The keep it simple theory

OANDA Market Insights podcast (Episode 29)

The keep it simple theory. 

My first boss on the trading desk constantly reminded me not to overthink things and this past week was a perfect example of that process.

Emerging market melt 

After more episodes of EM currency trader gone wild aired virtually every day this week with the Argentinian Peso going through a “Messi” time, and the Turkish Lira getting basted. Contagion fears spread like a plague of locusts through emerging markets putting Asian risk assets under pressure on a potent mix of the EM spillover and concerns that Trump will push ahead next week with the next round of $200 bio USD of China tariffs.

The Yuan

The Yuan continues to be at the epicentre of trade given the US administration is doggedly holding on to their China is a currency manipulator view. To counter that argument and to make a point, the PBOC set an aggressive tone early in Friday session with the fixing coming in -59 pips below my expectation ( loosely based on a combination of DB and CITI banks formula). This shift coupled with a sharp  sell-off in the onshore spot indicated the markets reluctance to chase USDCNH anywhere near the 6.90 level.

China’s yuan surges as PMI data beat estimates

A peek  into the crystal ball 

While many traders are happy to put the silly season behind them ( an affectionate term for August when traders typically take leave), the critical question is what lies ahead for the upcoming week and month!!

The first thing to understand about September is that its risk massive and should spark a significant uptick in volatility as the central bank, and political worlds collide. But the heavy economic docket should not be ignored.

No less than all G-10 central banks will hold rate meetings where traders are all in on both the USD and NOK hikes, but it’s  Poloz and CAD that contains the most intrigue given the intense focus the Canadain dollar has come under over the past month. Any chance of a Sept rate hike went out the window with a lower than expected GDP print this week, but I anticipate the Bank of Canada to signal a rate hike in October.  As for the rest of the G-10 central banks, well they will be fighting it out to see who is the most dovish. My vote goes to the RBA,

Housing market concerns and political turbulence should keep the pressure on the Aussie.

Westpac adjusting their variable mortgage rates higher due to funding costs abrading margins does raise the spectre of mortgage defaults, and one would assume the RBA is less than happy. I expect Westpac rivals to follow so this could get interesting as it may cause another negative repricing of RBA policy. I contribute to the Reuters RBA Rate hike poll where I didn’t expect the RBA to hike until late 2019, but here is a small overview:

** All but one of 42 respondents polled see RBA holding steady at 1.5 pct next week

The** First rate rise since Nov 2010 seen in Q4 20late

** 21 of 41 respondents see at least one hike by Dec 2019, 2 predict cuts to 1 pct, 18 see no change

We’re certainly on the edge of a slippery slope amid this bearish Aussie backdrop with a brewing political hotpot threatening a cherished AAA sovereign rating, but the RBA will ultimately struggle to hold their neutral tilt should any signs of housing meltdown materialise.

Politics 

It’s going to get interesting for the US political machine as the US weighs more measures against China and prepares for a (reported) Trump-Xi meeting in November. Also, the US  political machine will then turn will likely turn to the November midterm elections, as Trump looks to whip the  Republican Party in to form against the possible political fallout of Cohen, Manafort and Mueller developments.

In Europe, the vital political events remain Brexit and Italy.

Centring in on the week of September 2., its all about Trade war, Trade war,  and more Trade war. Strap in this should be a bumpy one !!

Three Trade 
i) Canada- Reuters confirmed parties would go back to the table  Wednesday

ii) Europe- Trump is on record of having rejected the EU offer to take auto tariffs to zero, saying the proposal was ‘not good enough’.

iii) China- the public comment period for the President’s proposed USD200bn in tariffs ends next week on September 6, and the President has indicated that he would probably move to implement the duties immediately afterwards

While all three negotiations are necessary, the US/China conflict is key for risk markets and as such traders have been de-risking ahead of the weekend.

Broader Markets

AUD: Westpac mortgage rate hike leave the RBA in a tight spot and at a minimum, they stay neutral my long-held theory about the Oz economy to be little more than an asset bubble on top of an iron ore mine is more appropriate now than ever. But of course, the significant risk to the short position is Trump back peddling on the Tariffs which will probably see some short position squaring ahead of the event  After hitting a fresh YTD low but found expected support around 0.7190. The pair now looks open for more to the downside, with the low from mid-2016 coming in at 0.7145-60

JPY: I fully expect the risk aversion trade into to JPY be faded continuously as per usual, but if a smoking gun does appear in the Mueller investigation then there is a chance we could see USDJPYcould breaking bad lower. But at this stage, there is no smoking gun.

GBP: Brexit is the key, enough said

CHF: Switzerland, the next currency manipulator?? let us see what the Trump formula for determining a currency manipulator is

EUR: Fitch has revised Italy’s outlook from stable to negative and affirmed the long-term foreign currency debt rating at BBB. EURUSD  did blink but the close below 1.1620  there remains some pressure head, but again the EUR should hold current ranges 1.1525-1.1725 until we get some hint of normalisation from the ECB then the  money trade kicks in

CAD: Cad trader on the edger of their seat awaiting a NAFTA   deal which should see mid 1.29’s easily

SGD: Its all about the CNH and US-China trade deal, easing in tension will be positive for local currencies but are still weighted down with a case of EM contagion.

Gold: While there was a bout of mild short covering in Asia yesterday, Gold continues to be Mr Irrelevant when it comes to a go-to risk hedge. Precious traders are showing little interest in the Trump tariff headline and nary a look from hedgers on yesterday morning emerging markets tumult (ARS and TRY). Indeed, Gold remains on the outside looking in. Unless a dovish shift in Fed policy or the USD dollar turns upside down, short positions should be rewarded.

Oil: US sanction on Iran remain the cornerstone for long positions, and while trade war has some fretting over the negative impact on global growth, which in my view is impossible to conclude as there is no way to quantify how consumers will react. But one thing that’s for sure, if the rest of Asia EM economies kick into overdrive like India, who just released an eyewatering GDP print of 8.2%, Oil will be in significant demand throughout 2018.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes