No Stopping The U.S. Dollar Runaway Train At The Moment

By Stephen Innes

US Markets

The US dollar is on a rampage as awe-inspiring beat on both the ADP and ISM services index combined with very supportive Fed speak sent the US dollar soaring.

Just another risk on the day for US markets despite US bond yields surging. But look no further than the September ISM non-manufacturing report which massively surprised to the upside, confirming that the US economy is indeed "firing on all cylinders." And triggering hugely bullish signal for both the USD and a myriad of other US assets like US equities, with the S&P rising to fresh session highs and US bond yields touching multi-year high water marks with the 10-year UST holding just above 3.16%. To put things in perspective, the ISM just printed a 21-year high beating consensus expectation 61.6 vs. 58!

Doubtlessly, nothing more bullish than the Dow printing record highs as US interest rates hit multi-year peaks.

No if and or buts, investors remain unambiguously bullish on the S&P 500. And with positive signs gradually showing up for the Shanghai Composite and the Nikkei, Asia equities, while still pulling up the rear, should make leaps and bounds this quarter even more if US-China resolves their trade issues. But at this stage, it looks like US markets don't give a toss about China trade.

Oil Markets

The DOE data for last week showed a much more significant than expected 8.0 million barrels per day build in the US commercial crude, which generally suggests that oil prices should tumble. Given the market is doing the exact opposite with Brent touching $86 per barrel, it indicates the markets remain singularly focused on Iran sanction and the questionableness of OPEC's amplitude to increase production quickly enough to offset any Iran supply loss. In other words, the market is focusing on spare production capacity and the US sanctions effectively drying up the physical markets.

So if you were waiting for a bullish catalyst, when oil markets rally after a significant and highly unexpected DOE inventory build, price action can't be any more telling than that. Absolutely, the stage is set for a test of Brent $90 per barrel which should provide clear sailing to the opulent $100 per barrel mark.

All this on top of the other big news of the day from Riyadh that indeed Saudi Arabia and Russia will boost their output in October and November (Reuters).

However, after dissecting the article, it was merely an affirmation of something that we had suspected all along, but now it is confirmed that Saudi Arabia and Russia are working closely together in coordinating their response to the oil market. The headline confirms Saudi Arabia and Russia sideline discussion at a St. Petersburg conference back on May 25, subsequently ratified by OPEC.

And yes, Saudi Arabia and Russia are both supplying additional barrels, but I genuinely believe both parties are as equally price-sensitive as they are about making concessionary overtones. So, if the markets remain fluid and accept the additional barrels at or near current levels, triggering tears of joy to all oil producers, including those in Texas and Oklahoma, indeed the Saudi-Russia led mega oil cartel will be more than happy to add supply.

The Russians and the Saudis agreed to add barrels to the market quietly with a view not to look like they are acting on Trump's order to pump more,"

One quote in the article, however, reminded me of one of my long-held theories that we are on the cusp of a new axis of oil price control that would involve the world's three mega-producers - Saudi Arabia, Russia and the US. While I still think this locus of control will happen eventually, although the US inclusion will likely ruffle some Middle East feather. But frankly, without offering US Shale producers a seat at the negotiating table, any coordinated efforts to stabilise prices over the long run could be difficult without their participation.

Gold Markets

Gold prices slid lower on Wednesday, triggered by a significant beat on the ISM resulting in higher US bond yields and a very strong USD. But with bond traders effortlessly taking out key interest rate levels, which are falling like ninepins, it does suggest the dollar rally has much more room to run. After waffling its way through September, the greenback is starting to reassert itself supported by a significant fair wind from the US rates markets with 10-Year UST holding north of 3.15%. It is difficult to envision gold tracking any which way but down. Yesterday's Italy-inspired safe-haven rally is starting to look more and more like a massive missed opportunity; that's if you didn't sell, as, on a strong NFP print, gold could flop towards the mid $1180s in a heartbeat.

Currency Markets

It's not only the Aussie moving down under, but so is the euro. And with the US10-Year Yields sliding through crucial resistance level like greased lightning, the euro is folding like a cheap suit. But it was the constructive tone from Fed chair Powell that lit a fire under the dollar after he suggested that the Fed is a long way from neutral rates. So, assuming the US data supports, I guess we can count on the Fed to roll out quarterly rate hike for the foreseeable future, or at least until there's a downturn in the US data. Given the moves on USDJPY, it does indicate the EURUSD could fall further as the market aims at the next critical pivot level of 1.1420.

EM Asia

A tale of 2 barrels of oil

The Indian Rupee

With Brent testing $86 per barrel and the USD reasserting itself across G-10, the Indian rupee got hammered overnight. This trade was the equivalent of taking candy from a baby after yesterday's comments from the RBI, which is unwilling to react to what it believes is a knee-jerk reaction on INR and oil, and utterly unwilling to support a separate USD window for oil companies.

We knew the rupee was going to be in for a rough ride, but the voracity of the move is what is frightening. But with intervention proving futile due to India's heavy reliance on imported oil and gas, the import bill is going to be eye-watering and humongous and will continue to provide ammunition for currency speculators to target the rupee.

But deferring to the Oxford Economics matrix, in India's case "A 10 per cent increase in oil prices can lower the real GDP level by 0.2 per cent four quarters later." So this oil move is going to have lingering effects.

Malaysian Ringgit

On the other hand, the Malaysian ringgit will be relatively insulated from the stronger dollar, and surging US yields as Malaysia pumps about 666 K barrels per day which generate a tidy sum for the country and not to mention the downstream effect which is an absolute boon to Malaysia's expansive oil and gas industry. While USDASIA will trade with a defensive posture, today the ringgit should be viewed in a much better light than the regional peers, but demand will remain muted.