Make Or Break Week For US Dollar

Okay, very good morning to you. It is Monday the 17th of August. Hope you had a fantastic weekend. Don't forget to check out on my Twitter account, I've pinned the tweet from Sunday for the Macro Menu, the fundamental kind of 3-minute review of what to expect for the week ahead. Do check that out. And also don't forget to like and subscribe to the YouTube channel. Had some really great engagement and some good questions last week. So long may that continue. But, uh, let's get straight into the actual briefing and talk about a few things then. Going to talk about the delay of the US-China meeting from the weekend, further liquidity injections from the PBOC overnight. Also going to talk about the importance for the dollar from a medium and long-term perspective. This week could be a real catalyst for a break of some key trend lines we've been watching in the likes of EURUSD and in Aussie dollar. And then also going to talk about the calendar. We've got the FOMC minutes, of course, on Wednesday, and you've got a variety of economic data coming out throughout the week. Also a quick update on the things like COVID, the JMMC meeting as well. So that's what's on the agenda for the briefing. A quick look at the charts this morning though, and I was kind of tracking, you know, one thing I look at to just gauge very simply sentiment over the weekend is if you were just to punch into Google the Weekend Dow by IG, which is kind of a product that they've created in order for people to trade the US indices over the weekend where obviously the major markets are closed. It would just give you an indication then of whether or not markets are going to gap up, gap down, or accordingly at the reopening of trade for the week. And yeah, it was basically absolutely flatlining all weekend. And when I was going through the news on Sunday writing my, my macro menu I was just a little bit surprised about how really quiet it was. I mean, obviously a lot dominated by the delay in the US-China trade talks, which we'll talk about in a moment, but, but very quiet overall. There's certainly lots going on this week, but the weekend news flow was pretty tame at best. Just having a look at the charts then this morning, EURUSD seeing some slight upward movement, cable pretty flat though for the moment. Gold equally so, just sitting around what has been a technically important level around 1954. Equity indices, US touch higher, the DAX a little bit lower, 17 points this morning, and the US 10-year up 3.5 ticks in combination with gold up around $3, and then oil's up about 38 cents as well. So all in all You know, the Dixie trading down about 0.1%. It's a pretty quiet open to kick things off, and that might be surprising for some who— obviously a lot of the market attention at the weekend was, was into this teleconference call that's supposed to be happening on high-level officials between the US and China. And you could be forgiven for thinking that a delay and that meeting not occurring could be construed as a negative uh, in terms of its reaction on market prices. But as I'll describe, there are a number of things that China basically has been doing in terms of accelerating its purchases of these goods as what was per part of the original plan for Phase 1. And that seems to have just kept both sides then happy for the time being. And whether or not there is a meeting to follow up in the coming days or weeks, I don't really think is that important. What is, is that China starts— after being very uncompliant with the deal that was in place— as long as they start to fall back in line, then I think both sides will be happy at this point in time. So a quick look then at this, this Reuters exclusive which came out at the weekend, and got a couple of notes here. So the US and China delayed their review of Phase 1 that was initially slated for Saturday. This was supposed to have been the 6-month anniversary from when they initially signed that historic deal back in, in February. They cited, in terms of the official reasons, scheduling conflicts and also allowing time for more Chinese purchases of U.S. exports. No new date has been set as yet. The postponement did not reflect any substantial problems with the trade deal, according to one of the sources in Reuters. Another source familiar with the plan said U.S. officials wanted more time to allow China to increase its purchases of U.S. goods agreed in the deal to improve the political optics of the review. China imports— so this is where there's a little bit more detail now— so China imports of U.S. farm and manufactured goods, energy, and services are well behind the pace needed to meet that first-year target. Which was an increase of $77 billion over 2017 purchases. Remember, over a 2-year period, they committed to an additional $200 billion worth. But if you look here, a couple of things then. Chinese buyers have been snapping up generally commodities. On Thursday last week, they booked deals to buy about 200,000 tons of US soybeans, and that was the 7th weekday in a row that the government had reported a sale to the world's top buyer of oilseed. The other thing as well is PetroChina so far has booked about 10 million barrels of US oil loading in August and September as well. So a lot of this then, I mean, if you look at it here, US crude exports to China, they've jumped sharply here more recently as shipments to China are set to rise sharply Following that, state-owned firms are ramping up purchases of US-specific crude. And remember, China typically a big buyer of the more heavy grade of oil that comes out of the Middle East and predominantly Saudi Arabia and particularly Iran as well. But also just looking to appease them on this deal and the Americans at this point, given some of the recent escalation we've seen, whether on the tech side through whether through the political side with the consulate situation and what's been going on in Hong Kong with that National Security Law, things seemingly are starting to fall a little bit into place here. So I think on the balance then, although this meeting hasn't occurred, I think the message has been received in my view by Beijing, which is that over recent weeks then, knowing that there was a formal kind of meeting or gathering that was due to take place, they've just started accelerating now BATSO's purchases. And partly, I guess, due to the fact that economically things in China have stabilized somewhat. If you think about it, the deal was signed in kind of February time, but that was pretty much about a week and then COVID broke. There was a COVID outbreak in mainland China, which of course is where it all began with the pandemic. And so China's always going to be behind the curve in terms of these purchases because there was no way they were going to be buying large amounts and importing goods through that period of March, April. So I think for the moment then, Trump will be happy. He'll be able to say, well, look, the tangible result of what I've been doing in terms of being quite aggressive with China is paying dividend here because of— look at these numbers. And I'm sure he'll be tweeting about how much of US goods that they're buying to try and dismiss some of Biden's claims about the whole thing being quite economically damaging for the US economy. So yeah, the other thing is overnight in terms of the Asia-Pacific indices, the Shanghai Composite did actually outperform. This was against a fairly flatlining Asia-Pacific region overall. The Shanghai Composite was actually up in excess of 2% at one point. The PBOC once again boosting liquidity. They've been doing it in all forms of duration over the course of the last week or so. They added 700 billion yuan in one-year funding via the medium-term lending facility overnight. That equates in US dollar terms to around $100 billion worth. The net injection According to what analysts' interpretation is, that it indicates a more accommodative stance on keeping liquidity levels ample so that commercial banks can continue to support bond issuance and to stabilize credit growth. So rather than in a Western format where the central bank just interjects or intervenes in a form of government bond buying in QE, they're looking to support then the commercial banking sector so that then it's kind of dripped down. And as long as there's liquidity in that area, then it can facilitate then companies and consumers being able to remain confident that conditions will remain generally low in terms of lending rates. So that continues to be their strategy at this point in time, but does show then that a general easing bias in their monetary policy strategy from overnight in Asia, which if anything, um, as we've seen globally, whenever we see a more expansive, more accommodative monetary policy stance, it typically underpins, then supports markets going forward. So that's happening in, in China. A quick look elsewhere, and I just wanted to talk about the dollar because read this article this morning. I thought it was quite interesting because I was looking at a couple of charts. I know Sam, if you, if you didn't see it, he did an excellent video with his trade setups that he does on Sunday for the week ahead, and he was talking about this at length. And first of all, some details here. So hedge funds are short on the dollar for the first time in 2 years as falling US real yields are sapping the currency's allure. This is coming out in Bloomberg this morning. So the actual details here is that net futures and forward positions held by leveraged funds against 8 other currencies dropped to minus close to 8,000 contracts last week according to the CFTC. The swing was driven by growing bullish bets on the euro. So this isn't very different from really what we've been talking about for a while, but you know, the reason why this is quite interesting of course is because we've been eyeing up this euro long-term chart for quite a while, and here we are this morning, you know, just kicking things off. We're just going to the European Open and we're right there back at that key critical level. So definitely for this week, I mean, obviously we've got the Fed minutes, we'll talk about those in a second. Well, in fact, let's just incorporate the Fed minutes into this discussion here. Now, the last Fed meeting that we had was fairly benign. There wasn't really any way of expecting surprises against expectation that came out, but analysts at ING this weekend were writing that any suggestion at impending average inflation targeting, uh, or yield curve control, uh, could be perceived as a dollar negative. Uh, that in combination with the fact that we've got the eurozone PMI data coming out the end of the week, and that is expected to continue to show a relative rebound, that could be the catalyst. And so a couple things there: midweek, end of week, Generally then, still supportive of this narrative where we've got a weakening dollar story against somewhat a continuation of more bullish themes for the euro. And again, we've, we've been rejected a number of times here up at this key long-term trendline and summer 2018 high, but I do feel that a break is gonna come this week. And if that does, I then a big push up to 1.20 is definitely the kind of area I'd be looking at. In particular, 1.2050 starts to incorporate some of those highs from SEP '17 and then support point back in August of 2012. But we're talking quite long-term levels here. If that does really get a head of steam, well then the medium-term target for the euro then would be up at around this 1.25, which I know Alex has been calling for, for quite a while. I'm just gonna quickly see if I can bring the Aussie in. I haven't marked up the Aussie, you have to forgive me, but I do recall that Sam was talking about this in, in quite a lot of detail. Let me just remove some of the pivots. Weekly. So let me just put a trendline on here if it will allow me. Again, apologies, I've not marked this up in advance, but I believe this is what Sam was talking about here. So as you can see, it's pretty similar-ish, slightly shorter time frame to what we were talking about in the euro. But going back to 2014, had a test up at around, uh, the beginning of 2018, and here we are again here. So interestingly for the Aussie, despite the slight apprehension because of the repercussion that any fallout