There’s a high level of circumspection associated with this weekend’s G7 meeting as President Trump prepares to enter the G-7 lion’s den. Usually, a non-event for markets but with all the focus on escalating trade tensions amongst long-standing G-7 allies, there’s a good reason for investors to be chary as this meeting is unlikely to follow an orderly arrangement of discussion. Even more so as Canada and Mexico have retaliated against a range of U.S. exports and the EU has promised to do so as well. The mood is sour but the G 7 summit (dubbed the “G6 plus one”), and the high-risk events of next week (FOMC, ECB, BoJ, Brexit votes). For the most part, traders choose to take their chips off the table awaiting more clarity on all fronts.
The usual havens are doing ok (JPY, Gold) with USD rising too, and risk currencies are generally trending lower. Not to be interpreted as an expression of support USD per se – merely an offloading of riskier assets. EM FX has been on the outs this week, and with all the currency shifts and the recent noises from the ECB, things could get squirrelly next week.
Closing Bell Friday
The Emerging Markets(EM) induced hysteria eased as some massively oversold positioning pared back on the understanding that EM central banks are putting currency first and everything else on the back burner. Turkey’s central bank surprise rate hike on Thursday followed up my massive Brazilian intervention are cementing that view. EM central banks are mindful of the Federal Reserve’s plan to continue raising the interest rates in 2018 but are now factoring the ECB trimming back central bank largesse (QE) sooner than expected.
The improving EM sentiment helped push the US equities finished the week on an upbeat note, despite most investors on edge awaiting the press communique from the G-7 Fight Club in La Malay, Quebec Canada. But there may be no communique given the great trade divide between G-6 and President Trump, which could unsettle markets a bit at Monday open.
While President Trump continues to overplay his Trade cards, causing a high level of investor angst, there remains this dominant narrative the trade issues will get settled before it negatively impacts global growth.
Oil prices continued to trade most of the NY session defensively after spilling heavy at the London close. There’s such a loud bearish murmur, and whether it’s from slashed forecasts or itchy fingers, traders continue walking on edge heading into June 22 OPEC Vienna meeting, despite massive supply woes in Venezuela.
OPEC meeting remains a massive risk for oil traders. The market generally remains bullish, and despite traders adjusting downside hedge ratios, oil could gush significantly lower if OPEC supplies come online quicker than expected.
Next week might turn out to be the busiest week in the markets in some time as events from the usual central bank policy, the critical historical summit on geopolitics, and an important calendar event for global trade will keep traders hoping.
Let us kick things off right here in Singapore with the June 12 summit between the US and North Korea. The hurdle for success has been lowered but with a low bar comes a much significant tail risk if talk collapse.
White House deadline for finalising tariffs on Chinese goods (June 15) which should not be overlooked by any stretch of the imagination. But China continues to offer a very flexible olive branch, so the hope is that matter de-escalate before the deadline.
Then there’s that small matter of the European Central Bank and Federal Reserve Board meeting’s which could be very crucial for the markets next tack.
The Fed is widely expected to announce an interest rate hike on Wednesday, but investors will be keying on forward guidance for clues if the U.S. central bank could raise rates a fourth time this year.
While Draghi’s lieutenants rolled out a well-orchestrated PR campaign leaving the market convinced the ECB would discuss the removal of QE at next week’s meeting. This news is hardly a watershed moment, but being so deprived of any hawkish ECB inference the markets will run take off running at any hawkish glean. But be cautious of Draghi’s propensity to downplay QE reduction at the follow-up presser, which could prove to be a bitter pill to swallow if one decides to recklessly go all in on the EUR at this stage of the game.
Let’s not forget the Bank of Japan policy decision, but this meeting is shaping up to be a bit of snooze, even more so with inflation flagging again.
G-10 Week Ahead
USD: CPI and FOMC meeting next week loom large. I still favour USD upside given the supporting data.
EUR: Hawkish ECB commentaries but the question is how much can the ECB surprise now?? Not too much I suspect.
JPY: A bit of risk aversion playing into the equation but over the long haul, the pair should continue to watch Bond yields and will likely be quite sensitive to next week’s FOMC and ECB outcomes.
AUD: AS usual the RBA provided no excitement while GDP came in higher as expected. The higher GDP number will not move the RBA dial as wages remain subdued. Although many got stopped out this week on short AUD, it looks like the market is refocusing lower as high beta FX.
SGD: Sadly, the Sing dollar got swamped in the waves of EM capital outflows so what was setting up to be a break of 1.33 on substantial inflow early in the week and pivoted back to 1.3350 + But the wrecking ball in EM is the stronger USD, so ultimately this will be a FED forward guidance trade next week.
CAD: Yet another knee-jerk in the CAD employment headline over the employment number USDCAD has rallied from 1.2980 towards 1.3040 following the Canadian jobs report. As a disappointing figure for the net job, changes led to a slump in full-time employment. Keep in mind that ~75% is priced in for a hike next meeting. But the @TradingTerminal tells the real tale of the tape 3.9%YoY wage jump marks the fastest since 2009 while hours worked increased by 2.0% in May. So, funds are back trading below where the spot was at heading into the print. I know the trade war noise, but a stronger CAD doesn’t feel all that Lonnie right now.
MYR: Emerging market struggles are numerous, and it always seems to boil down to stronger USD or equity outflows. But today the seas of red in regional equity markets that contributed to broader weakness. There remains net selling by offshore bond investors although that flow has slowed post-election. But in general, the MYR is trading very sensitive to regional risk sentiment which suggests if local equity markets to well so will the Ringgit. But with so many external factors competing for attention, that riskier profiled assets like the MYR will play second fiddle to G-10. So, with the lack of inflow, I expect the current ranges to hold but with the USDMYR to gravitate to the top side of the spectrum. Exposing a possible move through USDMYR through 4.00 if 1) Trump Kim summit fails 2) either the ECB or FED is more hawkish than expected.
The Liquidity Providers love USDCAD after all who doesn’t mind getting paid on 60 pips + risk transfer week in week out over news events. Trading USDCAD amongst a plethora of other G-10s’ over news events in the eFX Interbank markets is a shamble. And don’t even get me going about EM liquidity if a market moves as some banks permit their traders to turn off the e- pricing if the market moves. The electronification of FX markets not to mention the “Juniorification” of trading desks is crippling liquidity.
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