Aussie/Kiwi dive on dovish RBA/RBNZ vibes

20th October 2020 – Macro Daily


Major European equity bourses trade with losses this morning (Stoxx 600 -0.3%), as the region plays catch up to the slump on Wall Street yesterday evening; various US political journalists reported yesterday that, according to their sources, progress towards a new US fiscal stimulus deal between the White House and Democrats has not yet been sufficient and that “language” continues to present a problem in agreeing on an overall package. This is one factor being attributed as contributing yesterday’s downbeat market tone (the S&P 500 closed 1.6% lower), while virus concerns are being cited as another. SEB this morning notes that “in the US, especially states in the Midwest that have previously been less hit by the Covid-19, have seen the virus spread increase rapidly while the positivity rate is alarmingly high (i.e. increased testing is not the reason)… the number of new cases in the US is now starting to approach the previous top levels seen last summer.”

Elsewhere, others point to a rising S&P 500 VIX (still below 30, but only just off highs for the month) and elevated post-election implied vols as evidence that fears of a contested outcome are on the rise. This coincides with a minor improvement in Trump’s re-election chances over the course of the last week, ahead of Thursday night’s debate; “With two weeks before election day” notes TD Securities, “Joe Biden has maintained a healthy lead over President Trump in national polling. The former VP’s advantage has remained close to an election-cycle-high at 10.6pp, up modestly from 10.4pp last week… Polling at the state level, however, shows a marginal pullback in tossup races, with Biden losing ground in FL and IA, while OH has flipped back to Trump… Although no states flipped for the President, MN and NV have now shifted to “leaning ” from “solid Biden”… (and) Florida is still “leaning Biden,” but just barely.

In terms of other asset classes, US yields are a little higher this morning amid a mild recovery in US equity futures overnight and crude oil markets are also higher, having been buffeted over the last 24 hours by a combination of broader risk appetite, yesterday’s OPEC+ JMMC meeting (no indication from the Russians that they will make up for recent overproduction), rising Libyan supply, but also the news that demand from China is strong (premiums for Russian ESPO crude for December delivery hit three-month highs).

Looking at FX markets, things have been broadly flat/subdued this morning, although AUD and NZD have seen selling pressure amid dovish RBA and RBNZ commentary (more below).

G10 FX

The Day Ahead

0900BST/0400EDT, Riksbank Governor Ingves and Deputy Governor Ohlsson will participate in an open hearing on current monetary policy.

1030BST/0530EDT, BoE MPC Member Vlieghe speaks at “Assessing the Health of the Economy”… Vlieghe hasn’t featured much over the past few months. His most recent comments came on the 2nd of September and were quite pessimistic; while he said he was fairly confident that, in the months ahead, the economy will bounce back, he noted this would still leave GDP 5% or more below its pre-pandemic level and that there is a material risk in my view that it could take several years for the economy to return to full capacity.

1250BST/0750EDT, ECB’s Hernandez de Cos delivers speech at the honorary closing of annual financial event organized by KPMG… Last week de Cos noted that it is important to retain flexibility in asset purchases to avoid fragmentation.

1330BST/0830EDT, US Building Permits & Housing Starts (Sep)… Wells Fargo are looking for a below-consensus modest 0.8% rise in September housing starts to 1.427 million units, while he consensus is looking for a slightly larger gain. With the NAHB homebuilders’ index at an all-time high of 85 yesterday, Wells Fargo note that it is not difficult to make a case for another strong report, adding that “starts also likely fell less this September than they normally do, which would boost the seasonally-adjusted data.” They explain that their below-consensus forecast is based on some mean reversion of starts in the Midwest and West, which jumped this past month, adding that “the Western wildfires might lead to an even larger pullback.”

1550BST/1050EDT, FOMC Member Quarles speaks on “Financial Stability Board Agenda” before virtual SIFMA Annual Meeting… Most recent comments; negative repo rate “has not been on the agenda at all”, that the sheer size of treasury market may have outpaced the private market’s ability to absorb any stress and that he expects the recovery to proceed somewhat better than expected.

1600BST/1100EDT, Global Dairy Trade Price Index… Australian Bank Westpac “expect(s) whole milk powder prices will lift a touch at this auction and thus build on the previous increases. Prices have risen a cumulative 5% or so over the last two auctions. We are marginally more bearish than the dairy futures market. It is pointing to a slightly larger price lift of around 2% as at the time of writing. Global dairy prices continue to prove resilient as evidenced by Fonterra’s 2020/21 milk price forecast range upgrade to $6.30/kg to $7.30/kg. The strength or otherwise of New Zealand production, though, remains a swing factor.”

1800BST/1100EDT, FOMC Member Evans speaks on current economic conditions and monetary policy before virtual event, “Detroit Economic Club: The Pandemic’s Impact and the Future of the U.S. Economy”… Most recent comments; on QE, the Fed has capacity to do more asset purchases, but does not see need for it now and, on fiscal stimulus timing of fiscal stimulus is important, as delay could mean more economic scarring.

2000BST/1500EDT, FOMC Member Brainard speaks on “Community Reinvestment Act” before virtual event hosted by the National Housing Conference.  

2130BST/1630EDT, API Weekly Crude Oil Stocks

2200BST/1700EDT, FOMC Member Bostic participates in “Perspectives on Fair Housing: Economics” virtual panel before the Penn Institute for Urban Research.

19/10/20 – G10 FX Correlations Weekly

  • G10/USD 30-day rolling correlations to the S&P 500, Stoxx 600 and Commodity Index increase, while correlation to gold remains stable and to WTI are more mixed.
  • CADUSD now has highest positive 30-day correlation to both the S&P 500 and WTI out of the G10/USD pairs.

G10 FX sensitivity to “risk” (equities)

30-day rolling correlation between major G10 USD crosses and the S&P 500 for the most part strengthened last week, as can be seen in Chart 1. CAD and NOK dollar crosses are the most sensitive to the S&P 500, with 30-day correlations above 0.7. AUD, NZD, SEK and GBP crosses are the next most sensitive, with 30-day correlations between 0.5-0.6.

EURUSD has seen its positive 30-day rolling correlation to the S&P 500 strengthen to above 0.4, synonymous with an increase in the strength of the negative correlation between the S&P 500 and the Dollar Index (DXY) to below -0.5. Meanwhile, USDJPY continues to have next to no correlation to the S&P 500.

As shown in Chart 3, G10 currencies have also shown an increase in their sensitivity to European equity markets, which struggled last week on increased fears over the impact of rising Covid-19 cases in Europe and the economic impact of renewed lockdown restrictions.

Chart 1
Chart 2
Chart 3

G10 FX sensitivity to gold

It was a choppy one for gold last week; early in the week, USD strength sent the precious metal crashing back beneath the $1900/oz mark. By the end of the week, however, much of these losses had been recovered. As can be seen in Chart 4, correlations to G10/USD major crosses have stayed broadly stable; AUD, NZD, NOK, EUR, SEK and CHF dollar crosses all still have positive 30-day rolling correlations to gold of above 0.6, while GBP, CAD and JPY dollar crosses still have the weakest correlations to gold. DXY continues to have a strongly negative correlation to gold of just above -0.7.

Chart 4

G10 FX correlations to (front-month) WTI

A somewhat mixed week in terms of the evolution of G10/USD cross 30-day rolling correlations to WTI; as can be seen in Chart 5, DXY, GBPUSD, EURUSD and CHFUSD all saw the strength of their correlations to WTI soften significantly. DXY’s negative 30-day correlation to WTI is now above -0.3. AUD, SEK, NZD dollar crosses all saw their 30-day correlations remain broadly stable, while CADUSD saw a jump in the strength of its positive correlation to WTI to around +0.5. The cross now has the highest correlation to WTI out of the G10/USD majors, overtaking GBPUSD.

Chart 5

G10 FX sensitivity to the Commodity Index

In contrast to the above, USD saw the strength of it negative 30-day rolling correlation to Refinitiv’s basket of global commodities (the Commodity Index) strengthen last week to below -0.6.

Thus, G10/USD cross in general saw their correlations to the Commodity Index rise (see Chart 6). This dynamic was not just driven by USD, however, with most JPY major crosses also seeing a substantial rise in their 30-day rolling correlation to the Commodity Index (see Chart 7).

NOK, CAD, AUD and NZD are unsurprisingly still the most Commodity Index sensitive currencies, and JPY the least.

Chart 6
Chart 7

FX markets meander ahead of busy week of central bank speak

19th October 2020 – Macro Daily: Week Ahead


US equity index futures trade with reasonable gains (S&P 500 futures +1.0%, Nasdaq 100 futures +1.1%, Dow futures +0.9%), amid a risk on start to the week. US/China tensions have been in the spotlight this weekend (China warned the US it may detain Americans in response to the prosecutions of Chinese scholars, reported the WSJ), but pre-US election stimulus hopes appear to be winning out, with Republicans and Democrats still seemingly pushing for a deal; US House Speaker Pelosi gave the White House a 48-hour deadline on Sunday to strike a deal, with Pelosi and US Treasury Secretary Mnuchin are expected to talk today. Moreover, US President Trump said over the weekend that he wants an even bigger stimulus deal that House Speakers Pelosi’s proposal (of $2.4trln).

Across the pond, European equities also trade in the green (Stoxx 600 +0.8%), despite a continued rise in virus cases over the weekend and more countries announcing stricter lockdown measures (this weekend it was Italy’s turn). Eslwhere, US bond yields are mostly higher and crude oil markets are marginally higher amid the risk on tone, and as participants of the latter eye today’s JMMC meeting, which starts at 1430BST/0930EDT.

G10 FX

Despite the somewhat risk on tone in global equity markets, USD trades flat, with DXY rangebound between narrow 93.65-75 parameters, close to its 21dma at 93.73. Fed’s Rosengren and Kashkari delivered remarks over the weekend that were critical of the bank’s lack of tools to prevent firms from taking on excess leverage, as well as the market’s dependence on Fed intervention. We have plenty more Fed speaker to digest this week, kicking off with Powell, Williams, Clarida, Kashkari, Bostic and Harker today.  

EUR is also flat. ECB commentary over the weekend was as expected; ECB President Lagarde reiterated that policy will be kept supportive for as long as needed and ECB’s Panetta sounded dovish (ultra-easy policy is “all the more necessary” amid rising Covid-19 risks to the Eurozone’s economic recovery. EURUSD meanders just above 1.1700 for now, with its 21dma at 1.1736 the first notable level of resistance, followed by last Friday’s high around 1.1745.

GBP is an outperformer this morning, posting reasonable gains of around 0.4% vs USD and EUR amid focus on Brexit news; the UK may be willing to “water down” its controversial Internal Market Bill as a means of kick starting stalled negotiations (as a reminder, the UK said that talks had essentially ended last Friday, given the EU signalling the full onus to compromise was now on the UK’s side). Talks between UK Brexit Negotiator Frost and EU’s Barnier look to be on for this week.

With Brexit stealing the limelight, GBP has largely ignored a downgrade to AA3 from AA2, Outlook Stable, at Moody’s. The Rating Agency said it believed growth would be “meaningfully weaker” than it had previously believed and that the country’s economy had been struggling even before the pandemic reached Britain.

As has been the case for most of the month thus far, GBPUSD has thus managed to hold above its 21dma which currently sits just below the 1.2900 mark, the cross having advanced towards the 1.2950 mark. To the upside, last Friday’s 1.2960 high marks the first area of notable resistance, followed by the psychological 1.3000 level and the 50dma at 1.3019. Meanwhile, in a similar vein, EURGBP has managed to stay below its 21dma (as has also been the case for most of the month so far) at 0.9101, the cross falling below 0.9050 in recent trade. To the downside we have last week’s lows just above 0.9000 level.  

Elsewhere, risk sensitive NZD, AUD, NOK and SEK are doing well, underpinned primarily by the market’s positive risk tone. NZD appears to have taken this weekend’s election result in its stride; PM Ardern won a landslide victory, with here party taking 49.1% of the vote and securing a rare outright parliamentary majority.

Meanwhile, CAD is also nursing modest gains vs USD ahead of today’s BoC Business Outlook Survey, while JPY and CHF are subdued amid the lack of demand for havens. Finally, USDCNH is flat despite the firmest PBoC CNY fixing of the year, following mixed overnight Chinese data release; Q3 GDP growth was a little disappointing at 2.7% Q/Q (exp. 3.2%) and 4.9% Y/Y. However, activity data for September was strong, with Industrial Production up 6.9% Y/Y (exp. 5.8%) and retail sales up 3.3% Y/Y (exp. 1.8%).

The Week Ahead

The evolutions of the Covid-19 pandemic, Brexit and US politics remain the most important market themes in terms of their impact on sentiment, but there will plenty of focus on this week’s busy data schedule, of which preliminary October PMIs on Friday are likely to be the highlight. We also have plenty of central bank speak; FOMC members speak 19 times and ECB GC members 10 times and we also have a few BoE, Riksbank and RBA speakers. Meanwhile, crude oil market participants will be eyeing the OPEC+ JMMC meeting which starts from 1430BST/0930EDT.

Monday – Plenty of data and central bank speakers to keep us on our toes on the first day of what will be a busy week. In terms of data, we have Weekly Swiss Sight deposits, Canadian Wholesale Sales (Aug), US NAHB House Market Index (Oct) and NZIER Business Confidence (Q3). Meanwhile, Central Bank watchers will be eying speeches from Fed’s Powell, Williams, Clarida, Kashkari, Bostic, Harker, ECB’s Lagarde and Lane, BoE’s Broadbent and Cunliffe (twice) as well as Riksbank’s Skingsley, as well as the BoC’s Business Outlook Survey.

Tuesday – The heavy slate of data and speakers continues on Tuesday, starting with RBA Assistant Governor Kent, the release of the minutes of the October RBA meeting and a LPR rate decision from the PBoC in the early hours of the morning. In the European morning, we have German PPI (Sep), followed by Riksbank’s Ingves and Ohlsson, BoE’s Vlieghe and ECB’s de Cos. In the European afternoon/evening, we have US Building Permits and Houseing Starts (Sep), followed by Global Dairy Trade Price Index data, as well as FOMC speakers Quarles, Evans, Brainard and Bostic. We also have Private oil inventories.

Wednesday – Main data points are UK CPI, PPI and Public Sector Net Borrowing (Sep), Swedish National Debt Office forecasts, Canadian CPI, New Home Price Index and Retails Sales, as well as EIA crude oil inventories. We also have another day packed with central banks speakers, with ECB’s Lagarde, Lane (twice) and de Guindos (twice), BoE’s Ramsden and FOMC Members Brainard, Mester, Kaplan, Kashkari, Daly and Barkin, as well as the Fed’s Beige Book. In the late evening, we also have RBA Assistant Governor Debelle.

Thursday – Another busy day of data releases, with overnight focus on Australian NAB Quarterly Business Confidence, followed by German GfK Consumer Climate (Nov),  Norwegian Industrial Confidence (Q3) and Unemployment Rate (Aug), UK CBI Industrial Trend Orders (Oct), US Weekly Jobless Claims, US Existing Home Sales (Sep), Eurozone Flash Consumer Confidence (Oct) and New Zealand Consumer Price Inflation (Q3) and , Australian Preliminary Manufacturing PMI (Oct) in the evening. We also have speeches from ECB’s Panetta, BoE’s Haldane and Bailey and FOMC’s Barking, Daly and Kaplan.

Friday – The final US Presidential Debate starts in the early hours of the European morning, the outcome of which will be a crucial determinant of sentiment as the election rapidly approaches. But preliminary Japanese, Eurozone, UK and US October Markit PMI data will steal some market attention. Otherwise, we also have Japanese CPI (Sep) and UK Retail Sales (Sep).

Sterling stumbles as implied vol surges; EU Summit, Johnson’s deadline loom

14th October 2020 – Macro Daily

Market Update

Risk tone remains cautious early in the European trading session; the Stoxx 600 trades with minor gains of around 0.2%, while S&P 500 futures are up around 0.4%. Crude oil has had a slight negative bias, US yields are flat/slightly lower and USD remains supported at highs for the week.

Rising Covid-19 cases in Europe remain at the forefront of investor concerns (Netherlands announced new restrictions and the UK govt is mulling a national lockdown should the recently announced three-tiered system fail). Meanwhile, Eli Lily announced that it had halted its Covid-19 antibody treatment trail due to safety concerns, just a day after J&J halted its vaccine trail – trader note that a large number of similar studies continue, however, so the sense that a vaccine is on the way sooner or later remains. Meanwhile, market’s seem to have come round to the idea that pre-election US fiscal stimulus is unlikely, amid continued gridlock in negotiations between the White House, Republicans and Democrats; the Senate Republicans will vote on a “stripped down” $500bln package next week, but the Democrats, who control the House, have indicated they will oppose this package.

USD strength this morning is mostly being driven by downside in GBP, as rhetoric from the EU hardens somewhat; the message from the EU in Brexit negotiations this week has very much been “we want a deal, but not at any cost”, a variant on former UK PM May’s “no deal is better than a bad deal” from back in the day. This morning, a draft document seen by newswires suggests that, at its Leaders Summit from Thursday to Friday, the EU will say that progress in talks with the UK on the future relationship are not sufficient, thus, no deal preparations must intensify. However, negotiators will be directed to intensify efforts to reach a deal.

Note that UK PM Johnson has threatened that if a deal remains out of sight by this Thursday (the 15th of October), the UK will walk away from talks with the EU and focus on preparing for a no deal end to the transition period. Implied overnight volatility surged this morning to a 7-month high of above 13%; perhaps markets are increasingly fearing that Johnson might make good on these threats to walk away from talks (although the UK has previously said that the door will “never be closed” to the EU).

