- Forex today was positive due to the market's reaction to the Trump-Xi trade war ceasefire.
- The EM-FX space and high betas outperformed on a weaker dollar outlook with the Chinese yuan continuing its local session rally - (USD/CNH extending its decline to about -1%, around 6.88 in NY).
- Asian gains were largely maintained but not extended while US bond yields retraced lower on a speculation that the Fed is on the verge of pausing on its interest rate hike regime.
However, there was some confusion over just what had been agreed between the US and China, whereby Trump left a caveat in the proposals to the Chinese and there were a number of different stories being run in Chinese official media that contrasted to that of what was being run in the US. Nevertheless, global equities are trading higher, while US indexes drifted a touch lower on the mixed feelings over the truce and what after opening sharply up. On a weakening Fed outlook, the US 10yr treasury yield fell from 3.05% to 2.99%, while the 2yr yields from 2.84% to 2.82%. We have the Fed this month and the Fed fund futures continued to price the chance of the next rate hike on 19 December at 80%.
Oil prices were a major lay in the US as well, surging on an announcement from Alberta, Canada, that they will cut output next year by 8.7%. We also had news from the weekend that Russia and Saudi Arabia will extend their accord to manage output. This comes ahead of this week's OPEC meeting. WTI was up 3.2% at just over USD53.88 in Asia, and then drifted lower to 52.13 the NY low. Gold prices were up over 1% on the weaker USD.
As for data, the November US manufacturing ISM survey bucked the easing trend in various US activity data of late and firmed to 59.3 from 57.5, showing impressive resilience in the face of market volatility and high trade tensions. We also had some mixed Fed speak that lead to dwindling US yields with Vice Chairman Clarida, suggesting that the economy is in good shape and that an inflation overshoot was permissible while Governor Quarles, said that the neutral rate is not a precise concept. Governor Brainard said the economy is at or beyond full employment.
The USD weakened across the board, benefiting both NZD and AUD as the outperformers as we head into the RBA today. AUD/USD extended its gains to highs above 0.7390 in European trade before trickling back to 0.7350 by the NY afternoon, compared to 0.7305 at Friday’s close. However, the NZD climbed up to a six-month high of 0.6940 before edging back to 0.6920 sending AUD/NZD down 15 pips to 1.0620. USD/CNH stays heavy so that helps both the Aussie and the Kiwi. EUR/USD ranged sideways between 1.1320 and 1.1380. EUR/USD sees limited impact from the G20 news and a drop in the bunds helped to keep a lid on any excitable bulls. There are a number of political risks associated to the European market which anchors the euro, from Italy, Spain (regional elections), to Brexit. Markets will look ahead to the US jobs data as the next major catalyst for the pair. EUR/USD closed around 1.1350 after reaching 1.1380 in London and 1.13020 in NY. Sterling was entering earl Asian trade down about -0.2% at 1.2725. GBP/USD had been as high as 1.12832 in the knee-jerk in the Asian open on Monday but political angst continues to weigh. Brexit minister Barclay says path unclear if the vote fails in parliament. 1.2700 is a knife's edged. USD/JPY traded between roughly 113.40 and 113.70 and USD/JPY uptrend holds. AUD/JPY will be in the spotlight today on the back of the RBA. For now, USD/JPY is well supported by rising Tenkan at 113.34 although offers are sighted up at 113.80.
Key notes from US session:
- Wall Street closes in a sea of green following relief rally on trade war ceasefire; DJIA eyes the 76.4% Fibo
Key events ahead:
For the day ahead, the RBA is likely to maintain its neutral stance given that rate hikes are not expected until Australian wage growth and consumer prices pick up. Housing is also a concern.
"There is again no tension about the RBA decision (2:30pm Syd/11:30am Sing/HK), with markets fully priced for the cash rate to remain at 1.50% to end the year. This was Westpac’s forecast this time last year, but as a reminder, during January 2018, rates markets were priced for the cash rate to be 1.75% by this month. It took until June for markets to fully match Westpac’s end-2018 view. In terms of the statement, we will again be very interested to see the language used to describe the slide in house prices, which accelerated in November," anlaysts at Wespac explained.
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