in, in trade rhetoric with China could have. And it has been a fairly rocky relationship of late despite the ongoing fact that the COVID situation has hit the Australian economy particularly bad. Came— comes in addition on the coattails of those bushfires that we saw, which were going to be economically damaging as well. The Aussie still pretty firm at the moment. I mean, but like most other currency pairs, like the euro and cable for example, being a beneficiary of a generally weaker green back. And here as well, quite a key level to watch in the Aussie. Any break above, then you've just got that high from the Dec of '18. That would be up at around the 174 handle, but you're talking about a decent 2-point-plus move beyond where we are trading at the moment if we were to break through these levels. So the point being here is that I think that it's a big week for the dollar personally, and certainly then keeping an eye on that yield. So story, which was obviously a real focal point for last week, whether or not then we start to reverse back into trend after that brief momentary kind of yield push that we had. As ultimately, you know, the longer-term view here is the Fed are going to remain accommodative. There's a risk of that even emerging in the minutes. I actually think the minutes will be quite dull personally, and I think that just heightens the importance then for the Jackson Hole Symposium, which will be held virtually this year. That's taking place the week after, so August 27th, 28th. And then that leads us into the meeting on September 16th for the FOMC. And I actually think that September meeting is the big one for the Fed because I think by then they're going to have a little bit more clarity over the current COVID situation, which is shaping up relatively positive in the US. Um, But they're going to have their latest projections. That typically historically means that they like to give a little bit more transparency to supplement then any particular more enhanced forward guidance they might issue at that time. So, uh, yeah, that's my overall kind of take on those, those things. So yeah, keep an eye on the dollar for sure. And actually this morning we've just dropped through 93 and we're at lows now. So since I've been talking, the dollar has been weakening. And we're down 2 tenths now. So keep an eye on those major currency pairs, could get quite lively even today. Um, other headlines, this was something I thought was quite interesting. This is the German finance minister, and reports are this morning that he's proposed a €10 billion plan to safeguard jobs. So the details here is that extending— that's extending the job-preserving subsidies during the coronavirus crisis to 24 4 months. This is above and beyond the, the regular more 12-month kind of fixture, saying the measure would cost the government an extra €10 billion or less. Now, €10 billion sounds like a lot of money, but actually, if you can keep people in jobs and at work and continue to then facilitate the economic recovery, well then, €10 billion could be deemed as a bargain if all things play out accordingly. The reason why I think this is quite interesting is that obviously there's a lot of pressure building on the UK Chancellor Rishi Sunak to deliver something similar, perhaps because when the furlough ends is when we should be looking to strike a tentative agreement then on Brexit, which is coming in the autumn around October time. And I just think there's going to come a little bit of a crescendo here for UK focus at that point in time because there's a lot of meaning around that, that kind of October timeline. So be interested to see— Germany have gone for it— whether the UK will do the same. Obviously it comes at a cost though. Talking of the UK, just having a look at the UK, just have a look at the pound at the moment. Obviously the pound in itself has been kind of carving out a little bit of a, of a range which we've talked about last week, that did hold last week, 130 to 132 on the upside. Obviously, you know, that dollar weakness story could see us retest up at these year-to-date highs around 132. Um, plenty of things going on in the UK this week from a data perspective. You've got July CPI, August PMIs, and July retail sales data all throughout the week. Uh, the activity data should support the recovery narrative even though the outlook may start to deteriorate in September as higher joblessness starts to come through. One interesting thing I saw from Capital Economics, who do tend to be on the quite bearish side of things, they said that the impact of tax cuts for the hospitality sector and a government subsidy eating out program could mean the UK enters a brief period of deflation. So going forward, be interesting, particularly then this is July CPI data we'll get this week, but then for the August number the following month. Also as well, to boot with the economic updates, the next round of EU-UK Brexit talks recommence this week as well. So yeah, plenty going on from a UK perspective for you guys to be aware of. Okay, moving on, the The next thing I want to talk about quickly is the oil market. Bloomberg just, just locking in on, on really two main things. One being the, the JMMC, which stands for the Joint Ministerial Monitoring Committee. They're set to meet midweek. It's going to be closely watched to see how basically certain countries being identified specifically as Iraq and Nigeria, those who have been culprits of high non-compliance in the past and how they're adhering to this new plan. Remember, as part of the existing OPEC deal, it was important that a lot of these, um, non-compliant countries would cut even deeper than what is necessary month to month going forward in order to make up for that lack of compliance in the past. So whether or not that is happening will be quite key to see whether there's any longevity or not with this deal really, really biting to help markets or underpin and support the crude market. It's not expected this meeting, the JMMC, is more of a technical update than it is something spectacular in terms of the way of real new meaningful decision-making on, on the deal itself. So shouldn't be too