NOK is being hit hard and EUR is marginally softer, but all other G10 currencies are flat vs USD, more below…

G10 FX

 Fundamental ObservationsTechnical Observations
USDSupported this morning mostly by downside i GBP. PPI (Sep) and FOMC’s Clarida, Barkin, Quarles and Kaplan ahead.  DXY saw some upside on GBP weakness this morning, gains but remains capped by the 21dma at 93.64. To the downside, last Tuesday’s low is at 93.33 and the 50dma at 93.26.
EURFlat on the day vs USD. Final Spanish September CPI was in line and Germany is reportedly planning to extend aid for companies by six months to June 2021. Eurozone IP (Aug) and ECB’s Lagarde, Lane, Merch, de Galhau, de Cos and Holzmann ahead.EURUSD has recovered from a minor slip after the EU open, and remains supported ahead of yesterday’s lows around 1.1730. A 1.2bln expiry at 1.1750 and the 21dma at 1.1752 might provide resistance.
GBPHas slumped since the EU open, now down roughly 0.35% vs USD and EUR. Brexit concerns are weighing, given increased talk of upping no deal preparations heading into the EU leader summit tomorrow. Increased “circuit-breaker” lockdown talk if current restrictions fail also weighing. Johnson, von der Leyen and Michen call, as well as BoE’s Haldane ahead. GBPUSD has slumped below its 21dma at 1.2890, but is yet to test last Wednesday’s 1.2850 lows. Further resistance in the form of the 200dma sits at 1.2818. Meanwhile, EURGBP is finding resistance at its 21dma at 0.9115 for now.
JPYJapanese industrial production numbers in August were a little underwhelming; production grew at 1.0% M/M, below expectations for a rise of 1.7% and a big drop from last month’s 8.7%.USDJPY fell to lows of just above 105.30 overnight, but the cross has since recovered back to the 105.40s, with the 21dma at 105.35 providing some support. Below that, 1.2bln in expiries between 105.15-20 might also provide support.
AUDA little higher on the day vs USD amid the minor pick up stocks. Traders look ahead to tonight’s speech from RBA Governor Lowe and then the latest Aussie jobs numbers for September.Gains remain capped below the 21dma at 0.7175, as well as 550mln in expiries between 0.7175-80, though the cross has managed to mostly stay above 0.7160.
NZDA little higher on the day vs USDamid the minor pick up stocks. Comments from RBNZ Assistant Governor Hawkesby were seen as broadly neutral overnight; he noted how some data has surprised to the upside, but that the economy continues to need policy support. Moreover, he said a lower exchange rate could provide further stimulus.NZDUSD remains supported above 0.6650 for the time being. Below that, the 21 and 50dmas align nicely at 0.6634, just above Tuesday’s lows around 0.6630.
CADFlat vs USD, loonie traders are looking ahead to today’s speech by BoC Deputy Governor Tim Lane.  USDCAD is flatlining at the upper end of its 1.3100-1.3150 range for the week so far.
CHFA tad firmer vs USD on the day.USDCHF rose back above its 50dma at 0.9130 yesterday. The cross has since been rangebound between 0.9140-50. To the upside, the 21dma sits at 0.9168.
NOKBack to flat on the day vs USD, having erased substantial post-EU open losses. Minor recovery in stocks is likely helping. EURNOK has been edging higher in recent trade, but remains below 10.8800. The 21dma sits just above 10.90 to the upside.
SEKA little higher on the day vs USDamid the minor pick up stocks. Swedish money market inflation expectations remained broadly unchanged, aside from a rise in the 5 year to 1.8% from 1.5%.EURSEK gains remain capped by Monday lows around 10.3750 and the cross’s 50dma just above 10.3800.

The Day Ahead

0900BST/0400EDT, ECB President Lagarde speaks at the online 16th biennial Global Roundtable organised by the United Nations Environment Programme Finance Initiative (UNEP FI).

1000BST/0500EDT, Eurozone Industrial Production (Aug)… Eurozone industrial output recovered at a rapid pace in back May and June, i.e. the initial rebound from March and April’s lockdown induced hit. The pace of recovery has since slowed, however, and this slowing pace is expected to continue into August; Eurozone IP is expected to rise at a M/M rate of just 0.8% in August, bring the Y/Y rate of growth a little higher to -7.2%. Notably, manufacturing sentiment in August and September continued to improve despite a surge in Covid-19 cases in the Eurozone that put pressure on the equivalent service and composite sentiment indices. SEB note that country-level data published last week gave a mixed picture; “despite a strong PMI-number and also order data, German production fell in August. Italy on the other hand surprised strongly on the upside with a 7.7% M/M rise and industrial production in now only marginally lower than a year ago. France, Spain and the UK presented weaker readings highlighting the fragility of the recovery.” The bank suggests going forward that “our overall assessment is that production will rise in the euro area as a whole but that growth rates will be more modest as the crisis related drop is getting smaller. The development of the pandemic and new measures to contain contagion will make monthly numbers even more volatile than we are used to.”

1300BST/0800EDT, ECB Chief Economist Lane speaks… Recent comments have been dovish in terms of their policy implications; in an interview with the WSJ over the weekend, he signalled that the ECB would allow inflation to overshoot and said that the ECB would be as aggressive as the Fed in pursuing the inflation target. Moreover, “I do not see that the ECB has a structurally tighter orientation for monetary policy” than the Federal Reserve, he said. Comparisons with the Fed and its AIT policy seemed to trigger some push back from other ECB members; ECB “sources”, speaking to Reuters, noted reluctance amongst ECB policymakers to follow the Fed’s move to target an average inflation rate, fearing this could tie their hands. The Reuters article noted that; policymakers… feared that going down this route risked encouraging financial markets to jump to the wrong conclusions about future policy decisions based simply on where the average happened to be at a given point in time. Instead, they wanted to retain the flexibility to judge each situation on its own merits, for instance by playing down the significance of temporary changes in inflation due to swings in the price of oil.

1300BST/0800EDT, ECB’s Mersch participates in a webinar hosted by the Institute of International and European Affairs (IIEA).

1300BST/0800EDT, International Monetary Fund officials conduct press briefings and news conferences.

1315BST/0815EDT, ECB’s Villeroy de Galhau, Hernandez de Cos and Holzmann speak at a conference.

1330BST/0830EDT, US Producer Price Inflation (Sep)… The headline number is seen rising at a M/M and Y/Y rate of 0.2% in September, while Core PPI is also seen rising at a M/M rate of 0.2%, while the Y/Y rate is seen jumping to 0.9% from last month’s 0.6%.

1335BST/0835EDT, FOMC’s Barkin speaks before virtual West Virginia Economic Outlook Conference.

1400BST/0900EDT, FOMC Vice Chair Clarida speaks at annual IIF Annual Meeting… In his most recent comments (made on the 23rd of September), the Vice Chair of the FOMC stuck to the Fed’s new AIT policy script; i.e. the Fed is not even going to think about raising rates until actual inflation is at 2% and the US needs to spend “some time” with inflation above 2% to offset time spent below it. Moreover, he cautioned that additional fiscal stimulus would likely be needed to aid the economic recovery, as have so many other FOMC officials as of late. Given continued impasse in fiscal stimulus negotiations, calls for more government aid might be a little louder today, but otherwise I see no reason why Clarida wouldn’t continue to stick to the usual script.

1400BST/0900EDT, Bank of England Chief Economist Haldane speaks… In his last batch of comments (on the 30th of September), the BoE’s Chief Economist noted how risks to the UK economy remain tilted to the downside, but urged that the faster than expected economic recovery from April lows had not been given enough credit. By the end of Q3, output is expected to be only around 3-4% below its pre-Covid-19 level, he said. Moreover, Haldane again pushed back on negative rates, saying that “none of the conditions for negative rates have been satisfied”.

1530BST/1030EDT, FOMC’S Quarles participates in “Financial Stability” panel before Systemic Risk Council Webinar

1530BST/1030EDT, Bank of Canada Deputy Governor Tim Lane participates via videoconference in a panel discussion at a joint Reinventing Bretton Woods Committee-Chamber of Digital Commerce webinar.

1900BST/1400EDT, Fed’s Beige Book

2000BST/1500EDT, FOMC Members Kaplan and Quarles participate in “Financial Regulation” panel before Hoover Institute Monetary Policy Virtual Series

2130BST/1630EDT, API Weekly Crude Oil Stocks

2245BST/1745EDT, RBA Governor Lowe gives an online speech… The last time we heard from RBA Governor Lowe was back in August. Since then, the RBA has adopted a more dovish stance, signalling that it is looking at further monetary policy easing options (including further cuts, perhaps even into negative territory, QE expansion and even FX intervention, although there are doubts about the latter’s potential effectiveness). Moreover, the RBA signalled that it is content with current financial market expectations that further policy easing is ahead. Many analysts now expect a 15bps cut to interest rates (taking them to 0.1%) in November. Market’s thus look to Lowe for confirmation of their dovish positioning.

