If Forex Markets Are Any Guide Traders Are Anticipating A Risk On Rally

Originally published by AxiTrader

Quick Recap

The small miss in US non-farm payrolls was mitigated by the uplift in the previous data by almost the same amount. So on balance the market is pricing less chance of a November hike (which was always remote) and an increase in the possibility of December which now stands at 65%.

That put some mild pressure on stocks, but US bonds closed 5 points off their highs and the US dollar was a little weaker.

But as we open the week we are seeing rallies in the Aussie and Kiwi dollars and a move higher in USD/JPY which could, I stress could, suggest that traders are factoring in a Clinton victory in the presidential debate which will happen in our time zone today. That suggest if that comes to pass risk assets might go a little bid during Asian trade.

What You Need To Know

Here’s What I picked up

International

• US stocks closed mid range after non-farm payrolls with the S&P 500 finishing at 2153, down 0.33%. The Dow Jones Industrial Average was 0.15% lower and the Nasdaq 100 was 0.27% lower. Technically the S&P is still trading within a very tight little wedge pattern with 2140 the key support to watch near term.

• US 10s were down 2 points on the day at 1.72% after hitting a peak of 1.77% after the release of non-farms. But elsewhere the bond sell off continued with German 10s closing the week above zero per cent (0.02%) for the first time in month’s while UK 10-year gilts felt the heat closing the week up 25bps at 0.885% after the pound collapsed and “hard” Brexit – and all the uncertainty that brings - seems to be becoming the accepted wisdom.

• Non-farms for September printed 156,000 – 16,000 fewer than expected. But the fact that August data was revised higher by the same amount mitigated the miss and by the close of trade futures pricing for a December rate hike had moved from 55% Thursday to 65% by week’s end. Some of that increase in December came as a result of the decrease in November odds – but that was always an unlikely expectations given logistical details like the presidential election just a few days later and the lack of a scheduled press conference in November.

• That expectations are rising, that the US dollar had a better week because of it, and that bond rates are rising in the US and across the globe means the release of the minutes to the September FOMC meeting are an important release when they hit the screens at 5am Thursday AEDT. Even though we had three dissenters the market (and Me) read the September statement and Yellen press conference fairly dovishly so it is worth noting that on Sunday Fed vice-chair Stanley Fischer said that September’s decision had been a “close call”. That the minutes may reflect that debate is a risk for bonds but a potential boon for the US dollar.

• It is worth also noting that Fischer sought to temper that by saying “with labor slack being taken up at a somewhat slower pace than in previous years, scope for further improvement in the labor market remaining, and inflation continuing to run below our 2% target, we chose to wait for further evidence of continued progress toward our objective.” He also noted that Fed policy is only mildly accommodative which means the Fed has little chance of falling too far behind the curve.

• Besides the FOMC minutes the data around the globe this week is second tiery in nature with US retail sales on Friday the highlight. But before we get to that there is a lot of water to flow under the bridge. Today we get the second presidential debate in the US right when the latest lewd Donald Trump revelations see him hemorrhaging Republican Party support and perhaps puts his race in terminal decline. Markets will no doubt start to factor out the chance of Trump presidency if he does poorly in the debate.

• Also this week we get the start of US earnings season in earnest with Alcoa (NYSE:AA)

• Here’s one to watch Bloomberg reported over the weekend that Deutsche Bank (DE:DBKGn) CEO John Cryan failed to reach an agreement with the US DoJ over the massive $14.5 billion fine when he was in Washington last week. That’s important for the recovery in DBs stock price. But it opens a fault line which is emerging between the US and Europe of DB and Europe’s banks. Dutch finance minister Jeroen Dijsselbloem said Friday that the DoJ fine is too big and undermines stability. “Let's hope it is an opening bid,” Dijsselbloem told Reuters in an interview. “These kinds of fines are completely oversized, they are damaging to financial stability.”

• It’s Columbus Day in the US today.

Australia

• The S&P/ASX 200 fell 16 points to 5467 on Friday with energy about the only bright spot on the index. Futures traders are betting on a cautiously optimistic start to the week with the December SPI 200 contract up 8 points at the close on Friday.

• The reality is though that US futures are likely to react to the debate during our time zone today. So there is a strong chance that by the end of trade the markets performance has been driven by perceptions about how Hillary Clinton has done. Trump doesn’t appear to have much to lose after the latest revelations so there is every chance his aggression could back fire terribly for him – at least the market could read it that way.

• That’s likely to be read positive in our time zone. We’ll all be watching closely.

Forex

• It was all about the pound and the collapse from 1.26 to 1.18 in the blink of an eye Friday. That such a move could happen in one of the globes top 3 currencies amazed traders, commentators and the press. But an unfortunate (for Sterling bulls anyway) confluence of events – Teresa may signalling hard Brexit, markets nervousness about what this means, the Bank of England continuing to warn of dire consequences and last Thursday night saying they would be ignoring strong data because future economic deterioration is coming, and what appears to be growing EU belligerence toward Brexit – all came together when the FT article (where Francois Hollande said Britain must pay the price to keep the EU together) hit the screens in an illiquid Asian morning session.

• There really isn’t anyone warehousing risk the way they used to in markets, and as I said in my morning video Friday – why would you want to buy the pound?. So GBP/USD hit an air pocket, bids evaporated, a few robots probably joined the fray and we collapsed to 1.1840ish (no one knows exactly – but that’s the official low) before GBPUSD recovered to close the week around 1.2430/40.

• A couple of things are worth noting now for GBP. We’ll probably see some consolidation given all the stops in the 1.18/1.26 region would have been triggered. But structurally my question from Friday remains – why would you buy the pound? So it’s probably going lower in time. How low depends on many factors. But a retest of Friday’s low at some time seems a fair bet.

• Elsewhere on Forex markets Friday it was fairly orderly although there was a sharp reversal in USDJPY which closed under 103. But it’s back at 103.20 this morning, EUR/USD is at 1.1180, the NZD/USD is at 0.7167, and the AUD/USD is back near 76 cents at 0.7592 – well of Friday’s 0.7550 low.

Commodities

• Gold fell to a 4-month low of $1241 Friday before recovering to $1256 at the close. That could be the end to this run lower for the short term. Unsurprising Gold’s recovery from the low matched the recovery in US rates from their highs.

• As discussed Friday it was time to scale out of remaining longs. And Crude Oil is back at $49.81 at the close from a high of $50.74 during the day. $47.50 seems a reasonable target. The Iraqi’s are calling for more production which can’t be good and worth noting there is an OPEC non-OPEc meeting this week.

• Copper is at $2.1565

Today's key data and events (all times AEDT)

• Australia - Nil
• New Zealand - Nil
• China - FDI - Foreign Direct Investment (YTD) (YoY) (Sep) (n/a)
• Japan - Nil
• Germany - Imports (MoM) (Aug), Current Account n.s.a. (Aug), Trade Balance s.a. (Aug), Exports (MoM) (Aug) (5pm)
• EU - Sentix Investor Confidence (Oct) (7.30pm)
• UK - 10-y Bond Auction (n/a)
• Canada - Nil
• US - Nil

Have a great day's trading