The USD closed the session 0.4% lower and is looking vulnerable to a further sell-down, although tonight’s US headline and core CPI print should influence price in the coming 24-hours. With US PPI coming in slightly weaker-than-expected overnight (printing -0.1% vs +0.2% eyed), some feel lower business input prices, could translate into downside risks in consumer prices - so, we could argue that the market goes into tonight’s release positioned for headline CPI of say 2.7% or lower.
What caught my eye is the reasonably pronounced head and shoulders pattern on the USD index (daily chart), where the neckline intersects at 94.65, not too far from where price currently recedes. Ideally, I would like to see a decent close through the neckline, followed by the re-test and rejection, to give this pattern any credence. But, it certainly won’t have gone unnoticed by many in markets.
Today’s ECB meeting (21:45aest) isn’t expected to cause fireworks, and while overnight ATM EUR/USD implied volatility has pushed into 12.57%, the ‘straddle’ gives us an expected move on the day of around 60-pips. We could argue this seems somewhat low, but it seems options traders would likely require Mario Draghi to detail something unexpected, with a decent beat/miss in US inflation to make buying volatility worthwhile. We shall see, but with EUR/USD currently oscillating around the 5-day EMA (currently $1.1615), this highlights the lack of trend in this pair at present and the search for a new catalyst, despite US 10-year Treasury yields widening to 255 basis points and a multi-year high premium relative to German bunds.
So, the market doesn’t expect much in tonight’s ECB statement, with some talk we could see the bank's growth forecasts taken down 0.1% for 2019 and 2020, while there will be attention on the Asset Purchase Program (APP) and a slower pace of purchases from October. But on the whole, if we look at implied vols we can see the market is largely expecting a repeat of the July statement and the notion that the ECB will keep rates at present levels ‘at least through the summer’.
USD/CNH has possible been the key driver of G10 overnight, although NOK has fed off the follow-through buying in Brent crude, with the oil price here trading into $80.13 before traders faded the move. The news that the US has invited China back to the table pushed USD/CNH from 6.8727 and into 6.8271 in quick fashion, and naturally, the market took this as a cue to bid up the China proxies.
Copper closed up 2.1%, while iron ore futures gained 1.4% and in the ETF space, the Deutsche X-trackers Harvest CSI 300 China A-Shares (NYSE:ASHR) ETF closed +2.2% higher and indicative that the mainland equity markets could perform more positively through Asian trade today. That, in itself, is a big ‘if’ given we have a technical bear market in the CSI 300, Shanghai Composite and now the Hang Seng and sentiment here is shot to pieces. Price action will reveal a lot though and while the headlines around trade talks are constructive, one questions if the narrative is enough to install a belief that that the Trump trade team are not going to push for a further $267b in tariffs? I remain unconvinced.
AUD/USD was bid off the session low of 0.7094 through Asia yesterday and got a boost into 0.7182 on the weaker US PPI and moves in CNH. There is nothing here that resembles Aussie economic fundamentals, and the AUD is a vehicle for expressing a view on China and is simply the inverse of USD/CNH. That said, the correlation with the Hang Seng is also high too, and a simple regression shows 78% of the variability of AUD/USD has been driven by the Hang Seng (as the independent variable) since June. With this in mind, its hard to believe today's Aussie jobs are going to do little more than cause a short-term move in price and the market's pricing of 11bp of hikes from the RBA, through to the end-2019, should not change to any great degree; if at all. Happy to fade moves in AUD/USD into 0.7200 to 0.7220 on the day.
While the focus is on the Chinese markets, the ECB and BoE decision, as well as US CPI, for those who like things a little spicier should keep an eye on tonight’s Turkish central bank meeting (at 21:00aest). Here we can see that the consensus (of the 23 economists polled by Bloomberg) believe that the Turkish central bank could hike the one-week repo rate by 3ppt (or 300 basis points) to 20.75%, with the economist’s expectations ranging from 25% to 17.75%. A 300-basis point (bp) hike is a punchy move, but one questions if it is enough to fully stabiles the lira longer-term. I suspect it isn’t, and the central bank would perhaps need to hike by 500bp to send a powerful message that they are going to take a far tougher stance on its inflation problem, which would support the lira longer-term given it would discourage capital outflows.
As things stand, with inflation running at 17.90% and the one-week repo rate at 17.75%, Turkey has an effective negative ‘real’ (or inflation-adjusted) interest rate. Negative ‘real’ rates are an incredibly accommodative monetary policy setting for any central bank, let alone one with an inflation problem, and subsequently this policy setting is a green light for traders to remain short of the lira. If the central bank does not meet the market's expectations and hike by less than 300bp, then USD/TRY should in theory rally hard, breaking through recent supply levels seen above 6.7000 and possibly into the August highs. However, if they hike by an amount towards the top-end of the range, which is a big ‘if,’ then USD/TRY will take a bath. A risk event that firmly should be on the radar.