US Dollar Stronger As Short Rates Rise Again

Originally published by AxiTrader

Welcome to my daily Markets Musings.

Almost back to normal now – probably tomorrow. Bit of jet lag and not too much sleep the only challenges this morning.

Feedback always welcome

Greg

Market Summary

The Dow Jones Industrial Average traded above 23,000 for the first time overnight before closing just shy of that mark at 22,997.44 up 0.18%. It’s the fourth such 1000 point big figure change in the Dow this year and speaks to the ongoing bullishness of US stock investors.

That of course was a new record for the Dow with the S&P 500 also hitting a new high. It closed at 2559, up 0.7% while the Nasdaq 100 was 0.13% higher at 6,122. Stocks in Europe were down and SPI traders have knocked about 6 points off prices overnight after another solid day’s trade yesterday. It might be time for the bulls to rest on the ASX today.

US rates are higher after mostly stronger than expected data. The Fed is on track to hike in December and continue hiking in 2018.

On forex markets the US dollar was stronger early but gave bacak a lot of that strength except against the euro and pound, which are at 1.1764 and 1.3188 respectively. USD/JPY is still atop 112, and the Aussie dollar is mid range for the past 24 hours at 0.7844 but with a downside bias.

On commodity markets oil’s march to range highs continues while gold fell under the weight of the US dollar and rising bond rates. Copper's rally paused as well.

Today we get the start of the 19th National Congress in China

Here's What I Picked Up (with a little more detail and a few charts)

International

• US import and export prices rose more than expected in September posting year on year gains of 2.7% and 2.1% respectively. Year on year industrial production was also stronger than expected up 1.6% while the NAHB housing market index was also stronger at 68 from 64 expected. That all helped the Citibank Economic surprise index for the US lift a little to 6.3. And it saw US 2-year Treasury rates are now up at 1.55%.

• Such is the nature of the synchronisation of global growth though at present that data out of Germany overnight again highlighted the strength of the economy. The ZEW reported the economic sentiment index printed 17.6 in September from 17 the previous month. It again highlights the tight rope Mario Draghi and his colleagues need to walk as they acknowledge the improvement in growth across the EU while also withdrawing monetary stimulus and keeping rates and the euro as low as possible. No small task.

• And here’s more evidence that global investors are upbeat on the outlook for global growth – and by extension assets that benefit from it – in the year ahead. The FT reports the latest BAML survey of big global investors says the percentage of respondents who think we’ll see a goldilocks economy of above trend growth and below trend inflation “rose 5 percentage points to a record high of 48 per cent”.

BAML Economic Outlook (Source: FT.com)

• Also out is the monthly look at what investors see as the “most crowded trade” with investors again picking long Nasdaq – read tech – stocks as the big crowded trade at the moment. Interestingly, investors see more balance in the short US dollar trade which is now just the fifth most crowded trade according to repondents. EM debt concerns has come out of nowhere it seems which is something worth watching as global central banks continue to normalise interest rates.

BAML "most crowded trade" (Source:FT.com)

• The 19th National Congress kicks off in China today with much focus on whether President Xi pushes for an upgrade to his position within the party, and what he signals about the outlook for growth in the year and years ahead.

• The battle over the future of NAFTA continues. While traders wonder if the deal can last news overnight is that Canada and Mexico are going to push back against US overtures of an aggressive approach toward negotiations. That uncertainty is hurting the Canadian dollar and Mexican peso although last night the peso fought back with a more than 1% gain.

• And in independence news. Catalonia has refused to back down from its independence call as it confront Madrid. While Iraqi forces have retaken control of all of the oil fields run by the national oil company near the city of Kirkuk.

• Sources report President Trump will announce his pick for Fed Chair by early November before he heads to Asia.

Australia

• Another solid days trade on the S&P/ASX 200 yesterday with a gain of 42 points, 0.7%, to close at 5889.6 another highest close since early May. The banks were higher again as were the big miners. So it’s not hard to see where the turbo charge for the local markets move higher has come from.

• I’m always wary of markets that go vertical in the way the ASX200 has over the past couple of weeks. No matter what the asset, or price movement, there is always an inevitability to a pullback when I see this type of price action. The question is always from where and when. For me the chances are that we are close with the setup in the ASX200 very much like copper (see below) which had an inside day yesterday.

• SPI traders have knocked just 6 points off prices from yesterday afternoon so they are cautious but hardly concerned this morning. I’m wary though today that we might need a pause to refresh the rally. It might be time for a 50-100 point retracement in coming days to see just how strong the bulls hand really is. Overall though a run toward 5950, or thereabouts seems intact medium term.

