Trade war breakthrough?
US markets are off to a rousing start in the wake of a report that US and China are said to restart talks to avert the escalating tit for tat trade war but renewed selling in large-cap tech companies has tempered gains. But indeed any tempering of this confrontational issue ahead of the Presidents 200 billion trade threat will be viewed in a favourable light and provided parties remain at the table, where there’s a will there is a way.
As expected there was no hawkish midsummer nightmare but rather he BoJ did not change rates nor did they show any signs of shifting from ultra-loose monetary policy and predictably USDJPY has been grinding higher while taking the NKY is tow. The BoJ announced minuscule adjustments: Firstly, no surprise here that both GDP and CPI expectations were revised lower. Secondly, they increased the band around the 0.0% target for 10y JGBs from 10bps to 20bps, permitting more movement in rates. They changed the ETF program, maintaining purchases at JPY6.0tn but adjusting the allocation more to Topix rather than Nikkei. Finally, the BoJ adopted a forward guidance strategy as traders view incredibly subtle shift towards policy normalisation definitively dovish and topside USDJPY is now in play.
Chinese Manufacturing and non-manufacturing PMI’s were slightly below expectations but did not seem to have a notable market impact. If anything, base metals are trading mixed this morning after the data.
On the highly watched USDCNY post, the overnight the fix came out in line with expectations at 6.8165, +34 pips but on the positive trade headlines long USDCNH positions are buckling from 6.84+ to sub 6.80 as long dollar positions are running for the exits.
The AUD dollar was trading bid after residential building approvals came in better than expected overnight, But on the back of this morning move below 6.80 USDCNH has seen an exodus from arguably the market most crowded trade, short Aussie.
The National Post report overnight indicating US diffidence for Canada to join the current US/Mexico trade talks saw USDCAD spike back towards 1.31 but provided traders with an excellent opportunity to re-engage CAD longs as the outlook remains favourable for the Loonie,.And local dealers were rewarded after the positive GDP overwhelmed the negative NAFTA news.
With an apparent easing on Trade tensions, the Malaysian Ringgit should find some support on improving risk sentiment, but as we enter the two days Fed policy meeting, the USD is holding up its end of the bargain. But in addition to the Fed policy meeting, traders have payrolls on their mind which should continue to lend support to the Greenback and will limit MYR gains.
Oil prices were back peddling out of the gates this morning ahead of today’s contract expirations in September Brent, after reports from Interfax pointed to increased supply, specifically from Russia, whose oil production was up to 11.22mm bpd this month. However, both Brent and WTI have reversed tack and are moving higher on the positive US-China trade headlines which are easing global growth concerns.
Gold prices bounced off session lows with the Yuan rallying. However, with the Fed expected to stay the course with two interest rates rises in 2018 which should underpin near-term USD sentiment, speculators will continue to fade upticks in the absence of haven and sluggish physical demand.