The USD Is Strengthening On Bets Of A December Rate Hike

Originally published by AxiTrader

Quick Recap

The US dollar is higher again as bets increase that the Fed will indeed be raising rates in December. That didn’t bother long bond or Fed fund futures traders overly but the strength is another handbrake on stocks at the moment in the US as it raises some residual concern about the outlook for earnings for those firms exposed to the Dollar strength.

Crude was a little higher and traders have catalysts for both buying and selling this morning after weekend comments. Which shoe drops might be instructive on the next month’s trade direction as we await the formal OPEC deal, or not as may be the case.

What You Need To Know

International

• US Stocks closed quietly to end the week in positive territory but marginally lower on the day. The Dow Jones Industrial Average dipped 0.09% to 18145, the Nasdaq 100 rose 0.3% to 5257 and the S&P 500 was unchanged at 2141. Earnings season continues this week and should be a key driver before we get GDP on Friday night.

• US 10 year Treasuries ended the week at 1.74% which is a pretty good result after the spike to 1.8% early in the week.

• John Williams, president of the San Francisco Fed, said Friday that the Fed is on track for a rate rise this year. HE said the economy is “well positioned” for a rate rise and that “this year would be good” for the hike. This echoes comments from New York Fed president Dudley. The blackout period starts early this week for the FOMC meeting in November so traders are left to their own devices again after today.

• A small part of Belgium’s federation is holding out on a EU/Canada trade deal. The Canadian delegation left on Friday and the EU was given Belgium till tonight their time to make a firm decision. It’s a trade deal with Canada but it’s easy for traders and investors to extrapolate this hold out region as indicative of the trouble the 28 member club is going to have difficulty with as it negotiates with the UK over Brexit. Put simply it increases the chances of a hard Brexit. \

• Fitch put Italy on negative watch Friday as prime minister Renzi battles with Brussels over his budget deficit which has risen over the past 2 years and is forecast to sit at 2.3% in 2017.

• China’s banking regulator has asked banks to step up risk management activity of property loans Reuters reports. The point is that the CBRC is trying to get banks to take measures to mitigate “systemic and regional financial risks” the regulator said Saturday.

Australia

• Not much of a lead from offshore for local stock markets this morning with the SPI 200 closing Saturday morning with just a 1 point loss. Bank reports later this week will be important drivers for the market but that doesn’t start till the NAB kicks things off on Thursday. In the meantime the moves in global commodities and the miners.

• Looking at the price action and the market (physical ASX) found support at the 38.2% of the recent up run up last week around 5380 and even though stocks dipped 12 points to 5430 on Friday it was a pretty good week for local stocks on this metric. But we saw a rally falter Thursday and a sell off get bought back Friday – it tells you traders are waiting for the next catalyst – either domestic or from offshore. CPI Wednesday is going to be a big driver on that basis.

Forex

• USD bets, and the US dollar again hit their highest levels in months last week with the US Dollar Index closing at 98.63 on Friday night. A number of positives continue to accrue to the US dollar foremost of which is the relative health of growth around 2% (Atlanta Fed GDP Now forecast of US growth is 2% with NY Fed at 2.2%) and the very strong signals being pushed by the Fed that it will be raising rates in December. So punters are long the US dollar as you can see in the chart below from COT base which summarises the commitment of traders report.

• The wash up is that the EUR/USD is below 1.09 at 1.0882 this morning, the AUD/USD is down at 0.7591, the NZD/USD is at 0.7157 and the CAD/USD is at 1.3329 after getting hammered last week on the BoC outlook and weaker data on Friday night. Retail sales for August surprised with a 0.1% fall against expectations of a 0.3% rise. CPI was also a little weaker in Canada up 0.1% in September with an annual rate of 1.3% against expectations of 0.2% and 1.5% respectively.

• Looking specifically at the Aussie dollar this morning and after two big, ugly down sessions to end the week the Aussie is back below 76 cents and waiting on the release of Q3 CPI this Wednesday. This is a huge release for local markets as it will inform expectations about what the RBA will, or perhaps won’t, do about interest rates in Australia.

• If prices in Australia have gone the same way as prices in most of the rest of the world recently then the lift in fuel is likely to give the CPI a boost meaning the market expectation of a headline 0.4% is likely close to the market, or could perhaps be a little light. Such an outcome would rule out a cut anytime soon. But a low number, say below 0.3%, would likely open the door to heightened expectations of a cut next week on Cup Day.

Commodities

• The Oil market is getting interesting again, as if it’s ever not. On Sunday the Saudi oil minister al-Falih said he was talking to his Russian counterpart as a way to help guide the non-OPEC discussions and garner an agreement. But we also heard from Iraq's Oil Minister Jabar Ali al-Luaibi who said on Sunday Iraq should be exempted from any deal on production because the nation is fighting a war with Islamic State. Pointedly he said “Some countries took our market share”. It looks like the agreement is still far from a done deal – at least the specifics.

• In terms of price Crude Oil and Brent Oil closed at $50.85 and $51.78 respectively on Friday. Still holding below the highs of last week. Where prices go from here in many ways depends on whether traders focus on the Saudi/Russia talks or the Iraqi comments. Given the inherent scepticism of traders it might be the Iraqi ones. But then again there could be many like me who do think some sort of a deal will be done. Anyway here’s the char – it suggests traders might focus on Iraq:

• Gold remains relatively calm – along with long bond rates at the moment and is at $1266.

• Copper is slipping anchor at $2.0835.

Today's key data and events (all times AEDT)

• Australia - Nil
• New Zealand - Nil
• China - Nil
• Japan - Imports (YoY) (Sep), Merchandise Trade Balance Total (Sep), Merchandise Trade Balance Total (Sep), Exports (YoY) (Sep) (10.50am); Nikkei Manufacturing PMI (Oct) 911.30am); Leading Economic Index (Aug), Coincident Index (Aug) (4pm)
• Germany - Markit PMI Composite (Oct), Markit Services PMI (Oct), Markit Manufacturing PMI (Oct) (6.30pm); German Buba Monthly Report (9pm)
• EU - Markit PMI Composite (Oct), Markit Services PMI (Oct), Markit Manufacturing PMI (Oct) (7pm)
• UK - CBI Industrial Trends Survey - Orders (MoM) (Oct) (9pm)
• Canada - Wholesale Sales (MoM) (Aug) (11.30pm)
• US - Chicago Fed National Activity Index (Sep) (11.30pm); Fed's William Dudley speech, Fed's Bullard speech (12.05am); Markit Manufacturing PMI (Oct) (12.45am); 3-Month Bill Auction, 6-Month Bill Auction (2.30am); Fed's Evans Speech (4.30am); FOMC Member Powell Speech (5am)

Have a great day's trading