- Forex today was risk-off following the market's interpretation over the US-China agreement at the G20 whereby the ambiguous detail of the deal left a trade war still very much on the table.
European markets were also soft but the mood really soured in the NY morning as President Trump’s many tweets included reaffirmation of his underlying preference for trade tariffs: “President Xi and I want this deal to happen, and it probably will. But if not remember...I am a Tariff Man. China also vowed serious punishments for IP breaches overnight
When Wall Street came online, things really turned sour and the Dow fell by as much as 800 points. The greenback started to pick up the bid again and everything else was history. The currency board turned red and profit-taking left EM-FX out to dry along with the high betas such as the antipodeans. At the same time, US 10yr treasury yields extended a month-old decline, from 2.97% to 2.88% - which was the lowest since early September – then pushed back to 2.92%.
The Fed is increasingly concerned by the crashing yield curve. Even Williams (hawk, voter) also sees risks on the horizon as the 2yr-5yr curve inverts signalling economic weakness. The 2yr yields were choppy but net only 1bp over the day at 2.81%. The Fed fund futures now price in a slightly lower chance of a 19 December rate hike and the market is starting to believe that the Fed they won’t achieve their objective on rates, (futures see peak Fed Funds around 2.75% vs current dot plot at 3.375%), nor their economic aspirations which leaves the greenback vulnerable from heavy long positioning.
Currency action
EUR/USD climbed to 1.1419 but then fell in NY to 1.1340 as the dollar picked up a bid and also in sympathy with GBP. The single unit is under pressure also due to the news flow over the Paris protests that have forced Macron to cave in on fuel tax ahead of the European Parliament votes next spring. EUR/USD now trades back below the 10 & 21-DMAs, with eyes on a test of the 1.1305/20 support zone.
GBP/USD rose to 1.2840 then slid back to 1.271, breaking new ground after May loses unprecedented parliamentary contempt vote and is now being held in contempt for refusing to provide the full legal advice it received on the Brexit deal it negotiated with the European Union. Comprehensive legal advice from the attorney general on Brexit treaty will be released while the opposition claims earlier summary had attempted to obscure controversial details. The 2018 low is in reach at 1.2696.
USD/JPY dropped about 1 yen to 112.60 in NY on the back of risk-off flows, and a sell-off on Wall Street with the pair now burdened on trade doubts that could well provoke a short yen squeeze if derisking intensifies. The 200-DMA at 110.50 could be targeted if yields continue to fall and calls for a US recession echo for much longer. The USD/CNH extended its decline to just under 6.83 before steadying around -0.5% on the day, at 6.8450 while AUD/USD initially popped up to 0.7394 but risk aversion kicked in and took the pair lower to 0.7330-40 with a slide in global bond yields, equities and commodities souring risk sentiment of which the Aussie trades as a proxy and AUD/JPY fell to near 82.60.
Key notes from overnight
Key events in Asia
Analysts at Westpac noted the key events coming up in Asia as follows...
"Australia’s Q3 GDP data is due at 11:30am Syd/8:30am Sing/HK. Following the firm net exports and public demand data yesterday, we look for growth of 0.6%qtr, with risks evenly balanced (consensus is also 0.6%). Annual growth is forecast at 3.3%, little changed from 3.4% in Q2. The arithmetic of our Q3 GDP forecast is: domestic demand +0.5%; inventories -0.3ppts; and net exports +0.4pts. Key uncertainties: the consumer and the drought – with a lack of partial data around consumer spending on services and on farm inventories. The drought in NSW and surrounding areas is likely to have its biggest impact in Q4 and Q1, but there is a risk of an inventory drag in Q3."
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