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Collinson FX: Oct 11, 2018 - Deer in the headlights

by Collinson FX 10 Oct 2018 20:50 PDT 9 October 2018
Racing in the 2009 Louis Vuitton Pacific Series on what will be Course C in the 2021 America's Cup © Richard Gladwell

Collinson FX: Oct 11, 2018 - Deer in the headlights

Equity markets suffered renewed pressure, overnight, as interest rates became the nominal threat. US 10 Year Bond yields regained 3.24%, which is a revisiting of recent record levels and promotes fears of funding costs and debt servicing abilities. The IMF reviewed global growth forecasts lower and this sent some risk-off emotions through markets, looking for direction. The US Bond Yields continue to reflect US economic growth and now sends a paranoid market into fears over debt levels.

The EU and UK look to be close to an agreement over ‘Brexit’, which will boost the GBP, as a result of certainty rather than any benefit. The UK will regain some momentum, but any agreement must be a real split from the Socialist Union, or the UK will suffer. The EU will be mortally wounded by ‘Brexit’ and the UK will be liberated. The currencies will reflect this. The GBP regained 1.3200, while the EUR pushed above 1.1500, as the reserve takes a breather.

The Dollar is softer overnight but the NZD and AUD remain targets. The vulnerability lies in the Sino/US trade war, as both are major suppliers to China and remain prone. The AUD looks to regain 0.7100, while the NZD attempts to hold 0.6450, but both are ‘deer in the headlights’. Technical levels point to extreme vulnerabilities to the downside.

Collinson FX: Oct 10, 2018 - Factors form Perfect Storm

It has been a slow and quiet start to the week, which was hampered by a long weekend in the US. Equities have been flat, after taking a hiding to close the previous week, over fears over spiking US interest rates. The US economy has been driving interest rates, with surging economic growth and a tight labour market. The continuing strong economic data must drive the narrative. The EUR remained below 1.1500, after flat German trade data, while Italian budgetary excesses have been the major bone of contention. The GBP regained 1.3100 again, as rumours swirl surrounding a ‘Brexit’ deal, supporting a stronger currency.

Rising US interest rates have supported the surging currency and this has driven commodity currencies to new lows. The NZD has collapsed to trade 0.6450, while the AUD has been marginally stronger, attempting to regain 0.7100. The major negative influence on these trade exposed currencies has been the Sino/US trade negotiations, which has combined with the surging reserve to form a perfect storm. The domestic data has been relatively good so this is not the source of the problem. The falling currencies have assisted export returns but drive rising cost of living pressures.

Collinson FX: Oct 8, 2018 - US employment on 50yr low

Non-Farm Payrolls missed expectations for September, but August was reviewed sharply higher, while the headline Unemployment number fell to the lowest level since 1969 (3.7%)!

US equites added to the previous day’s losses, in sharp reply to the Employment data, which boosted the US 10 year bond yield to 3.24%. US interest rates reflect the market and will lead the Fed to hawkish monetary policy. Fed Chair Powell has iterated that ‘interest rates are a long way from neutral’. The US economy is booming and the Labour market remains tight, driving wages and interest rates higher, which has mixed effect on equities. Equities remain at record highs, although the end of week correction allowed shares to drift, but productivity and profit continue to drive them higher.

Global trade wars have been the major risk to markets, but the Canadians return to the fold and signing the USMCA, smashed much of market uncertainty. The Japanese and Indians have both indicated an intention to sign an agreement with the USA, on a bi-lateral basis. The Chinese are the now the only significant hold out and considering the trade imbalance, will likely compromise soon. This hold out is impacting the trade dependent and exposed nations of Australia and NZ and has been a influence on the associated currencies. The AUD has fallen to 0.7050, looking extremely vulnerable, despite a strong domestic economy. The NZD has collapsed to 0.6440, which is a symptom of the rising reserve, but domestic economic conditions remain challenging. NZ cost of living is becoming prohibitive, to the average consumer, while wages remain soft. The Government has little in the way of solutions and are indicating legislative wage rises, which are ineffective and damaging to business and prices. Wages should be driven by demand and raising labour costs will only add to the rising cost of living.

