Fed officials agreed on their new policy framework last month but are now debating how to implement the new strategy, and it seems there may not be a rush, according to The Wall Street Journal's Fed watcher, Nick Timiraos; they evidently have some way to go and may not deliver new guidance later this month, waiting instead until November or December


Interestingly, there were different takes on the ECB read. Several of my guys in London think ECB President Lagarde was cautious in addressing the currency during their recent press conference. And her pushback on Euro strength was lighter than expected, thereby green lighting the EURUSD higher. But one the thing we all seem to agree on is that while topside is the much preferred long term option, CFTC positioning says no. 

And the short EURUSD view is getting magnified by a rising number of new Covid-19 cases in Europe and negative Brexit headlines; this could eventually force some repositioning. 

There also seems to be an unusual amount of ECB clarification going on today as ECB’s Chief Economist was out blogging to make sure there was no misunderstanding about the ECB currency watch. And tentatively getting on the "euro does matter bus," ECB Governing Council member Villeroy says the ECB does not target exchange rates. Still, the exchange rate does matter for inflation and policy. He says the ECB keeps all of its policy options open and is ready to do more if necessary.

Besides my less dovish non-market consensus view of the FED into the FOMC, the rising number of new Covid-19 cases in Europe, compounded by negative Brexit headlines, could eventually force some repositioning lower.

EURUSD remains in a broader holding pattern, consolidating between 1.1700 and 1.2000. Given the ECB focus on the Euro's impact on inflation expectations and Vice Chair Clarida's September FOMC bazooka walk back, the street should look to fade strength into 1.1880/90. Re-assess on a daily close above 1.1925/30. To the downside, 1.1790/1.1800 and 1.1750 are the initial areas of support to lean into, ahead of the more critical 1.1680/1.1700 area.

Next week's FOMC meeting will be a significant one for the ECB and there’s an excellent chance the Feds strengthen forward guidance and a maturity shift in QE purchases given the latest equity market rout.

In such a scenario, EURUSD might get quickly pushed above 1.20, and further, as the divergence between the Fed and ECB would become all the starker.

If I were ECB President Lagarde, I’d be cheerleading an FOMC pause, which could also seem reasonable given that the policy framework is a ‘whites-of-the-eyes' approach in terms of inflation, where it won't hike rates until inflation is at or above 2.25%. Still, it’s a policy built for the future, not around what is happening today.

Knowing how forex traders think, the market will test the ECB on the exchange rate and inflation expectations. Frankfurt's worst-case scenario would be if the Euro strengthened because the Fed waxed dovish, and then gets compounded by a run of weak EU data pushing inflation expectations. In that case, it might be challenging to wait until December to expand PEPP and consider further negative rates in such an occurrence. 

The Ringgit 

The MYR has outperformed in 3Q-to-date, alongside the RMB, but the ringgit’s strength is extended. While the MYR is still cheap and enjoys a yield advantage (the slippery slope for oil prices notwithstanding), the not-so-small matter of WGBI review by FTSE Russell occurs later this month. Malaysia bonds have been facing exclusion risk for some time now, and there’s also a possibility of China's bonds being included. I’m sticking with the Yuan but pulling back bullish MYR view until oil bounces and we get through the WGBI risks. 

Shoulder Season 

Crude stocks build by 2mb w/w, reversing some of the previous week's sizable draw that was distorted by hurricane disruption and primarily driven by lower refinery utilization, partly reflecting the faster restoration of crude production than processing issues after the hurricane.

The biggest issue is the weakness across gasoline and distillates. US gasoline demand has softened considerably in the last two weeks, which is the most worrying issue for short term traders. Considering we’re at the tail end of the summer driving season, demand tails seasonally from September onwards. Weakening gasoline demand could put a further crimp refining margins. 

But, overall, in the context of the Covid beat down, underlying demand looked ok even as the market begins to move into the shoulder season. And with more charterers looking for VLCCs again for short-term time charter, as freight is dipping to a record low while crude oil contango widens, prices could remain supported.

Steepening contango

When oil markets are in "contango" – i.e. when the forward price is higher than the spot price – conditions are ripe for floating storage. The steeper the forward curve of crude oil, the more a charterer can pay for the use of a tanker as a storage device and still profit from buying crude now and selling it later. It is not bearish; it's just a logical trade. 

At current contango (Dec20-Dec21 -3.96), trading houses will begin thinking of purchasing now for future delivery and can start bidding on offshore storage. This is especially the case when tanker rates are as depressed as they are now, and should the curve steepen more, and tanker rates allow; there could be a return to oil bidding for floating storage. 


Gold seems to have set a bottom and is still trading with a high correlation to US equities. I expect interest and volatility to fade a bit, as there has been a fair amount of hyperactivity in the past month. I still think we test $1,910 next week as the markets get spooked by positive vaccine news and a not-so-dovish September FOMC. Flow-wise, there is extraordinarily little buying interest from real money accounts and some tentative selling from fast money. 

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But it's an intentionally little known fact that between 2005-2015 – and probably still to this day – I was the only FX trader that would show tradable two-way prices on any currency up to 10 million per side, gold 2500 oz a side, oil 10,000 barrels per side on Saturday and Sunday (24/7) – yes, weekend trading.

That made for some interesting Monday opens in Singapore where market makers at the banks would be hiding in the pipes from me if it was a volatile news weekend. Still, frankly, I held most of the risk, internalizing what I could and then hedging it out on a “when needed” basis. So, I’ve built some credible Monday gap and weekend event risk models that continue to work well to this day, which is very portable to any market modeling level. 

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