2300BST/1800EDT, FOMC Member Kaplan participates in a virtual town hall discussion on the economy and monetary policy hosted by the Federal Reserve Bank of Dallas.

Risk rally pauses for breath

13th October 2020 – Macro Daily

Risk Appetite

After yesterday’s impressive rally on Wall Street, sentiment is a little more risk off this morning, with a majority of the haven inflows/risk asset outflows coming in the immediate aftermath of the reopen of US cash treasury trade; at the time (shortly after mid-night), USD rallied against all of its major G10 counterparts, with NOK, AUD, EUR and GBP the worst hit, while global equities also slipped, although most assets have now pared back the majority of these losses. Nonetheless, S&P 500 futures trade around 0.4% lower this morning, the Stoxx 600 is down about 0.2%, US treasury yields are lower (and the curve flatter) and USD continues to lead the gains in the G10.

As to why we are a little more risk off this morning; no particular piece of news seems to have spurred the slightly more cautious flows. Admittedly, Johnson & Johnson did announce a pause to their Covid-19 study due to an “unexplained illness in a participant”, but they explained that this is a normal part of any large clinical study.More likely, markets are taking the opportunity to reassess/take profit after nearly a week of pretty much none stop risk on flows (in equity markets at least), as they await further clarity on key themes such as the US economy (we get some important data points this week), the US political circus, Brexit and the spread of the virus.

G10 FX

As noted, USD has been on the front foot since the start of the overnight session given an increased demand for havens; DXY has rebounded from support at the psychological 93.00 handle back to above 93.20, though it remains contained by the 50dma at 93.26 for now. Above that, 93.34 ought to be the next significant area of resistance (October 6th lows).

NOK, AUD, GBP and EUR are the worst performers this morning. Starting with the latter two currencies; EURUSD is now below the 1.1800 level and GBPUSD is back below 1.3050, both trading as a function of USD strength. With $2.5bln in option expiries rolling off at today’s NY cut at EURUSD’s 1.1800 handle, the round number might prove tougher resistance than is usually the case.

In terms of Eurozone fundamentals; though EUR did not react to the release of this story yesterday evening, suggestions from ECB sources yesterday that several ECB policymakers are reluctant to go down the same road as the Fed with average inflation targeting, given fears that it might “tie their hands” and “create unrealistic expectations” (indicative of further disunity on the Governing Council) might be weighing on the single currency. Remember, over the weekend, ECB Chief Economist Lane hinted strongly that the ECB might adopt such a policy, saying the ECB might let inflation overshoot and would pursue its inflation target as aggressively as the Fed.

Meanwhile, GBP seems to have largely shrugged off the August UK labour market report, which remains difficult to interpret given the distortive effect of the UK’s furlough scheme, which continued to pay up to 60% of employee wages in August. The unemployment rate rose to 4.5%, higher than expectations for 4.3%, while three-month employment change came in at -153k jobs, significantly worse than expectations for job losses of just 30k in the June-August period. However, the rise in unemployment benefits claimants in September was just 28k, lower than expectations for a rise of 78.8k. Consensus thinking remains that the worst is yet to come for the UK labour market, with things set to get ugly in Q4 as the UK government significantly winds down its furlough scheme – from October, it will only be paying up to 2/3rds of the wages of those who work for businesses that have been ordered to shut due to lockdown restrictions (i.e. hospitality).

Turning to AUD; knee jerk strength in USD shortly after midnight saw AUDUSD slump below the 0.7200 level and below its 21dma which currently at 0.7180, although much of this move has now reversed. The next area of significant support is all the way down at the psychological 0.7100 level (last week’s low and $1bln in option expiries for today’s NY cut).

Strong Chinese trade numbers were unable to lift the mood for AUD, although they have seemingly helped CNY; USDCNH is flat on the day just above 6.7400 despite the stronger dollar. China’s trade surplus was over $20bln less than expected at $37bln in the month of September, driver by a surge in imports. Imports were up 13.2% Y/Y in September vs expectations for an annual growth rate of just 0.3%. This included strong growth in imports of a number of key Australian exports including copper (imports grew to 772.5k tonnes from last month’s 668.5k) and iron (imports grew to 108.6mln tonnes from last month’s 100.36mln. Measured in yuan, imports hit record highs in September.

NZD is holding up much better than its antipodean counterpart and is an outperformer on the day alongside USD; NZDUSD trades nearly 0.2% on the day close to 0.6660, having fully recouped overnight losses that took the cross as low as 0.6630; the 21 and 50dmas both sit in the mid-0.6630s and seem to have acted as support. I haven’t seen any specific New Zealand fundamentals to explain its outperformance this morning, but some are suggesting that selling in AUDNZD (that has pushed the cross below its 21dma at 1.0820 and the 1.0800 handle) is supporting the currency.

Looking elsewhere, SEK, CHF and CAD are trade marginally lower vs USD; Swedish inflation numbers for September were soft at 0.4% Y/Y (exp. 0.6%) and 0.1% M/M (exp. 0.3%), but seem not to have had too much of a lasting impact on SEK; EURSEK trades at the bottom of its recent 10.3700-10.4100 intra-day range. Meanwhile, USDCAD managed to keep overnight gains contained below 1.3150, with a test of the 1.3100 handle seeming increasingly likely. USDJPY is back above its 21dma (at 105.36) and trades just below 105.50.

Finally, the stronger USD is keeping JPY on the back foot despite the broadly risk off market tone and reports that Japanese PM Suga is considering an extension of additional economic measures in November.

The Day Ahead

0935BST/0435EDT, Norges Bank Deputy Governors Wolden Bache and Nicolaisen give speeches for Regional Network Inland at Hamar.

1000BST/0500EDT, German/Eurozone ZEW Report (Oct)… ZEW Economic Sentiment is expected to have fallen in Germany to 73.0 from last month’s 77.4 reading. Despite the expected decline, the index would still remain close to historical highs. SEB think that “the large difference between the ZEW and other indicators such as PMI and IFO resembles the development in 2009… mirroring the views derived from equities that long ago have pencilled in a rather short drop-in economic activity.” SEB urge greater degrees of caution “as the recovery process in real economic terms is likely to be gradual and that the current crisis ought to leave some marks on economic activity for a longer period of time.”

1100BST/0600EDT, US NFIB Small Business Optimism (Sep)… Small business optimism rose in August back to above 100 for only the second time since Covid-19 struck the US economy back in March. Optimism is yet to recover back to pre-Covid-19 levels which were closer to 105. Wells Fargo think that it will be interesting to watch this index given that we are now in the throes of election season; “the survey respondents, who lean disproportionately Republican, should offer some insight on how small business owners are digesting the ongoing presidential election. During the 2016 election, the index saw a record two-month jump from October to December.”

1200BST/0700EDT, OPEC Monthly Report

1200BST/0700EDT, ECB’s Knot holds a press conference for the presentation of biannual Dutch financial stability report.

1330BST/0830EDT, US Consumer Price Inflation (Sep)…

TD Securities view Covid-19 as disinflationary, on balance, but with positive as well as negative effects, which they think will be evident once again in today’s September CPI numbers; for example, they “expect strength in used vehicle prices to lead to an above-trend 0.3% rise in the core index, but with an unwinding of earlier strength in food-at-home prices helping hold the rise in the overall CPI to 0.2%.” “Core as well as headline inflation has slowed, on balance, since early 2020” TD continues, “and we expect net slowing to be sustained amidst ample slack.” Markets expect M/M Core CPI to ease to 0.2% but the Y/Y rate to nudging higher to 1.8%. As a reminder, the Fed looks at Core PCE, which is normally around 0.3-0.4% lower than CPI, thus, today’s CPI prints are expected to remain well below where the Fed wants them to be (if the Fed wants Core PCE sustainably above 2%, then CPI will need to be sustainably above 2.3-2.4%).

1330BST/0830EDT, Norges Bank Governor Olsen gives a speech at the conference Norway Summit in Stavanger.

1330BST/0830EDT, European Parliament President Sassoli holds a video conference with EU lawmakers leading talks on the next EU budget and recovery fund.

1500BST/1000EDT, Bank of England Governor Bailey gives evidence on unemployment and COVID at a hearing before the House of Lords Economic Affairs Committee.

1600BST/1100EDT, Riksbank Governor Ingves participates in a panel discussion on the future of the payment market and how digital means of payment issued by central banks (CBDCs) may affect commercial banks and monetary policy.

1900BST/1400EDT, US Federal Budget Balance (Sep)

12/10/2020 – G10 FX Correlations Weekly

(30-day rolling Pearson correlations calculated to the 2nd of October 2020)

  • Rolling 30-day correlations between G10/USD and the S&P 500 broadly increase following what was for the most part a “risk on” week.
  • DXY’s negative rolling 30-day correlation to gold increases to highest levels in over a year of around -0.75.
  • WTI’s positive 30-day rolling correlation to most G10 USD majors drops around 0.1, but G10 FX correlations to commodities more broadly increases on the week, with DXY’s negative correlation to the Commodity Index back below -0.5.