The GBP regained 1.3100, which has been buffeted by Brexit speculation, amidst the Conservatives conference. The EUR regained 1.1500, while the reserve took a breather, as the Yen held below 114.00. US CPI data will confirm strong growth and inflationary pressures, in the coming week, which should support a bullish Dollar. Trade threats surrounding China, will continue, as speculation will drive daily moves.

Collinson FX: Oct 5, 2018 - KIWI crashes

US equities tumbled overnight ahead of the important Non-Farm Payrolls tonight. The strong ADP Jobs report and ISM Manufacturing data, out of the US, had triggered a rally in US Bond Yields and equities. The Bull run in US equities was tempered overnight, with a serious correction, as markets digest the implications of the rise in interest rates. The rise in yields is a sign of strong demand and offers improving, alternative investment opportunities. It also drives the cost of money for US business and consumers higher. The Challenger Jobs report signalled an increase in US job cuts, which may temper tonight’s Non-Farm Payroll expectations, although the Labour market remains tight. US 10 year yields have busted 2011 highs.

Global yields were higher but the rise in the mighty Dollar was mitigated, taking a breather, but may signal further rises supported by economic data and monetary policy. The EUR traded around 1.1500, while the Yen slipped below 114.00, more a reflection of risk adjustment. The GBP regained 1.3000, buffeted by Brexit speculation, amidst the UK Conservative conference. The US Vice-President Pence accused the Chinese of Political interference, in the coming Mid-Term elections and industrial espionage, as tensions rise in the US/Chinese Trade negotiations. This has driven the trade exposed NZD and AUD lower. The AUD plunged to 0.7060, while the NZD crashed to 0.6460, reflecting their trade vulnerabilities and technical support.

All eyes turn to the Non-Farm Payroll number released Friday, US time, which will influence bonds, currencies and equities.

Collinson FX: Oct 4, 2018 - Bull run on USD

US economic data continued to surprise on the upside, with the ISM Manufacturing number reaching record highs, while the ADP Jobs number was much better than expected. The ADP report is a fore-runner to the important Non-Farm Payrolls out tomorrow night, which confirmed strong private sector jobs growth, in line with labour market statistics. The strong economic data sent equities and bond yields surging, showing the positive functioning of a bull market, in complete contrast to the Obama led economy. Any rise in interest rates previously triggered a sell-off in equities and the bond yields were triggered by poor economic data! This US market is firing on all 8 cylinders. Strong data drives interest rates and equities higher. The 10 year Bond Yield has hit 3.14, which the highest since 2011, in line with Fed target territory.

The strong interest rates are driving a bull run on the US Dollar. The EUR slipped to 1.1500, while the Yen traded 114.40, also enhanced by recent trade achievements. Commodity currencies have been hit hard by the rising reserve, with the AUD falling to just above 0.7100, while the NZD may test 0.6500. These currency moves reflect the stronger Dollar and also the vulnerability of the trade exposed nations to continued China/US trade wars. The NZD was not assisted by a contraction in commodity prices, while Australian Building consents fell 9.4%, which only support the weak housing sector narrative.

Trade remains the key global narrative, although the Non-Farm Payroll number out in the US Friday, may determine currencies to close out for the week.

Collinson FX: Oct 2, 2018 - Last minute NAFTA deal

Markets surged overnight after a last minute deal over NAFTA was completed right on the 30th September deadline. Canada has agreed to the deal that the US and Mexico had previously settled. There has been agreement over Canadian dairy tariffs and Automobiles. The new agreement will be called United States Mexico Canada Agreement (USMCA Agreement). Trade has been the major risk to international markets and this is a major step forward. India and Japan are also negotiation bi-lateral trade agreements, so China remains the only major hold out. The Canadian Dollar recovered, along with the Mexican Peso, despite the resurgent Dollar.

European markets also gained ground with the risk-on news. The turmoil surrounding ‘Brexit’ continues with no agreement in sight. The Conservative party conference has thrown up more controversy over the structure of ‘Brexit’. The GBP retreated back to 1.3040, while the EUR slipped below 1.1600. Manufacturing data from Europe was flat, while the US data was steady, as the Dollar shows support from US monetary policy.

The AUD held above 0.7200, while the NZD struggled to hold above 0.6600, despite the resurgent reserve. Trade exposed currencies remain vulnerable to the US/Chinese lack of agreement, but is seems only a matter of time before the Chinese come to the party.

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