ASX200 Daily (Source:Investing.com)

• Yesterday’s RBA minutes were interesting in a few respects. The first was they showed that the RBA is not concerned about the level of the Aussie unless it rises “materially” from the levels that existed around the SoMP. That means current levels are not a handbrake on growth, or the outlook. The second point I’d highlight is that the RBA wants traders to know that it’s not part of the move toward monetary policy normalisation in a follow the leader manner because rates in Australia did not fall as far as they did in other jurisdictions. Indeed the minutes reflected tat the RBA board said “moves towards higher interest rates in other economies were a welcome development, but did not have mechanical implications for the setting of policy in Australia, where the timing of any changes in interest rates would be dependent, as always, on developments in domestic economic conditions”. The bank also highlighted its enduring concerns about the lack of price pressures in the economy. Overall it’s a central bank in no rush to move interest rates at all any time soon.

Forex

• The US dollar was stronger overnight but with the exception of the euro, pound, and Swiss franc has largely given up those gains as the night rolled on. Overnight Philly fed president Patrick Harker again highlighted why the Fed is getting worried about the chance that inflation returns at some point. He said that the while there are regional disparities there is very little overall slack in the US jobs market. That just reinforces why the news that maybe John Taylor will be the next Fed chair buoyed the US dollar the previous night and against the euro and a mildly dovish BoE impacted sterling. That is, traders know that the Taylor rule supports where the Fed is suggesting it is going to take rates across the course of the next 15 months – toward 2.5%, perhaps a little higher.

• For me though, the US Dollar Index needs to take out 93.75 first up and then 94.15/25 if it is to kick higher once more.

DXY Futures Daily (Source: Investing.com)

• The corollary of that is that the euro needs to fall below 1.1730/35 and then 1.1660/70 for its fall to intensify. In many ways only the ECB can engineer that given that data continues to support the notion that the European economy is growing along with the rest of the globe. The BoJ has been able to resist rising bond rates, and thus a stronger yen with innovative monetary policy and targeting a 10 year bond rate around zero percent. Is that the path the ECB may have to take as it winds down its QE program? It’s worth thinking about as US rates will inevitably continue to have upward pressure and thus support a stronger US dollar.

• Sterling fell out of bed overnight and has lost half a percent against the US dollar day on day to sit at 1.3180 this morning. But that percentage fall belies the fact that it’s around 1 full cent from the high GBP/USD traded up to earlier in the day. Headline inflation for September printed 3% year on year, with core at 2.7%. That would seem to support the chances of a rate hike. But in testimony to parliament’s Treasury Committee Mark carney didn’t sound overly hawkish and Silvana Tenreyro who is an external member of the Monetary Policy Committee, said the upward pressure on inflation from sterling weakness will start to wane in the coming months. Throw in comments from the BoE’s deputy governor Dave Ramsden said he was not part of the majority on the MPC who believes a rate hike is likely to be needed in the months ahead because he sees little sign of labour market price pressures.

• It leaves the pound under a little pressure now with traders clearly confused as to the outlook given the 1.3120-1.3337 range over the past 4 trading days. Downside looks the most probable path at present however.

• Commodity currencies are barely moved after a relatively robust days trade. The Kiwi traded in a 0.7146/7210 range anad is largely unchanged now at 0.7168. The Canadian dollar too cam under pressure at one point with USD/CAD trading up toward the range high with a print around 1.2590 overnight. But it’s back at 1.2525 now.

• Likewise the AUD/USD was under pressure at one point trading down to 0.7817 before recovering a little poise to 0.7844. There is not much in the way of AUD specific catalysts today, although the Westpac leading index of economic growth is interesting to me. So traders will be watching metals markets, the Chinese congress, and waiting for the release of very important employment data tomorrow.

• As it stands technically a break of 0.7815 would suggest the Aussie dollar is heading lower. Indeed that would suggests move back toward the recent lows around 0.7737.

Commodities

• Oil prices continue to walk toward recent range highs with WTI sitting at $52.03, up 0.35%, and Brent up 0.66% to $58.20. API data from the US overnight showed a big draw of 7.13 million barrels last week. If $52.83 in WTI and $59.22 in Brent give way then oil is stepping into a new and much higher range. Here’s Brent

• Gold is under a little pressure from a stronger US dollar and rising US rates once again. Gold fell around $9 overnight, down 0.68% to $1285 with a low around $1281. In many ways the chart looks similar to sterling, and the euro. So that tells us there is a big part of the US dollar in this move. So the question remains for traders to decide whether the US dollar has had its first reversal in an overall change of trend. Or whether this is just a hiatus in a renewal of the US dollar’s weakness. I favour Fed and economic induced strength for the dollar to weigh on gold.

• Copper was lower in the past 24 hours losing 1.33% to $3.19 a pound despite the fact that there was more talk of renewed Chinese restrictions on scrap copper imports likely in 2018. It’s only one day but with copper prices outside the Bolly Band there is a chance of consolidation within a move that is targeting $3.41 in the medium term.

Have a great day's trading.