G10 FX to risk

G10 USD major pairs have broadly seen their 30-day rolling correlations to the S&P 500 rise over the past week, following what was, for the most part, a strongly risk on week (the S&P 500 performing strongly while FX havens USD and JPY struggled); as can be seen in Chart 1, EURUSD, GBPUSD, AUDUSD, CADUSD, CHFUSD, NOKUSD and SEKUSD all saw the strength of their correlations to the S&P 500 increase, while only only NZDUSD and USDJPY saw theirs weaken/reverse.

CADUSD takes the top spot as having the highest correlation to the S&P 500 among the G10 USD majors, with a correlation of around +0.7 over the last 30 days. NZDUSD, AUDUSD, USDNOK and GBPUSD are all not far behind, with their rolling 30-day correlations to S&P 500 price action around +0.6.

JPY major pairing tell a slightly different story; as can be seen in Chart 2, NZDJPY still has the highest correlation to the S&P 500 out of the G10, followed by AUDJPY and GBPJPY then CADJPY. As with the USD major pairings, JPY major pairings also saw their correlations to the S&P 500 over the last 30 days increase last week.

Back to USD majors; EURUSD and CHFUSD are up next. Their correlations to the S&P 500 continue to be much lower than the more “risk sensitive” G10 crosses, but did see a reasonable jump last week. EURUSD’s positive 30-day correlation to the S&P 500 is now over +0.3, while CHFUSD’s is just under +0.4, both driven primarily by an increase in the strength of the dollar’s negative correlation to the S&P 500 to just under -0.4 (seen below in the DXY).

Finally, JPYUSD continues to have virtually now correlation to price action in the S&P 500, as has been the case for at least the last three months.

Chart 1
Chart 2

G10/USD to gold

It was a choppy week for gold last week, with the precious metal slipping to lows around $1870. However, gold finished the week strongly and with gains of around $30 (taking it to around $1930). Strong gains in the precious metal coupled with broad dollar weakness has seen its correlations to USD major pairings mostly increase over the last week.

AUDUSD, NZDUSD, EURUSD, SEKUSD and NOKUSD all saw their 30-day rolling correlations to gold rise above +0.7, while CHFUSD rose above +0.6 from closer to +0.5 at the start of the month. CADUSD and GBPUSD have weaker 30-day correlations to gold, but saw theirs rise above +0.4 by the end of last week. Bucking the trend was JPYUSD, which now has the lowest correlation to gold out of the G10 majors of under +0.4, having declined from about +0.5 since the start of the month.

As a result of the above, DXY’s negative 30-day rolling correlation to the precious metal has stormed to its highest in over a year at around -0.75. USD price action thus remains one of the dominant considerations when looking at gold.

G10/USD to WTI

Crude oil markets put in a strong performance last week, with supply side dynamics taking the driving seat at times more than the broader appetite for risk; for example, markets were sent into risk off (S&P 500 lower, USD higher) on Tuesday evening when US President Trump announced an end to US fiscal stimulus talks with the Democrats, but WTI still finished the day higher. Meanwhile, on Friday, WTI prices fell despite a strong rally in stocks and largest one-day decline in the DXY since August. In other words, correlations between WTI and broader risk appetite (thus also to G10 FX markets) over the last 30-days slipped due to last week’s price action;

GBPUSD continues to have the strongest 30 day correlation to WTI, followed by CADUSD and NOKUSD, all of close to +0.4, each down about 0.1 on the week. NZDUSD, SEKUSD, CHFUSD, AUDUSD and EURUSD all also saw their positive 30 day correlations to WTI drop around 0.1 last week and are clustered between around +0.2 to +0.3. JPYUSD continues to have the weakest 30-day correlation to WTI of not to far from 0, as has been the case since early August.

G10/USD to Commodity Index

WTI makes up around 25% of Refinitiv’s Commodity Index. Despite this (and the decline in the WTI to G10 FX 30-day correlation last week), correlations between the Commodity Index and G10 USD major pairings rose last week.

As is normally the case, AUDUSD, NZDUSD, NOKUSD and CADUSD continue to have the highest 30-day correlations with commodities in general, and with the Commodity Index of between +0.6 and +0.7. Elsewhere, SEKUSD and GBPUSD saw their positive correlations to the commodity index rise to just under +0.6 and EURUSD and CHFUSD to above +0.4, each up around 0.1 compared to last week. Again, JPYUSD bucks the trend and has seen its positive corrrelation to the Commodity Index over the past 30 days drop to below +0.2. DXY has seen its negative rolling 30-day correlation to commodities strengthen to above -0.5.

Quiet trade ahead amid Columbus Day in the Americas

12th October 2020 – Macro Daily: Week Ahead

Risk Appetite

Today is set to be quiet, with US and Canadian participants away for Colombus day (although US markets will be open as usual). S&P 500 futures trade around 0.2% higher and the Stoxx 600 is up around 0.1%, with modest gains spurred by a solid start to the week for Chinese equities after the PBoC announced that the RRR rate on FX forwards would be lowered to 0% from its current 20% level (news which also weighed on CNY and CNH).

Otherwise, financial press continues to cite US fiscal stimulus “hopes” as a risk appetite positive. The latest on that front is that the Trump administration continues to push for a “comprehensive” Covid-19 relief package, as well as the passage of a smaller bill that could utilise the approximately $1.8trln currently sat in the US Treasury cash account. House Speaker Pelosi said over the weekend that talks remain at an “impasse”, but that she remains hopeful that progress can be made. Elsewhere, Democratic Presidential Nominee Biden seemingly continues to solidify his lead heading into November 3rd’s vote; the latest ABC News/Washington Post poll has him 12% ahead holding onto a solid lead in swing states Michigan, Wisconsin and Pennsylvania.

More broadly, it looks as though, despite concern over rising Covid-19 cases across developed countries, the coming US election and continued drama over Brexit, markets might be seeing a return to the “business as usual” type trade that we saw throughout most of the summer (i.e. equities grinding higher amid a lack of good, or any, news). Mohammed El-Erian commented over the weekend that “this market wants to go higher”.

Looking at other asset classes, bond yields are marginally higher in the US, while Core European bond yields are a little lower. Crude oil markets are also a little lower, as supply dynamics override the pull of higher equity prices (Hurricane Delta has subsided allowing a return to normal production in the Gulf of Mexico, Norwegian oil firms and labour unions came to a deal to end a 10 day strike and Libya is reportedly pumping again).

G10 FX

G10 FX markets are seeing a broadly subdued start to the week amid North American holidays and the subsequent lack of important data points.

A weaker CNY/CNH has helped USD to marginal gains at the start of the week; after testing the 93.00 mark late in last Friday’s session, DXY has rebounded to around 93.10. DXY remains at risk of further downside though as long as global equities continue to see upside; aside from the psychological 93.00 handle, the next clear area of support is 92.70-80.

EUR, GBP, CAD, CHF and JPY are all pretty much flat vs USD and each other; EURUSD trades within a thin 1.1805-1.1820 range, GBPUSD topped out around 1.3060 and has since reversed lower to around 1.3040, USDJPY reversed opening gains to 105.90 and now trades around 105.50 and USDCAD has flatlined between 1.3120 and 1.3140.

EUR and GBP seem to have broadly shrugged off further alarm over rising Covid-19 cases in the continent (the UK is expected to announce a three tiered regional alert system this week) and comments from a few ECB speakers over the weekend; most notably, ECB Chief Economist Lane again sounded dovish, saying it is important to put exchange rate at the centre of policymaking, that the ECB may allow inflation to overshoot and that the ECB will be as aggressive in pursuing its inflation target as the Fed. Meanwhile, EURGBP is broadly flat around 0.9070, as markets await the next steps in EU/UK negotiations on the future relationship ahead of this week’s EU Summit (Thursday-Friday) and UK PM Johnson’s deadline for a deal to be in sight (Thursday).

Amid weakness in the Yuan, AUD and NZD have been marginal underperformers (both down just over 0.1% on the day vs USD). The outperformer is NOK, despite underwhelming price action in the crude oil complex (perhaps the end to the Norwegian oil production strike is being seen as a net-net NOK positive event, or perhaps that is reading too much what is actually pretty shallow price action – NOK is just 0.2% higher on the day vs USD).

The Week Ahead

Market focus remains on the ongoing themes of US fiscal stimulus, the US election, the international spread of and reaction to the Covid-19, as well as Brexit, but the week ahead does present plenty of interesting data points (particularly from the US) and central bank speakers.

