The USD attracted steady buy-side flows as yet another piece of evidence via an upbeat US retail sales seems to suggest the upcoming one or two insurance rate cuts by the Fed may be the intended tactical move rather than a rate-cutting cycle.
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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The USD attracted steady buy-side flows as yet another piece of evidence via an upbeat US retail sales seems to suggest the upcoming one or two insurance rate cuts by the Fed may be the intended tactical move rather than a rate-cutting cycle. This rationale would definitely gain a larger number of supporters at the helm of the Fed if the US data continues to show stable readings as it's been the case in recent times through the NFP, CPI or Retail Sales, all beating expectations. Amid the risk that the market has potentially overplayed the amount of easing the Fed is willing to pursue in the next year, Fed's Dallas President Kaplan made some revealing comments by what it may look like an attempt to massage the central thematic by emphasizing that a tactical adjustment rather than an easing cycle is what's needed. The outperformance of the USD comes in stark contrast with the price action witnessed in the Euro, finding an avalanche of sellers through Europe as the German ZEW is yet another reminder that the ECB may, after all, be inclined not to wait any further before initiating its new easing measures, judging by the state of demoralization in Germany's economic sentiment. However, one can only imagine the true extent of discouragement to hold Sterlings when even against a pressured Euro, the former still lost way more ground than any other currency as the market comes to terms that a hard-Brexit scenario is where the Brexit process seems to be headed with the soon-to-be-elected new UK PM. The Canadian Dollar, meanwhile, continues to struggle at a critical macro 100% projection level, with the collapse in oil prices on Iran-US back to the drawing table a key driver weighing on the currency. On Tuesday, we also learned that the NZ CPI Q2 remains steady from the previous quarter, which may not be enough to prevent the RBNZ from embarking upon more rate cuts if it aims to bring inflation closer to the mid-range of its 2% target mandate. However, the market has so far shrugged off that eventuality by keeping the NZD relatively steady. AUD traders also saw the RBA dampening expectations for further rate cuts short term after decoding Tuesday's July RBA minutes, with technicals in the AUD index, as in the case of the NZD index, still looking quite attractive. Lastly, a pair of currencies with erratic and non-directional price movements include the JPY and CHF indices, both trading around the 13-ema baseline, which clearly indicates a market that has taken a laxer approach towards supporting risk-off currencies yet not convinced to engage in protracted selling campaigns either, due to the evident risks that exist of slower global growth, trade uncertainties, hard-Brexit outlook to name the most pressing issues.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
NZ CPI Q2 rose by 0.6%, bang on expectations. By deconstructing the report, fuel prices contributed to the upward pressure but the rest of the components were subdued. Annual inflation in NZ stays on the lower end of the RBNZ target range mandate. The Central Bank has in recent times that to take the inflation back up towards the 2% midpoint of the target, more robust economic growth is needed, which is unlikely to be fostered under the escalation in global growth uncertainties, hence the data does little to discourage the Reserve Bank that a lower OCR would be required to meet its objectives.
The July RBA minutes have cemented expectations that the RBA will most likely take a thoughtful pause by holding rates steady until later in the year, subject to upcoming data. By comparing the June vs July minutes, strong statements that would indicate a third rate cut is imminent were dumped from the minutes. To top it off, a revealing sentence included that “the Board will continue to monitor developments in the labor market closely, and adjust monetary policy if needed”. This condition wording indicates a pause.
Talk about a potential USD selling intervention by the US Treasury has gained some air time with several banks and institutions I’ve read taking note of the prospects. While such a measure would be consistent with Trump’s trade policy, and both Trump and Kudlow have had a go with some vague jawboning, there is still a long way to go. As HSBC notes: “Currency intervention usually has three phases: Start with verbal jabs and jawboning, then move to threats of physical intervention and then finally: Physical intervention. We are only in phase one of three (jawboning) and so it is too early to put on any straight line weaker dollar trades in anticipation.”
The incessant selling of the Sterling continues as the risks of a disorderly hard-Brexit is a real prospect that market participants are pricing in. The refusal to negotiate the Irish backstop by Boris Johnson and Jeremy Hunt (UK PM contenders), both stating that it will not be included in any negotiations with the European Union, has really hurt the Pound. The market is connecting the dots by anticipating that, with no further concessions from the EU on the horizon, the odds are increasing by the day, unless a major turn of events, that a hard-Brexit is a real possibility by the deadline set on October, 31st.
