Mexico Deal Pushes U.S. Equities Higher; Dollar Correction Broadens

Equity Markets

Investors were in a festive mood after the United States and Mexico sealed a new trade deal, removing one major hurdle that has been haunting North American investors for months. Markets are reveling in any positivity regarding trade and with a tentative lull in the US-China tensions, the S&P 500 and NASDAQ powered to record highs. After all, a deal is a deal!

With the dollar declining and Wall Street on a tear, Asian stock markets are poised for more gains aided by a stable yuan.

Oil Markets

There's enough noise in the oil patch these days to confuse even smart people. But last week's bounce higher is showing some legs, supported by risk-on trade flows which are coat-tailing rising equity markets and a weaker US dollar after the US reached a new NAFTA agreement with Mexico. And despite increasing production limits, there’s a perception that these new barrels might not be adequate to offsets Iran sanctions. But also supporting the oil market, the grizzled old veteran trader in me tells me there will be a hard-bullish shift in sentiment as we near November 4 when sanctions become a real factor.

Gold Markets

Dip buying in gold is making a believer of some as the US dollar is flagging on the back of last week's Fed minutes and Jackson Hole which have left traders and investors to surmise that a more aggressive Fed, despite the strong US economy, is little more than pie in the sky at this stage.

Federal Reserve Board uncertainty?

Its now little more than a pipe dream to expect a more vigorous pace of Fed tightening post-Jackson Hole.

FX: USD Correction Getting Broader

Mexico

Mexico announcing its FTA with the US and now it’s Canada’s turn to head to Washington to finalize their side of the bargain.

The Canadian Dollar

Indeed, the Loonie was back in the highlight reels on the back of move from 1.3020 to 1.2960 levels. Even if its a bit early to jump on the NAFTA bandwagon, but nonetheless there appears to be some position jockeying ahead Thursday's Canada GDP print which should probably be the main near-term driver. While Poloz seemed to join Fed Chair Powell’s ” gradualism” rate hike club at Jackson Hole, I suspect a decent number could see USDCAD move to the 1.2800 as September rate hike repricing builds and even more so with NFTA euphoria kicking in.

But other factors are catalysing the overnight decline in the USD

Turkish Lira

After wobbling in another low liquidity ramp in UK holiday thin markets yesterday, the USD/TRY pair ran into to stiff opposition on a test of 6.30, and this seemed to hold the USD in check.

Euro

But perhaps one of the more exciting signals so far is the lack of fading for the latest bounce on the euro. Sure, we’re far removed from the significant euro buy-in which will happen when the ECB gets back on track. And with Italy risk looming, one would expect the macro trader to be fading this move. But there are a few reasons which might suggest the dollar correction could have some legs.

From a pure EU zone economic perspective, the easing on EU trade tensions should play out favorable on PMI indexes as Germany’s big exporters are in a much happier place. Italy can topple the apple cart but so far spreads have behaved, and there appears little panic is taking place for now.

Chinese Yaun

The PBoC look like they’re prepared to draw a line in the sand to defend the yuan and there are even some discussions in CNH circles that the PBoC will let the yuan appreciate through this next wave of trade discussions. But they’re indeed opening the money taps to get the economy back in flight, and this could be very supportive for the yuan and other regional currencies as mainland equity markets pick up steam.

Malaysian Ringgit

Despite higher oil prices and a weaker USD, the ringgit is failing to capitalize. But in addition to being held hostage by external factors around trade war, I think the MYR is better insulated to absorb that shock. The local unit is still struggling from the downbeat 2nd Q GDP that does suggest BNM next policy move could be a rate cut as economic expansion continues to run tepid.

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