By Stephen Innes
Monday's price action predictably stalled out during the NY session, as liquidity was negatively impacted by the Labor Day holiday in the US. But given the dearth of data or any principal Fed speakers to stir the pot, the sparsely serviced trading desks in New York were content to scan headlines while storm-proofing positions for an exceedingly eventful month ahead.
Tuesday kicks off with a well-subscribed RBA meeting, and I think there's a story to be told here. The market will be keenly focused on RBA guidance. The market has bought into an increasing dovish RBA narrative on the Westpac (NYSE:WBK) effect and weaker economic data, so unless the RBA does endorse the market's bearish lean, we could see a decent relief rally on the AUD. But of course, the markets will be looking to build on or re-engage on any significant uptick. On the other hand, if the RBA does validate the market's current bearish view, it will be a free for all as the market scrambles for increased downside exposure.
US equity market futures held their own overnight, showing few knock-on effects from the Asian session that saw equities in the red across the board after President Trump celebrated the Labour Day holiday with some negative tweets towards his neighbours to the north. However, the President then cancelled his Labour Day golf game to get down to the business of putting this NAFTA deal together. And knowing the President's love of the links, could this be a foreshadowing of positive things to come?
I expect markets to trade incredibly mixed, but I'm continually passing on words of wisdom that I learned from my bosses in the early days - to keep in simple and not overthink it!
Iranian sanctions remain the cornerstone support for oil markets, but by any metric, supply stays very tight as refiners clamber to mop up any available barrels before the re-imposition of U.S. sanctions on Iran in early November. Which, of course, is providing the underbelly of support from prompt contracts.
For oil to move higher amidst this contentious escalation of a US-China trade war, it all comes down to how quickly the lost Iranian barrels can be replaced, if at all. Let's face it, Iranian sanctions are an absolute game changer and will continue to dictate bullish market sentiment for no other reason than losing a significant OPEC oil supplier is a huge event.
Though it feels like a dead money trade for long gold positions, while all the noise building around trade dispute, along with unsettling economic prospects of Turkey and Argentina, will likely drag more EM economies down that slippery slope, gold should be in demand.
However, with US equity markets holding stable and the USD showing few signs of buckling, until the worm turns for the greenback, the strong dollar narrative will remain a chink in the gold armour.
Now we have the Argentine government attempting to pull off a "Hans Brinker." Their latest attempt to stem the flood of capital outflows is taxing grain exports and slashing government largesse, all of which is likely a day late and a penny short. While these moves are a step in the right direction, they're unlikely to be convincing enough to remove currency speculators from the driver's seat. I guess it's all down the IMF's "white knight" to the rescue. However, we are getting into the realm of unquantifiability, which makes the market utterly untradeable, in my view.
G-10 Currency markets
My focus remains on both the Aussie and the loonie.
G-10 traders expressed little optimism overnight, thinking that damage was done on Friday when there was no agreement. And while hope springs eternal, the words of Gandalf are coming to mind as we approach 1.3100. "There never was much hope. Just a fool's hope?"
I fully expect an air of caution to permeate regional equity markets as the China and US trade agenda focal point nears. However, with the PBoC biasing the fix below expectations, the central bank provided some comfort to some regional currencies. After all, what investor doesn't appreciate currency stability? And with the PBoC drawing an impressive line in the sand, dare I say the brave at heart is running against and shorting USDCNH ahead of tariff decision day?
Yesterday's price action was a combination of a catch-up to Friday's news and pre-positioning ahead of tomorrow's well-subscribed MPC. I expect no change in policy, but anticipate a slight dovish lean after GDP and inflation metrics both missed the marks. And with trade wars front and centre, although I believe the MYR is better insulated from this external shock due to higher oil prices over the long term, near term there is not a great deal to be bullish about, and predictably, USDMYR remains firmly bid on dips, with dollar bulls targeting USDMYR 4.15.
There was a wave of long liquidation of trade war hedges, which was a bit surprising considering the Kospi was trading in negative territory with a reported -170 million USD in outflows yesterday. The move has all the hallmarks of exporter-driven flows, reminding us that real money flows do count!