US Election Tail Risk
With three weeks to go, we are counting down to US Election Day. Although polls have shown Democrat candidate Hillary Clinton to be consolidating a lead in polls over Donald Trump, there are two main tail risks surfacing:
- The polls could be completely wrong and Trump wins. A massive equity rout ensues, and a gold rally takes off, with typical safe haven assets flourishing
- Clinton’s lead widens and consolidates closer to the election resulting in the Democrats winning the House, which guarantees big fiscal spending, creating inflation, inducing a US bond market to sell off
There is an extremely light global economic calendar today, so traders attention will turn the 4 Fed speakers, with two voting members, Dudley and Powell, as well as a 2016 voter, Bullard and a 2017 voter, Evans, taking to the airwaves.
The market is pricing in a strong possibility of a Fed hike, so investors will look for further affirmation the December hike is on course. Both Dudely and Powell are speaking of the US Treasury market, but Q&A sessions may generate some mention on Monetary Policy.
While Friday’s CPI release was in line, Canada retail sales for August moved into negative territory at -0.1% m/m versus +0.3% expected, was especially painful for the ‘loonie’ (1). If Governor Poloz needed any further read on the economy to justify a rate cut, Friday’s horrendous retail sales print likely sealed that deal. We should expect mounting pressure on CAD, and if the OPEC deal falls flat, the Canadian Dollar could be in a world of pain. We’re seeing early pressure on WTI oil this morning which is spilling in the CAD, pushing against the key 1.3350 level.
The Canadian dollar continues getting knocked around by oil price volatility. On Friday, Oil prices were erratic as weekend risk mounted, with Russian and Saudi oil ministers scheduled to meet Saturday and Sunday. Despite there not being any major news from the meeting, there have been mounting calls for non-OPEC support from both Iran and Venezuela, suggesting that Russia and non-OPEC member co-operation is needed for this production cut to stick. Venezuelan President Nicolas Maduro even suggested that the US should be invited to the output meeting, realising that without the US shale producers on board, supply concerns are likely to linger.
Outside of inventory and Baker Hughes-influenced price zig zags, we should expect oil markets to remain in a holding pattern between now and November’s OPEC meeting.
In the absence of any substantial production cut news, near-term price movement is influenced by broader USD moves, especially with the greenback showing some muscle these days.
China and Asia EM
As if on cue, post-SDR and after a quiet quarter on the news front, the local market was side swiped by bad news: mounting inflationary pressure (PPI), horrible exports (Trade Data) and the ever expanding probe, with local investors scurrying for US dollars as a hedge and equity exposure in Hong Kong
On Friday, the Yuan fell to a six-year low as the PBOC apparently signalled a green light (weaker Fix) for further Yuan depreciation amid broader USD strength and the collapse in exports.
After a midweek breather on the back of solid China data, EM Asia fell under modest pressure to end the week as the CNY fixing broke through 6.75 and USDCNH traded to fresh year highs.
While the drop in the Euro after the ECB meeting was the primary driver, capital outflow likely exacerbated the frenzy. With year-end dollar demand pressure mounting, traders and hedgers alike will be watching this week’s PBOC fixings for any signs of intervention, especially with the Six Plenum taking centre stage on the mainland.
I think the general Asia-basket will suffer near term as Fed rate hike expectations mount, but with the added China risk premium, USD Asia currencies that are more sensitive to China currency policy, like the SGD, will underperform the carry oriented pairs like the IDR and INR.
The USDJPY continues trading off the US curve. While there has been some BOJ tapering, comments in the press have kerbed USDJPY momentum higher and there is little desire to push USDJPY lower given the broader USD strength. JPY remains gridlocked, and a bit of a sideshow, as the focus remains on Euro, EM and the Commodity Complex.
The probability of a Fed rate hike is now priced in at 70%. It is hard to see the USDJPY making much headway above 105 at this stage as we are more likely to see exporter offers layered between 104 and 105, providing additional topside resistance.
On the data front, JAPAN OCT PRELIM PMI MANUFACTURING: 51.7 V 50.4 PRIOR; 2nd straight month of expansion; 9-month high– SourceTradeTheNews.com but there has been little follow through on the data print as focus remains on external drivers.
Japan’s export fell for the 12th consecutive month, but less than traders feared, but still highlights the nation's economic woes amidst a stronger YEN. Market impact was muted
ECB and the EURO
While the debate will rage on about the QE extension until the December ECB meeting, traders have already voted that more Euro easing is coming, as the Euro trades at sub 1.09. In the wake of the ECB announcement, dealers that were hedged for an ECB taper quickly headed for the exit rows, with new Euro shorts getting positioned in anticipation of a Fed rate hike, amidst the heightened risk of European financial instability.
Opposition lawmakers walked out as Prime Minister Najib Razak unveiled a 2017 national budget Friday that is up 3.4% from this year’s budget. Mr, Najib made no reference to the state investment fund 1 Malaysia Development Bhd (1MBD), which frustrated opposition members. However, with no real surprise in the Budget, we are likely to see the MYR trade on broader US dollar moves.
In the face of the resurgent Greenback and weaker commodity prices, the MYR is showing some bravado as GDP is predicted to fall between 4 and 5% in 2017. Although interest differentials will work against the MYR in the short term, if the Fed implements a rate hike in December, Malaysian growth differentials should continue attracting foreign investors and should support the MYR medium term.
The broader risk-off move that kicked in late last week has triggered currency sell-off in the EM complex while weighing negatively on high-risk currencies such as the Australian dollar.
With mounting US rate hike speculation, it is clear why the AUD is struggling near .7600 this morning. However, the AUD is by no means out of the woods, as there could be more pain delivered from this week’s Q3 CPI print which could impact the odds of an RBA rate cut. The tail risk is that a weaker CPI will cause a deeper re-pricing on RBA rate cut expectations, which would add further pressure to a reeling Aussie dollar.
The RBA has emphasised the importance of the national CPI data, yet the expectation for a tepid print is running low on last week’s stronger-than-expected CPI data in New Zealand. So unless there is a major shocker to the downside, given the very limited expectations for any imminent change to RBA policy, the AUD should overcome this near-term hurdle.
RBA Governor Lowe has said that “recent data suggest that the economy is adjusting reasonably well and he is watching employment and stability of financial system when setting rates. He said that inflation expectations have declined, but not at unprecedented lows; there is a need to guard against inflation expectations falling to land”.
Like Glenn Stevens, Dr Lowe is adopting the moniker as the ‘reluctant cutter’ in the sense that interest rates are already accommodative and there is little economic benefit gained by lowering rates at the risk of creating financial instability.
Regardless of subtle shifts in the domestic economic landscape International events, primarily the US interest rate curve, and the US election premium will continue driving Aussie dollar sentiment. Currently, the US dollar is King as investors increase wagers on the likelihood the Federal Reserve Board are preparing to raise rates in December. And while e are entering a period of broader consolidation and the potentially high volatility US election tail risk could be a massive game changer.
The Canadian one dollar coin is commonly called the loonie; it is a gold-coloured one-dollar coin introduced in 1987