Today – Colombus day in the US and Canada so it ought to be a quite US session, although markets are open as normal. The only data of note will be Chinese money supply and loan growth data at 1300BST/0800EDT and New Zealand Electronic Card Retail Sales (Sep) at 2245BST/1745EDT. Otherwise, Bank of England and European Central Bank speakers will take the spotlight; we have BoE’s Ramsden at 0900BST/0400EDT, ECB’s Schnabel at 0945BST/0445EDT, ECB President Lagarde at 1200BST/0700EDT, BoE’s Haskel at 1500BST/1000EDT, ECB’s de Guindos at 1600BST/1100EDT and finally BoE Governor Bailey at 1700BST/1200EDT.

Tuesday – Significantly busier from a data standpoint, although no central bank speakers of note on the docket just yet; we have UK BRC Retail Sales Monitor (Sep) and the Australian NAB Business Confidence survey in the early hours, followed by the monthly UK labour market report, Swedish CPI and German ZEW in the European morning. On the UK labour market report; most analysts expect a rise in the unemployment rate in August, given that it was the first month when the UK government reduced its contribution to workers wages via the furlough programme. Later in the day we have US NFIB Small Business Optimism, Consumer Price Inflation and Federal Budget Balance (all for September). We also get the monthly OPEC Oil Market Report.

Wednesday – Focus returns to an abundance of central bank speakers, with; ECB Chief Economist Lane, FOMC Vice Chair Clarida and BoE Chief Economist Haldane in the European afternoon, followed by FOMC’s Kaplan (twice), FOMC’s Quarles and RBA Governor Lowe in the European evening. Comments from Lowe will take the spotlight, given that November’s RBA meeting is considered “live” (a cut of 15bps in the pipeline?). Data of note includes Eurozone and Japanese Industrial Production (Sep), US Producer Price Inflation (Sep) and Weekly API Crude Oil Inventory data. We also get the release of the International Energy Agency’s monthly oil market report.

Thursday – Overnight we have the latest Australian labour market report (Sep) and Chinese Consumer Price Inflation (Sep). In the European morning, we than have Swiss PPI and the Swedish unemployment rate for September followed by the latest Bank of England credit conditions report. Things get busy in the afternoon with US weekly jobless claims, Philly Fed & NY Empire State Manufacturing indices (Oct) and Import & Export Prices (Sep), followed by BoE’s Cunliffe, BoC’s Time Lane, FOMC’s Quarles and FOMC’s Kaplan, as well as official Weekly Crude Oil inventory data and New Zealand PMI and CPI later in the evening. Note also that Thursday (the 15th of October) is the first of day of a two day EU leaders Summit, as well as the day by which UK PM Johnson has said he wants a deal to be in sight or else the UK will walk away from talks (though the EU have indicated they are prepared to ignore this deadline).

Friday – Things wrap up with arguably the week’s most important data; US Retail Sales for September. We also get Canadian Manufacturing Sales, Foreign Security Purchases and US Industrial Production (all also for September), followed by the October preliminary reading of the US Michigan Consumer Sentiment survey and NAHB Housing Market Index.

Sentiment supported as focus turns to piece meal/post-election stimulus

8th October 2020 – Macro Daily

Risk Appetite

Market tone remains broadly positive on Thursday morning, with US equity indices gradually rising overnight (S&P 500 futures +0.7%) and European equities trading with solid gains (Stoxx 600 +0.6%), while USD continues to ebb lower.

Hopes for at least some “piece meal” stimulus from the US Congress ahead of the election is likely helping; White House Chief of Staff Meadows said last night that the Trump admin believes there is “broad” support for a limited stimulus package. Moreover, US House Speaker Pelosi and Treasury Secretary Mnuchin spoke yesterday on a stand-alone airline aid bill and will talk again today.

Perhaps more importantly for risk appetite; Democratic Vice Presidential Nominee Harris is broadly seen as having won the VP debate last night (a CNN polling showing 59% picked Harris as the winner vs 38% for Pence) and in the aftermath of the debate, betting markets have seemingly upped their expectations for a Biden victory on November 3rd (Real Clear Politic’s Implied odds gives Biden a 64% chance of winning, vs 35% for Trump). Thus, the risk of a contested outcome has been further reduced, allowing market focus to increasingly turn to post-election Democratic fiscal stimulus (ING think that this, combined with an FOMC determined to keep real rates lower for longer, gives the dollars a “fragile” post-election outlook).

Elsewhere, markets largely took the release of yesterday’s FOMC minutes in its stride; the minutes revealed nothing new or unexpected. More interesting were comments from Fed’s Evans soon after the release in which he said while the Fed has the capacity for more asset purchases, they are not needed right now. Moreover, he acknowledged that the Fed will soon need to provide more explicit guidance regarding asset purchase.

G10 FX

As noted, USD continues to trade on the back foot as the market’s wider appetite for risk improves; DXY has ebbed below its 21dma (at 93.62), but remains supported above the 93.50 mark for now. JPY lags alongside USD, with USDJPY flat around the 106.00 mark.

EURUSD is largely trading as a function of the weaker USD and is this a little higher this morning, with the single currency having largely ignored this morning’s strong German trade data. Exports grew more than expected in August (2.4% vs exp. 1.4%), but the country’s trade surplus was a little less than expected at EUR 15.7bln (exp. 18.2bln) given an even larger beat on expectations for import growth (which came in at 5.8% vs exp. 1.4%). EURUSD continues to trade within the fairly tight 1.1760-80 parameters that it has been locked in over the last roughly 24 hours. Notable resistance comes in the form of yesterday’s 1.1780 highs, then the psychological 1.1800 mark. In terms of support, we have the 21dma at 1.1763, 1.1760 (the bottom of the recent intra-day range), chunky 1.8bln in option expiries between 1.735-45 and yesterday’s low in the mid-1.1720s. EUR traders now look ahead to the release of ECB minutes at 1245BST/0745EDT.

GBPUSD is performing a little better, currently trading just below 1.2950. To the downside, the 21dma at 1.2870 and yesterday’s lows at 1.2850 ought to provide decent resistance, while to the upside the main level of note is the psychological 1.30000 handle. In terms of the Brexit latest; Sky News reported last night that some progress is being made on the issue of State Aid, while the gap between the UK and EU on the issue of fisheries remains the largest. Elsewhere, Bank of England Governor Bailey spoke to the Yorkshire Post this morning; he does not expect the second wave of Covid-19 to have the same effect as the first. Finally, the UK RICS Housing Survey reached its highest level since 2002 in September of 61 (well above expectations for 40). Amid the Chancellors recent cut to stamp duty, the UK housing market continues to boom although RICS did note that 12-month sales expectations had turned slightly more negative.

In terms of the G10 outperformers; NOK and AUD are doing the best (closely followed by GBP). CHF, CAD and SEK are up by similar margins as EUR vs USD; of note for Switzerland, the seasonally adjusted September unemployment rate came in a little lower than expected at 3.3% (exp. 3.4%). NZD is also marginally higher vs the struggling USD, but lags its antipodean counterpart following dovish RBNZ commentary overnight; the RBNZ reiterated that it is actively working on negative interest rates, as well as a funding-for-lending programme, while Chief Economist Young Ha said the bank would rather do too much too soon as opposed to too little too late. Young Ha also said that the bank is mulling a tiering regime for its negative rates plan. Note also that the NZ ANZ Business Confidence survey for October showed a solid improvement to -14.5 from -28.5 in September.

The Day Ahead

0825BST/0325EDT, BoE Governor Bailey and ECB’s Schnabel participate in panel on “the impact of the Covid-19 crisis”

0900BST/0400EDT, ECB’s de Guindos takes part in an online event organized by El Economista

0920BST/0420EDT, ECB’s de Cos participates in the online 2020 SRB conference session: “Resolution planning under the banking package”

1030BST/0530EDT, BoE’s FPC publishes its quarterly policy statement, setting out the central bank’s latest thinking on how to make sure the financial sector does not put the economy at risk.

1030BST/0530EDT, SNB Chairman Jordan delivers a speech at an Economic Conference organised by the Progress Foundation

1115BST/0615EDT, ECB’s Mersch delivers a pre-recorded speech at the 50th Anniversary of the Werner Report event organised by the Luxembourg Center for Contemporary and Digital History

1230BST/0730EDT, ECB Minutes… The ECB made no major changes to policy in its September meeting. The focus in the minutes will be splits in opinion, given divergent commentary over the last few weeks from the ECB doves and hawks, as well as source reports of an increasingly divided governing council; the hawks seem to have wanted to quietly slow the pace of PEPP buying and thought the bank’s forecasts were overly pessimistic, while the doves pushed for a stronger warning on EUR appreciation. Going forward, SEB thinks that “the all-time low core inflation in September requires the ECB to be more vocal about the further stimulus potential and cannot keep pointing fingers to the EU/national governments and asking for fiscal stimulus.”

1315BST/0815EDT, Canadian Housing Starts (Sep)

1300BST/0800EDT, OPEC will publishes its 2020 OPEC World Oil Outlook via a videoconference in Vienna, Austria.

