbling overnight, the $1190 trap door gave way as Gold has fallen to $1183 just ahead of the COMEX break. Besides with the final reading of second-quarter GDP holding at 4.2%Thursday, its reinforced the Fed rate hike outlook for 2019. Gold has been a seller’s market for some time, but with $1190 yielding, bearish activity could intensify with short-term speculators likely to target the August low when the yellow metal hit $1160 before rebounding.

Currency Markets

The Euro 

When you thought it was safe to buy the post FOMC EUR dip, Italian risk rears its ugly head making it difficult to hold an absolute bullish view at current levels G-10 traders were utterly caught out as they had virtually priced all the Italian risk out of the Euro equation.

The reason why Italy warrants so much attention is because it’s big quite frankly. As simple as that view is, we could just as easily see a leak lower after the significant 1 1660 support level gave way. However, the markets could continue to remind itself that EU politically inspired Euro sell-offs tend not to have long legs after the considerable drop,  and I’m not so sure Asia G-10 traders would be keen to add downside risk at current levels as the Markets remain on Italian budget standby.

Japanese Yen

Patience is a virtue these days when trading USDJPY as there have been very few express elevators up on this trade. Besides some walking back from bad post-FOMC USD short positions, but overall risk sentiment improved, and US yields have started to pick up again.
While there likely the quarter year-end dollar demand impact, but with reports of the year-end turn interest rates already getting bid up considerably this to can affect USD demand.
But ultimately this is one of these keep it simple type trades that all currency traders like, global tensions seem to be lightening up boosting risk sentiment while all things continue to point higher for  US interest rates.

Turkish Lira
Well, maybe Turkey won’t be on everyone’s Thanksgiving menu come November as the Lira was pardoned again after some incredible price action this week.
TRY reacted favourably post Fed as the less hawkish tone was a real boost to well oversold weakest links in the EM chain, not to mention the 20 % yield on TRY looked gorgeously attractive But local traders were spirited on by talks of a Chinese acquisition into a sizeable Turkish company which continued to resonate overnight.

EM Asia

It’s good to be pliable trading local EM Asia currencies as the narratives are forever shifting after the intense focus on Current account deficit vs Current account surplus ASEAN currencies, were now back again to discussing regional high vs low yielders. But it all adds up the same in my book.

Asia High Yielders 

It’s debatable if we’ve seen the last major sell-off in INR-IDR or PHP, as my rational logic says we have not. But one thing that is clear RBI-BI and BSP mandate to keep on tightening while implementing various synchronous stop gap controls to keep currency speculators at bay, are having a short-term positive effect on market sentiment. Despite the fact they are not the big elephants in the room, which are the deficits. AS such the tail risk remain high, but as EM traders will continuously remind themselves if there’s no risk, there’s no reward.

Asia Low Yields

On the flip side, local low yielders are very prone to higher US Interest rates and are extremely sensitive to global risk, which leaves us between a rock and a hard place as US rates are moving higher, but risk is improving. Ultimately higher US interest rates will give way to a burst of risk euphoria if the US and China can come to terms on a trade deal.

Malaysian Ringgit

Unfortunately, the MYR is getting tugged in many directions resulting in little positive momentum despite improving risk sentiment and higher Oil prices. The Ringgit remains hypersensitive to higher US rates, especially considering the weak Q2 GDP and moderate inflation which will keep the BNM sidelined while the FOMC will continue to raise US interest rates. The local unit does feel trapped between a rock and a hard place. So, and until US-China trade leaves the picture, the MYR could remain weighted down.

The Chinese Yuan

Some odd uncorrelated moves in play that has many scratching their head wonder what is driving this USD demand. Suggesting this is the real corporate driven application that has traders possibly guess that Chinese corporates are increasing USD hedge as per SAFE warning back into eh summer or more simply that Chinese corporates have real US funding requirement. There seems to be no reason why there would be speculative demand but puzzling none the less. But USD trade war hedges are going to be smiling.

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