Super Thursday, indeed
Super Thursday for some but a Topsy-Turvy one for others. Of course, much of that had to do with what side of the US dollar coin you were on.
Hope springs eternal for emerging markets anytime the US dollar weakens and yesterday was no exception. As indeed the stars aligned for emerging markets (EM) assets after an astonishing interest rate hike from the Central Bank of Turkey (CBT) of 625bp and an exceedingly soft US CPI data. And for beleaguered emerging markets, the timing could not have been any better as traders were coiled and ready to strike after the past fortnights of intense EM bloodletting. Meanwhile, the BoE meeting proved a total non-event but the ECB, more constructive.
Not surprising, interbank EM currency volumes surged as a solidarity rally by proxy ensued, much to the relief of just about everyone quite frankly, as
US stocks pushed higher with the technology sector rebounding as participants took a more calming view of the US-China trade dispute while emerging market assets rallied on the weaker US dollar which supported a very bubbly risk environment.
Indeed, we could see this “risk on”shift that was set in play in early Asia yesterday extend throughout today’s APAC session. Mind you, chasing short covering rally can be fraught with danger.
With that in mind, let me do my best spoil the party by suggesting that much of this rally will depend on what level of diplomacy that can be reached from the US-China talks and if President Trump is willing to fold a strong hand and not impose 200 billion in tariffs? But failing any progress on these fronts, the Pboc will be less incentivised to keep the RMB complex in check, and we could be in for another EM fracas if the Pboc guides the Yuan incredibly cheaper. And of course, there that small matter about rising US yields which generally sounds the death knell for EM currencies, but let’s leave that one alone until next week.
Topsy Turvey Thursday indeed!!
Oil futures markets gave back Wednesday’s gains, but there must be more to it than a realisation that last weeks inventory reports included a significant increase in product inventories that more than offset the US crude inventory draws. That’s second nature for the Willey oil trading community, so the issue does run deeper Specifically, those same Willey veterans latched on to International Energy Agency report which indicated daily crude-oil output in the Organization of the Petroleum Exporting Countries climbed in August by 420,000 barrels a day, to average 32.63 million a day.
So, while the anticipated production drought from Venezuela and Iran could be an issue in the future, it’s not an imminent one as OPEC total crude production came in the right on top of estimates and triggered a bearish correction on both WTI and Brent prompt contracts.
So, in a nutshell, the market came off aggressively as Crude Oil supplies are not tight, well not yet anyway. But when you look at in the context that EM countries crude demands are at risk from an economic slowdown( tariff impact) coupled with the sturdy supply report, there are some concerns that increases from OPEC and non-OPEC producers can offset the Iran sanction concerns.
A convincing snap in the XAU-DXY correlation overnight suggesting that the de-escalation in US-Sino trade dispute is having a calming effect on overall risk, and despite the dollar trading considerably weaker after the soft US CPI data, the tight correlation snapped.
Of course, from a hedger perspective, the focus has been on US equities as opposed to the US dollar so with global equities back on the boil there is little demand for gold in general. At the heart of the matter, ETF flows remain stagnant, and gold continues to be little more than a dead money trade at this point.
But the enormous tail-risk remains in play as when dollar strength return sand that tight XAU-DXY correlation will come back with a vengeance with a high degree of certainty.
Oh my, what a carry!!
The CBT set the one-week repo to an astonishing 24%! (+625bps) And that sigh of relief you heard out of Japan, was from Tokyo’s fervent carry traders who now have 24% annualised wiggle room to manoeuvre. We did see more TRYJPY buying this week than average, so there will be more than a few happy Japanese investors this morning especially after being nearly toppled when USDTRY rose more than three per cent yesterdy on President Erdogan who was bizarrely advocating for a rate cut.
And as expected on this decisive policy shift, it has triggered concurrent relief rally across EM.
Draghi was steady on headline inflation but a tweak in the core which is easily interpreted in the less dovish context that the ECB does expect inflation to concenter at its target as monetary accommodation is reduced at the fringe. A bit of a tough pill to swallow for EUR bears but, price action must be respected, and with US CPI providing little relief for the nascent dollar correction, I suspect the EUR bears will remain sidelined until more definitive signals emerge.
Price action was telling as indeed short position was much cleaner after the yesterday’s short Aussie squeeze, so we didn’t get that outsized reaction on positive EM development nor the weaker US CPI print that many had expected. But since we get to do this all over again next week, “Prudence”, suggests its time for the sidelines and to fight another day.
Regional risk should trade positively today, suggesting the MYR will be mildly supported, but with Oil prices falling overnight, it will likely balance out the EM solidarity knock-on effect from the astonishing 625 bps CBT rate hike, so we could expect the MYR to trade neutral bias given the mixed signals.
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