Oil sold off aggressively after tentative signs of an improvement in the US-Iran relationships. Both US Secretary of State Mike Pompeo and President Trump implied that a small window of opportunity might be opening up to make headway in the negotiations. Trump’s approach towards Iran was less critic by noting regime change is not on his agenda and that a lot of progress has been made as of late, while Pompeo said Iran is willing to talk about the potential shutdown of its missile program.
Germany’s July ZEW survey current situation was a very disappointing reading of -1.1 vs 5.0 expected, while expectations also fell further to -24.5 vs -22.0 expected. The nefarious reading, officially recording the weakest print in 9 years, may lead to tilt the balance towards an earlier rather than later initiation of the new ECB easing campaign. The data led to a substantial selling in the Euro even of bottom pickers emerged to keep the valuation in the EUR index by NY close far from the worst daily levels.
Following Trump’s tweets from Monday that China ‘needs’ a trade deal with the US, China’s foreign ministry has hit back by stating it is misleading to suggest that it needs a trade deal with the US. These comments, once again, portray how far apart both sides are from any deal. China even implies that rather than inking a half-baked deal, an alternative always available is to resort to stronger domestically-oriented stimulus policies. To make matters worse, Trump’s comments today are not helping, noting “he could impose more tariffs on China if he wanted”, adding that “we have a long way to go with China on trade.”
US June advance retail sales overshot estimates with a +0.4% print vs +0.2% expected. When looking at the internals, the control group rose by 0.7% vs +0.3% expected. Interestingly, while the data managed to see strong USD buying across the board, it barely dampened expectations that the Fed will only cut by 25bp on July 31st, with the odds for a 50bp rate cut at a generous 33% according to the CME Fedwatch tool. Note, the Fed’s rationale to adjust its rate lower in July is more about global growth, trade uncertainty, and business confidence, rather than consumption or jobs. Meanwhile, the small disappointment in the US June industrial production at 0.0% vs +0.1% expected barely budged the valuations in the USD. Utilities were the drag this time.
Bitcoin keeps selling off to the point of losing the 10k mark on a NY closing basis for the first time since June 20th. Last week’s Senate hearing on Libra or the negative rhetoric by policy-makers the likes of Trump or Mnuchin have taken its toll on sentiment. Crypto traders are coming to terms that the roadmap for the launch of Facebook’s Libra will have to face one stepping stone after another before getting the blessing of regulators.
Today’s intervention by Fed's Powell in a speech titled "Aspects of Monetary Policy in the Post-Crisis Era" at the French G7 Presidency 2019, in Paris, failed to yield new insights. The policymakers reiterated that the Fed will act as appropriate amid increased uncertainties. Powell re-visited the passages, as part of his speech, that more caution is warranted amid US growth down a notch and uncertainties around trade and global growth. The line that the FOMC "raised concerns about a more prolonged shortfall in inflation below our 2% target” was also repeated, suggesting that the Fed is turning laxer in accepting subdued inflation as the new norm.
Fed's Chicago President Evans - dovish member - said today that a 25 bps or 50 bps cut in July is a question of strategy, even if he is of the opinion that 50 basis points of accommodation are needed. Meanwhile, Fed's Dallas President Kaplan said he believes Fed funds rate will stabilize after one cut, essentially telling the market he is comfortable with one single cut. Of interest was the interview Kaplan conceded to Dow Jone, looking to massage his message as to imply that the tactical adjustment the Fed is after is one where one or two insurance cuts are needed rather than an easing cycle. "The persistence of the yield curve inversion "would make you consider at least a tactical adjustment-not a change in strategy, not the beginning of a rate-cutting cycle," he said.
Recent Economic Indicators & Events Ahead
A Dive Into The Charts (Techs, Funda, Intermarket)
Right off the bat, what jumps at first glance through Tuesday’s price action is the solid appreciation of the USD, which finishes off in style by the NY close, supported by higher US nominal yields after the upbeat US retail sales. From an equally-weighted measure against G8 FX, the USD index performance communicates risks of follow-through demand based on the latest sequence of volume dynamics and technicals, which serve as our premise to set a directional bias.
EUR/USD: Next 100% Proj Target Not Completed Yet
GBP/USD: Sellers In Full Control As Hard-Brexit Prospects Priced In
USD/JPY: Trendline Violation Shifts Focus To Stabler Price Action
AUD/USD: Trendline Breakout On Increasing Vol Warrants Caution
USD/CAD: Bullish Breakout To Encourage Dip-Buying, Canadian CPI Next Mover
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