1330BST/0830EDT, Weekly US Jobless Claims

1330BST/0830EDT, BoC Governor Macklem speaks at a Global Risk Institute event via videoconference

1710BST/1210EDT, FOMC Member Rosengren speaks on “Economic Fragility: Implications for Recovery from the Pandemic” before virtual Marburg Memorial Lecture event hosted by the Marquette University Economics Department

1800BST/1300EDT, FOMC Member Kaplan participates in moderated Q&A session before a San Antonio Chamber of Commerce virtual event

1900BST/1400EDT, FOMC Member Bostic participates in “Empowering Workers to Recover Stronger” virtual panel hosted by Rework America Alliance

1930BST/1430EDT, FOMC Member Barkin speaks before the “Investing in Rural America” online event hosted by the Federal Reserve Bank of Richmond

Trump triggers turmoil as stimulus talks halted

7th October 2020 – Macro Daily

Risk Appetite

Risk assets were sent tumbling late in yesterday’s US session when US President Trump announced via Twitter that he had instructed his representatives to stop fiscal stimulus negotiations with the Democrats until after the election, while accusing the Democrats of not negotiating in good faith. The S&P 500 ended the session 1.4% lower, with the index slipped from above 3400 to below 3350. Moreover, at the time, US bond yields saw a substantial drop and USD shot higher to just under 93.90 from around 93.50.

However, we have seen a decent recovery in sentiment this morning and since the overnight session; S&P 500 futures are up about 0.6% (back above 3370), European indices trade mostly in the green (Stoxx 600 +0.1%), US bond yields have been on the rise back towards yesterday’s levels (while the curve has returned to steepening) and USD has been coming off in recent trade.

Indeed, on the week, the S&P 500 still trades in the green; quite extraordinary given that US fiscal stimulus “hopes” had been slated as a key driver of recent stock market gains. To be fair, pre-election stimulus is not totally off the table; Trump tweeted last night for Congress to approve assistance for airlines, a payment protection programme for small business and also proposed a Stand Alone bill for Stimulus Checks of $1200 per person.

Alternatively, perhaps markets are hoping that fiscal stimulus delays might prompt the Fed to step up; this is unlikely in my opinion given last night’s comments from Mester that the timing of fiscal support is less important than the package itself (does this imply they are willing to wait until 2021 for a “good” package?). We have five more FOMC members speaking tonight after the release of the FOMC minutes (which ought to be pretty stale by now), who will likely touch on this topic.

G10 FX

As noted, USD rebounded strongly amid the deterioration in risk appetite following Trump’s collapsing of stimulus talks. DXY shot back above its 21dma (at 93.61) to reach highs of 93.90 last night, although with US equity futures recovering overnight and into this morning, DXY has slid back into the 93.60s and is lower by nearly 20 points on the day. Technically speaking, the picture does still look somewhat bullish; DXY has rebounded strongly from its first proper retest of a longer-term downtrend linking the 3rd, 12th August and 8th, 17th September highs. With positioning still very short (unusual this close to an election), USD could well be in for more upside in the coming weeks.

Moving on; EURUSD has largely shrugged off disappointing German Industrial Production numbers for August (a 0.2% M/M contraction vs expectations for growth 1.5%) and has been on the front foot in recent trade amid the gradually softening USD. The cross recently crossed back above 1.1750, a reasonable recovery from last night’s lows in the 1.1720s, although still some way off pre-Trump stimulus talks announcement levels in the 1.1780s. Yesterday morning’s low, as well as the 21dma sit in the 1.1760s and could provide resistance.

GBP is also trading in the green vs both the buck and single currency this morning, despite somewhat concerning news flow on both the Brexit and potential UK lockdown fronts; GBPUSD has recovered back above the 1.2900 mark this morning and is this morning’s third best G10 performer.

Regarding the latest on Brexit; RTE reported that some EU fishing states are hardening their stance against the EU making any concessions to the UK in the “current phase” of talks. This comes after positive reports that substantial progress was being made on the issue of fisheries yesterday, but also reports that the EU plan on ignoring UK PM Johnson’s 15th October “deadline”.

On the UK potential lockdown front; the Telegraph reported that the UK PM was “grappling” last night on the decision as to whether or not to impose tougher lockdown restrictions for millions of people in the north, a discussion which is also said to have divided the Johnson’s Cabinet. A follow up report from Politico this morning suggested that Johnson is considering imposing lockdown-style restrictions on Northern English cities “within days”, as “soaring hospitalizations force Downing Street into a major escalation of its efforts to contain the Covid-19 pandemic”.

Elsewhere, the two best performers this morning are AUD and NOK; AUDUSD was sent tumbling from around 0.7150 to 0.7100 last night by Trump’s announcement on stimulus talks, but found strong support at the big figure and has since recovered back into the 0.7130s in line with the recovery in US and European equities (which is also helping even more risk-sensitive NOK). NZD, CHF and CAD are also making back lost ground vs USD, albeit to a lesser extent.

Turning to the underperformers; alongside USD, JPY is struggling and lower by 0.1% vs the dollar, hurt by risk on flows. SEK is also lower vs USD by about the same amount, despite a lack of any Sweden specific fundamental developments.

The Day Ahead

0825BST/0325EDT, ECB’s Schnabel participates in a panel discussion at the Annual Single Resolution Board (SRB) Conference in Brussels

0830BST/0330EDT, UK Halifax House Price Index (Sep)

0900BST/0400EDT, ECB’s de Guindos participates in an online event “Entrevista Conversaciones 2020” organised by El Economista

1115BST/0615EDT, ECB’s Mersch delivers pre-recorded speech at the 50th Anniversary of the Werner Report event organised by the Luxembourg Center for Contemporary and Digital History

1300BST/0800EDT, BoE MPC member Tenreyro speaks at an event hosted by Argentina’s trade ministry and the Argentine-British Chamber of Commerce

1300BST/0800EDT, Riksbank Deputy Governor Skingsley gives her view of the coronavirus pandemic and the conditions for monetary policy in the period ahead

1310BST/0810EDT, ECB President Lagarde delivers pre-recorded speech at Paris Europlace online International Financial Forum… In an interview with the WSJ released yesterday morning, the ECB President reiterated that the ECB is prepared to add further stimulus, including via rate cuts, to support the Eurozone economic recovery, which she described (perhaps a little more dovishly than in the past) as looking “a little bit more shaky”.

1330BST/0830EDT, French Finance Minister Le Maire to speak at Paris financial conference… The French Finance Minister might soon unveil government measures to help the Covid-19-hit hospitality sector, as hinted yesterday.

1330BST/0830ETD, Norges Bank Deputy Governor Wolden Bache participates in a webinar arranged by Citi Market

1500BST/1000EDT, Canadian Ivey PMI (Sep)

1530BST/1030EDT, Weekly EIA Crude Oil Inventories… Last night, headline API Inventories for the week ending on the 2nd of October rose 0.95mln bbls, a a little more than the expected 0.3mln bbls. Cushing built 0.75mln bbls, Gasoline drew 0.87mln bbls, a slighty larger draw than the expected 0.5mln and Distillates drew -1.0mln in line with expectations.

1730BST/1230EDT, ECB’ Villeroy de Galhau to speak at Paris financial conference

1900BST/1400EDT, FOMC Minutes from the 16th-17th September meeting… At its last meeting, the FOMC kept rates and QE unchanged as expected, but made good on its announced shift in strategy to AIT (first announced in late August at Jackson Hole the Symposium) in unveiling new outcome-based forward guidance. The Fed now promises unchanged rates until the economy has reached maximum employment and inflation is at 2% and on track to “moderately” exceed 2% for “some time”. Moreover, FOMC members’ projections (via the dot plot) signal that rates are expected to be held at zero through 2023 (though one expects a hike in 2022 and four in 2023). Note also that there were two dissenters on the FOMC; Kashkari wanted more dovish wording to the new guidance, while Kaplan wanted more hawkish new guidance, given the risk of “excess risk-taking”. The main message of recent Fedspeak has been a plea to Congress for more fiscal support, and this plea is likely to seen in the minutes (i.e. members agree more government fiscal stimulus is needed…); given Trump’s decision to collapse fiscal stimulus talks last night (a decision that will dismay the FOMC), we are going to have to wait until after the election or this. Markets seem to disappointed by the fact that the Fed has not been forthcoming in indicating more incoming stimulus to back up its new dovish forward guidance – nothing in today’s minutes is likely to change this.

Fedspeak: 1900BST/1400EDT Williams moderates virtual conversation organised by the economic club of New York, 1915BST/1415EDT Kashkari (on economic impact of structural racism), 1940BST/1440EDT Bostic (also on racism and the economy), 2000BST/1500EDT Williams (no the road ahead for Central Banks), 2020BST/1520EDT Rosengren (also on racism and the economy), 2130BST/1630EDT Evans (on current economic conditions and monetary policy)… Expect all to express disappointment about the collapse in fiscal stimulus negotiations as FOMC member Mester did last night.

