FX Monday - Lame Trading

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 |  Includes: FXA, FXB, FXC, FXE, FXF, FXY, UDN, UUP
by: Dean Popplewell

The first real trading session after a contentious non-farm payroll print usually ends up being the quietest trading session for the entire month and this Monday seems bent on holding on to that tradition.

The release so far of data is limited and the range of currencies somewhat non-existent. The increased tensions in the Middle East continue to dominate global headlines as capital markets carry on from where they left off from last week. It seems that the market opinion remains of the opinion that the impact of an escalation of tensions in Syria should be limited, providing that there is limited international spillover – obviously a situation that can never be guaranteed.

President Obama’s decision to seek congressional approval for military intervention, following on from the refusal of the U.K. Parliament to back Prime Minister Cameron’s government's participation, means that no action is likely until Congress has reconvened and voted, which would be mid-week at the earliest – the vote and subsequent course of action are hard to predict.

Any type of “uncertainty” is rarely good for risk assets and indeed equity markets continue to drift lower as investors await more clarity. Many do not think that any limited engagement is expected to have a lasting or significant impact on the stock markets and analysts remain optimistic about a further rally in the latter part of this year.

Chinese data continues to offer signs that Asia’s biggest economy is stabilizing. Trade data over the weekend deals further support to the region and to the world’s second largest global economy. The headlines data show a pick up in exports last month, up +7.2% on the year. Other data confirms that the country’s inflation remains subdued, with Chinese CPI rising +2.6% on the year in August. All the regional data has helped the country largest trading partner and its currency, the AUD, to shoot higher (0.9922). The Aussies over the weekend electing a “new” conservative government has managed to end three-years of a minority government, which tended to weigh on business confidence. Markets are welcoming the resounding victory by new PM Abbott for the liberal-coalition win as it offers the chance of more certainty in government policy.

For the Bank of England, the remarks by BoE MPC member – Paul Fisher this weekend- provided some interesting insight. First, the fears of a housing bubble have been dismissed as “hype’” by Fisher, and only days after governor Carney said the bank was prepared to intervene to cool an overheated property market. His remarks appear to suggest that conditions are a long way off, a point “where the action threatened by Carney to keep a lid on unsustainable price growth would be necessary.” While the "market" may not believe in forward guidance, when it comes to households/firms, Governor Carney views it as working. As long as economic agents (household/firms) view it working then the BoE doves will “not see the need for further QE.”

However, the bar for the BoE to deliver QE remains high as households and firms believe in forward guidance. Carney’s messages has been directed more at the “less sophisticated” or these economic agents are more inclined to buy into the idea that rates will stay lower for longer. This has been enough to keep doves such as Fisher to call for further QE, seeing forward guidance as a substitute. This week's U.K. employment data mid-week should provide a stern test for both the currency and Carney again!

In times past, investors' worries that usually dented emerging markets assets were usually followed by outflow of capital from EM economies into U.S. Treasuries. But this year, concerns about less Fed stimulus means outflows are in fact actually hurting the demand for U.S. debt product. Currently, governments and EM central bankers are selling USD to prop up their own currencies – a good example would be USD/INR market. Beforehand, these reserves were used to purchase U.S. treasuries, a highly secure and liquid product that provides a basic rate of return. Approximately 35-40% of EM reserves were usually invested in the U.S. Treasury market. EM central banks weighing in to protect their own currencies has cost the U.S. Treasury market +$20-25B each month – inactions aiding U.S. yields in their back up.

For the first time in two years the “Eurozone Sentix” is in positive territory. This September’s headline print came in at +6.5 from -4.9 month-over-month. Probable proof that the recent uptick in manufacturing and services is making investors more optimistic. The 17-member single currency is trading at its highs since the release. Also, aiding the member driven currency is the dollar itself remaining somewhat vulnerable after last Friday’s NFP report. The EUR’s upside progress will facilitate some investor’s re-adoption of longs.

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