Trade talk news
The big news of the session was Trump administration officials are debating whether to remove some existing tariffs on Chinese goods as a concession to seal a partial deal, the Financial Times reported on Monday. The White House is considering whether to roll back levies on $112 billion of Chinese imports including clothing, appliances and flat-screen monitors, which were introduced at a 15% rate on Sept. 1, the F.T. said.
All aboard the yuan rally bus
After being stuck in a 200pips range for almost two months, the CNY fixings have finally started to move. The decline in USD/CNY fixings in the past week has been relatively convincing indication policymaker are comfortable with an appreciating yuan. So, trade truce euphoria is finally starting to influence the yuan, as the KRW, TWD and SGD have been carrying the Asia FX rally baton lately.
Last Thursday in the clear-cut case of wanting to stabilise the yuan, the PBoC sold bills in H.K. 30 billion yuan (US$4.3 billion) This a widely used policy signal making it more expensive for speculators to bet that the yuan will fall.
The doom and gloom fear of a rapid yuan depreciation had quickly evaporated into thin air leaving the majority of bank analysts going back to their drawing board while traders that smelled out the first signs of the rally when the US-China trade headwind started to diminish are revelling.
A tariff détente or even removal of some is not a bridge too far to cross especially as President Trump moves to bolster his political ambitions and guarantee that U.S. voters don't end up with a lump of coal in their holiday stockings this year.
Since the previous two tranches of tariff hikes saw spot move higher from 6.90 to 7.10, so if both October and December are entirely removed as part of the US-China 'Phase One' trade deal, there is downside potential for USD/CNH to hit 6.9.
Also adding China feel-good story, Premier Xi also reiterated today extensive pledges to continue to open China's economy and markets and strengthen protection of intellectual property rights and to attract foreign flows it much better to have a stable and robust yuan.
PBoC cut MLF rate for the first time since 2016
The PBoC is walking a fine balancing act trying to ease policy in the most cautious manner, suggesting that rising CPI inflation and massive concerns over macro leverage ratios will be the major hurdles to looser policy in Q4. While MLF interest rates could still drift lower look for the policy tap to be on a drip rather than a deluge mode.
G-10 Currency
The USD dollar bearishness in G-10 is abating somewhat. While the Fed continues increasing balance sheet and the Elizabeth Warren effect is still in play, there are subtle signs the markets are turning more natural on the dollar.
Sure the Fed's balance sheet expansion is still on, but they also just pivoted from a rate cut bias neutral, completing a mini rate cut cycle that looks a lot like 1995 where one bank is already calling for a 100bp move in U.S. 10y yields over the next six months. If you agree with that direction for U.S. bond yields its hard to remain short dollars or long gold for that matter.
Gold
The question is whether the market has now priced the fortuitous conclusion of phase one trade deal. And for the time being it appears, risk markets are in benefit of the doubt mode preferring to look through any fragility in macro data, while applying a higher weight to comments on trade.
While risk markets are in benefit of the doubt mode and so long as that continues, gold prices could struggle to push higher even more so as the change in the Fed outlook could also push U.S. yields higher on the Fed pause and as local government and corporation are racing to sell debt while the going is cheap, higher U.S. yield will not only hurt gold opportunity cost but strengthen the U.S. dollar.
Gold is only down around $ 8- 10.00 on the tariff rollback headlines suggesting yellow metal is showing a bit less reactiveness than usual to positive US-China trade talks banter as the gold market will continue to take primary cues from the rate markets.
But facing the prospect of higher bond yields and tariff rollbacks the move lower in gold is not surprising, but its resilience is what sticking out from my chair but how long that can hold up is anyone's guess.
Oil
Oil price action is running counterintuitive to the positive run of headlines and upbeat risk sentiment. When oil price move 50 cents is little more than a markets adjustment, but when the move 1 dollar without a reversion usually something is behind the move. But When trading oil, there's plenty of room to get creative on one's views!
Leaving aside the macroeconomic weakness and the trade talk headlines which will continue to influence short term machinations
There remains an OPEC 'put' on oil prices, but all appearances its strike might be considerably below the market price, suggesting that OPEC may not cut deeper next meeting.
Also, Russia's support for production cuts is expected to waver as Energy Minister Alexander Novak starts to jostle for position ahead of the December OPEC meeting. And the quick roundtrip price action post-September OPEC meeting could negatively impact views about Saudi Arabia's ability to build a strong compliance alliance
This may all be tied to U.S. production levels where lower for longer prices may continue to weigh on U.S. production level could prove to be a counterbalance to negative sentiment.
ON the Russia front, the Russian Oil Barron’s absolutely despise cutting their own production and giving a bigger slice of the global supply pie to U.S. shale.
Malaysia
BNM left its overnight policy rate unchanged at 3.00%, as expected.
The ringgit has picked up where it left off yesterday capturing some of that trade truce euphoria from the yuan. There's been a significant carry over from "feel-good Friday" as both trade optimism, and strong U.S. economic data continued to resonate with inflows into the KLCI suggesting real money interest is starting to steam into the Malaysia Capital markets