0200BST/2100EDT, US Vice Presidential Debate between Democrat Nominee Kamala Harris and Republican Nominee Mike Pence… National polling have so far this week shown Biden extending his lead over Trump since last week’s Presidential debate, though polling is yet to encapsulate the time since Trump was diagnosed with Covid-19. Trump’s decision to last night collapse stimulus talks will of course be a key topic of debate.

Subdued FX markets look to Powell, Lagarde

6th October 2020 – Macro Daily

Risk Appetite

Global risk appetite received a boost late in yesterday’s US session on the news that the US President had left hospital (although he will continue receive 24 hour care at the White House). Trump has reportedly had no fever for over 72 hours, nor has he had any respiratory complaints. US equities thus had a strong session, with the S&P 500 ending up 1.8% higher, with upside also being attributed to growing “fiscal stimulus hopes”.

Asian bourses thus also had a strong overnight session, playing catch up to gains on Wall Street. However, recent upside momentum in US equity index futures petered out overnight; S&P 500 futures currently trade 0.1% lower, with price action capped by the 3400 mark for now. Still, mid-September highs of around 3430 are not out of reach. Trade in European equities is equally subdued this morning (the Stoxx 600 is flat) and front month brent and WTI are flat-lining around the respective $39.50/bbl and $41.50/bbl levels. Meanwhile, the US treasury curve continues to steepen, albeit at a much more modest pace than was the case yesterday.

Today’s broader lack of conviction is unsurprising given we have both FOMC Chair Powell and ECB President Lagarde speaking, ahead of FOMC minutes tomorrow and ECB minutes on Thursday.

In terms of the latest on US fiscal stimulus, breakthrough on a deal remains elusive, but House Speaker Pelosi and Treasury Secretary Mnuchin continue to negotiate (they spoke for an hour on the phone yesterday and will exchange papers ahead of another call later today). It is worth noting reports that some within the Republican party remain “unconvinced” and continue to see Senate approval of any stimulus package as unlikely (but if Senate Majority Leader McConnell is on board then I’m sure a stimulus package could make it through). ING suspect that “in order to keep the good momentum in risk assets going, markets will likely require more indications that the bipartisan stimulus talks are progressing.”

Elsewhere, on the election front; further polling data suggests Biden is widening his lead over the incumbent. A Reuters/IPSOS poll of likely voters in swing states Pennsylvania and Wisconsin had Biden 5% and 6% ahead respectively.

G10 FX

Mirroring the tone elsewhere, G10 FX markets are mostly subdued this morning, though we did see some choppy action at the EU open (a bout of USD weakness that quickly reversed). USD is flat on the day, with DXY off lows in the 93.30s but remaining capped by the 93.50 level; to the downside, we have the 50dma at 93.25, to the upside 1st October low at 93.51 then the 21dma at 93.58.

After this morning’s brief bout of USD volatility, EURUSD is back to trading flat at the 1.1780 mark, with the psychological 1.1800 (which also has 600mln expiring at today’s NY cut) level providing resistance for now. To the upside, the 50dma sits at 1.1803 and to the downside we have the 1st October high of 1.1769, as well as the 21dma at 1.1766. August German industrial orders this morning were strong, in fitting with the narrative of outperformance of the Eurozone (particularly German) manufacturing sector – EUR was unmoved on the data.

Elsewhere, amid a lack of Brexit updates to drive sentiment, cable also trades relatively subdued, if not a little higher; GBPUSD saw short-lived gains above the 1.3000 level in recent trade, but is now back in the 1.2980s. UK Chancellor of the Exchequer was on the wires this morning but did not give away anything new on future UK fiscal policy.

Meanwhile, NOK, CHF, SEK, CAD and JPY are pretty much flat vs the buck on the day, while the antipodes are the underperformers, led lower by choppy post-RBA price action in AUD;

The RBA held rates at 0.25% (going into the meeting, money markets had been pricing a reasonable possibility of a cut to 0.1%), reiterated its usual forward guidance (to keep policy accommodative until progress being made towards inflation and employment goals) and came across as a little more optimistic on the outlook for the Australian economy, particularly in terms of GDP and employment. Thus, the immediate reaction of AUD was to spike higher; AUDUSD moved sharply above the 0.7200 from pre-meeting levels around 0.7190, but could not make it beyond the 1st October highs at 0.7210. The cross has since reversed sharply to trade closer to 0.7150 (just below its 100dma). In terms of why AUD might have reversed, some insight from Westpac;

Firstly, Westpac note that the Statement ended on a very clear dovish note, “The Board continues to consider how additional monetary easing could support jobs as the economy opens up further.” In this Statement he chose to end the Statement on this note rather than in September when the second last sentence read “continues to consider how further monetary measures could support the recovery”., Moreover, the Australian bank continues that the final sentence in the Statement will always be the one of most importance and that the new phrasing of “additional monetary easing” is a stronger signal than the previous wording of “further monetary measures”.

Secondly, the bank notes that the Governor directly refers to a further easing by quoting market pricing “3-year yields have fallen to around 18 basis points as markets price in some probability of further monetary policy easing”. Westpac comment that, in their experience, “central banks like to refer to market pricing when it is consistent with their own biases.”

Also of note for AUD; last night’s trade data was disappointing; Australia’s trade surplus in August was just $2.6bln, well below expectations for $5.1bln. Looking ahead, the government will propose the 2020-2021 commonwealth budget, which RBC say will “be the framework for the Government’s recovery narrative, with policy focused on supporting growth, confidence, and jobs. This will demand numerous measures, which will also deliver a historically large budget deficit (RBC AUD236bn) and accompanying issuance program.”

The Day Ahead – Not much by way of important data. Speeches by ECB President Lagarde and FOMC Chair Powell to dominate focus.

0930BST/0430EDT, Final UK Construction PMI (Sep)

0935BST/0435EDT, ECB President Lagarde participates in pre-recorded fireside chat at the WSJ’s online CEO Council Summit… Unlike other ECB members, President Lagarde has not been drawn into “jawboning” EUR lower. Her language on EUR remains relatively soft and pretty much amounts to stating the obvious; the governing council will carefully assess all incoming information, including developments in the exchange rate, she has said, as well as noting that the external value of EUR has an impact on inflation, (so) we monitor FX movements. Otherwise, Lagarde is expected to continue to characterise the Eurozone’s economic recovery as incomplete, uncertain and uneven, and, regarding reports of an increasingly divided governing council, will likely characterise dissent as “healthy”.

1030BST/0530EDT, Australian Treasurer Frydenberg unveils new Common Wealth Budget for 2020-2021… Despite post-RBA AUD downside, ING think AUD might pare losses in and around this event, given substantial new fiscal stimulus.

1130BST/0630EDT, UK PM Johnson gives a keynote address on the closing day of the Conservative Party Conference

1300BST/0800EDT, EIA Short-Term Energy Outlook

1330BST/0830EDT, US and Canadian Trade Data (Aug)… The US trade deficit was its largest since 2008 in July, widening to -$63.6bln. Wells Fargo note that “the wider deficit during the month occurred as growth in imports (+10.9%) outpaced exports (+8.1%). The relative strength in imports lately has been primarily fuelled by soaring consumer demand for durable goods.” The recovery in Exports may continue to struggle to keep pace with that of Imports as the global growth environment struggles to find secure footing (the new resurgence of Covid-19 in Europe is not helping). But it is worth noting that the pace of improvement may also slow given, as Wells Fargo note, “the summer bounce in consumer activity looks to be fading heading into the fall.” Markets expect a trade deficits of $66.1bln in the US and 2bln in Canada.

1400BST/0900EDT, ECB President Lagarde participates in a panel discussion on the 10th anniversary of the European Stability Mechanism (ESM)

1540BST/1040EDT, FOMC Chair Powell speaks (via webcast) at the National Association for Business Economics Annual Meeting on the Economic Outlook… Powell is expected to reiterate that the Fed will “do what we can for as long as it takes” to support the US economic recovery and is likely to again call for more fiscal aid for the economy. Beyond that, markets will be on the lookout for any indications as to what it would take for the FOMC Chair to back further stimulus, and in what form this could take (analysts speculate the FOMC could lengthen the maturity of asset purchases).

1620BST/1120EDT, GlobalDairyTrade Price Index (of note for NZD, given Dairy exports make up over one quarter of the New Zealand’s exports).

1630BST/1130EDT, ECB Chief Economist Lane deliver an online speech at the online 62nd NABE annual meeting… Lane’s language on EUR has been much stronger than that of the ECB President’s; on September the 11th, he noted that core inflation has been significantly muted by the appreciation of EUR, and that recent appreciation dampens the inflation outlook (EURUSD was just above 1.1800 when these comments were made). More EUR jawboning is therefore possible, but is likely to have lost much of its sting.