By Stephen Innes
Global risk assets should remain under duress due to an ongoing potent mix of emerging markets spillover amidst concerns that President Trump moves forward this week with the next round of tariffs directed at China.
Despite the weakest links in the emerging markets currency chain, ARS and TRY, recovering lost ground on Friday, they remained deeply under water from the same time last week. And don't be fooled by Friday's close, as the developments in LATAM and CEEMEA has a host of EM currencies, including many in Asia, stuck on that slippery slope.
Given the Labour Day holiday weekend effect, position squaring and profit-taking played a significant role in Friday's price action as traders moved into risk reduction mode, while positioning the US dollar as go-to primary haven currency hedge.
With US equities and fixed-income markets closed for Labour Day, expect quiet markets to start the week
But this US holiday effect is little more than the calm before the storm and indeed belies the impending groundswell. Batten down the hatches, as the main feature that stands out about this week - and the month of September, for that matter - is that the market risk is massive as the central bank and the political worlds collide. Indeed, such collisions tend to escalate volatility exponentially, and I expect some episodic moments that will have traders looking for the exits or ending up over the barrel.
There's an intense focus on trade war this week, with the US and Canada back at the NAFTA table on Wednesday. But it's Friday's USTR decision on the new $200 billion Section 301 Chinese imports that is uppermost for risk markets. But in the meantime, traders will continue to second-guess one another on whether the tariffs go through or an is extension offered.
My best guess
The other developing political intrigue that should be on everyone's radar is that the President will have to spend a considerable amount of political clout whipping the Republican Party into shape for the midterm election run. Given the potential electoral fallout from the Cohen, Manafort and Mueller developments, surely Trump wants to get trade issues behind him. Let's face it, a tariff amounts to little more than a tax and will be viewed as hugely unpopular by the Republican base. Hence the reason why I think we get an extension on the $200 billion Section 301 Chinese imports but a US-China trade deal at some point in September. It's a matter of how much pain one wants to absorb in the meantime waiting for that view to solidifying.
Indeed, the Labour Day holiday weekend effect dampened oil markets on Friday, as book squaring and profit-taking saw West Texas Intermediate crude oil shaving its gains for the week.
Similarly, Brent Crude traded in a consolidated manner but remains confidently supported by the notion that US sanctions on Iranian crude oil exports will eventually lead to constricted markets and higher prices in the months ahead.
And while analysts continue fretting that $200 billion in tariffs could drag down oil demand, it isn't at all clear that such type of economic headwinds will topple oil prices given supply constraints amidst the constant barrage of supply outages.
Some interesting price dynamics last month nonetheless, as after going through very step correction through early to mid-August, when Trump announced a possible 25% tariff on $200 billion worth of trade, oil markets have convincingly rallied since, as Iran sanctions and surprising US inventory draws have provided a solid foundation of support.
Eventually, gold will move higher, but it will need some enticement from a weaker US dollar or haven appeal that might be in the offing as the Trump administration prepares the Republican Party for mid-term elections against the possible fallout from Cohen, Manafort and Mueller developments.
As for the short-term prospects, despite gold showing Moxy around the $1200 level of late, but with the US dollar looking strong, short positions are not about to lose the plot anytime soon.
Upticks in price continue to be faded, suggesting the bears are entirely in control as such, and the discussion among long-term buy and hold position traders suggests they are just as content to wait for lower prices as they are to buy aggressively on a technical break of $1225.
Chinese Equity Markets
Chinese equity markets have seen yo-yo-like movement over the past week, first buffeted by fleeting optimism following the Mexico NAFTA deal. But that optimism gave way to the reality of $200 billion more in tariffs. With tariffs looming, we should expect mainland markets to trade off their back foot given Friday's futures closing levels. As we start this week, however, they're likely to be on the back foot again, as indicated by the latest closes.
A very theatrical way to end the month of August with the USD rallying hard X Japan, as traders opted for a "keep it simple" hedge strategy. But I continue to focus on the Commonwealth group of currencies - unfortunately for AUD and CAD, for all the wrong reasons. But with a good chance NAFTA II gets ratified this week, the long CADAUD and short USDCAD should look attractive from that perspective.
With much of the September rate hike probabilities reduced after the slightly-lower-than-expected GDP print last week, the market will be focused on Governor Poloz's forward guidance, where it is fully expecting him to lay the groundwork for an October hike. So, this brings us back to the nasty business of trade. Those of us lucky enough to sell some $CAD on the "Mexico-only deal to replace NAFTA headline" when the loonie weakened to near 1.3100 were happy to hear US-Canada talks will resume on Wednesday. Trading around this optimism will be a considerable focus early this week. Indeed, the order books are lining up, and with Freeland suggesting the negotiations are moving forward in good faith, a bit of "love is in the air" was directed toward the loonie into Friday's close
When it comes to currency trading after 20+ years in the fray, I've concluded it's better to be lucky than good.
If you can't say anything nice, don't say anything at all.
But the market does have a knack for bird-dogging Aussie oversold positions, which always reminds me to book profits after an outsized move. But provided market participation remain intact, with the thunder down under signalling more trouble to come, it may be time to revise my year-end target from .69 to .67, more so on any hint of housing market troubles.
Emerging Market Currencies Asia
Over the weekend, the White House announced a major Presidential snub that is raising a few local eyebrows. Vice President Pence - and not President Trump - will attend two major Asia summits in November. I wouldn't read too much into this, as by now we should be used to the fact that the President marches to the beat of his drum.
Let us focus on what counts. This week, we will see PMI data from some Asian countries.
Not only will it be a be a hectic week on the data front, but local traders will also try to navigate the impact of a stronger USD, seeping EM contagion and a possible nasty escalation in US-China trade tension.
But on the home front, there is a deluge of economic data which will keep trader hopping. (Nikkei PMI for August (September 3, 01:30); Trade balance for July (September 5, 05:00); BNM rate decision (September 5, 08:00); Foreign reserves (September 6, 08:00); Industrial production for July (September 7, 05:00); CPI for August (September 19, 05:00))
While my focus will be on external factors, the BNN rate decisions on September 5 does offer some intrigue in the wake of a subpar 2nd quarter GDP and tepid inflation reports. Both bond and currency markets are positioning for a slight dovish lean from Governor Datuk Nor Shamsiah Mohd Yunus.
As for the key external risk, the ringgit should be less susceptible to external risk than regional peers due to rising oil prices.
Already in contraction territory as far as PMI goes, it will be interesting to see the market reaction to export numbers released over the weekend. While recording a second straight month of gains amid escalating trade tension between China and the United States, the print was well below expectations that were running above 10%, which shouldn't provide a great kick-start to the week for the Kospi nor the won.
Despite the blistering 8.2% GDP print, what ultimately matters for currency traders is the trade balance, and that is a significant point of contention. In a robust USD environment versus EM currencies coupled with higher oil prices, there is little appetite to buy the rupee outside of sheer necessity,
The trade deficit and reliance on oil imports are just pummeling the rupiah. With critical technical support levels taking out and traders now eyeing the USDIDR 15,000 level, capital outflow could intensify.