exciting. The one thing though that might help underpin oil is kind of like what we were talking about with the Chinese story earlier. Remember what I said about the fact that PetroChina, the state-backed energy company here, has booked about 10 million barrels of US oil loading in August and September. So, you know, this is, this is a really important kind of step here. And, you know, if that then starts to mean that China are ramping up, and if there is let's say, a continued pickup globally in demand, which, yes, in the case of America, things on the COVID side are looking fairly good at the moment. But elsewhere in the world, there's obviously been new travel bans in Britain, on the likes of quarantine in France and Netherlands, people traveling to those locations. Quite a few European countries— Germany, France, Belgium, Netherlands— have seen minor upticks. Italy and Spain closing nightclubs at the weekend. But, you know, if COVID remains relatively contained at this point, then certainly China ramping up their purchase of US crude could help then us start to see a bit of a breakout of what otherwise has been a period of consolidation around this $42.36, a really key area. We got rejected on that March 2nd low at $43.30 $32 back on the 5th of August. That's kind of the nearest upside target here, and we are within $1 range of that as we speak to kick off the week. Interestingly, short-term price action, you can see the 21 DMA has provided quite a nice area of support both on Friday session but also on Monday session and the prior Friday back on the 7th. So near term, I'd keep keeping an eye on there. And yeah, let's see what can happen for the oil market if we continue to kind of edge up and sentiment remains fairly positive. If equities continue to claw up to record highs we got just short of at the end of last week, in the likes of the S&P, for example, I'd expect that to be fairly correlated then with oil moving and following in tandem with that, with that progressive move higher. Um, okay, quick look at the calendar then for the week ahead. From a US data point of view, this afternoon you've got US New York Fed Manufacturing. You've also got US building permits and housing starts. And then you've got the Fed minutes, the FOMC minutes, coming out on Wednesday night. So they're kind of your main things coming out, in fact, from the US for the whole week. One other thing you actually have got that's happening Monday through Thursday is it's the US Democratic National Convention. Now I did talk about this a little bit more detail in the, the macro menu, so I'll leave you there to, to review the full report. But this is an update on the RealClearPolitics average kind of poll of polls, and we have been seeing— I mean, it's actually come, um, Biden was actually a little bit had re-widened this lead a little bit further yesterday. It's actually narrowed again slightly now. You see it's just bumped up on Trump here overnight, literally. And the lead though has re-widened since Biden has appointed Kamala Harris. And going into the convention week, analysts do suggest then that just given the amount of press attention, media coverage it gets it does tend to exacerbate then, uh, probably in favor of the political party holding the event. So you'd probably expect then by, by middle to end of next week that that number of 7.5 percentage point lead on average for Biden might well increase to 8.5, 9 again. How sustainable that can be, yet to be seen. If you did want the full Speaker scheduling for the entire event. You can access this here. Again, the link is in my, my macro menu. But one of the things I talked about there was this, this site. If you've not looked at it before, FiveThirtyEight, it's one of the most kind of infamous statistical modeling websites by a very famous chap called Nate Silver, who gets closely followed in every political, uh, event that happens in the US. And he basically last week unveiled his latest model for the US election, and where he simulates an election 40,000 times, inputting then a whole multitude of different variables to see what the outcome would be if the US election were to happen today. And basically the sample of 100 outcomes came out that Biden would win 72 in 100 times. Now interestingly, this is pretty much exactly identical to what his model was suggesting, that Clinton would win over Trump in 2016. And obviously we know what happened there. But the point being is between now and November is a lifetime in, in politics. As we know, it's a fairly fluid situation. One story that comes out or a misplaced comment can shift things spectacularly. Uh, bottom line, this is to be monitored going forward in combination with some of that RCP average polling. Check it out though, this website. There's some really interesting analysis here. I particularly like this, um, the path to victory, where he basically identifies the solid wins for both camps, but then almost chronologically, and how to then zone in and focus on the night of election where the tipping point of balance might come, dependent on various different indicators that we know at this point in time. So here, Pennsylvania could be that tipping point alongside Florida and Minnesota on either side. So yeah, check it out, it's super interesting analysis that he does, and if is something that is very closely followed by, uh, in the market. Otherwise, just going back to the calendar, as I said, from the UK you've got quite a few other things coming out. You've got the, the CPI number, the retail sales figure, the PMI numbers, and you've got Brexit talks happening, and they meet those chief negotiators on, on Friday. You've also got the ECB minutes on Thursday as well as RBA minutes tonight going into tomorrow morning. From an earnings perspective, things start to tail off a little bit from a brick-and-mortar point of view. And obviously Home Depot is quite a big Dow component. You've got them and Walmart reporting pre-market on Tuesday, maybe worth just keeping an eye out on as well. But yeah, that is it for the briefing this morning. Hope that was useful. Any questions at all, just let me know, and I'll see you same time, same tomorrow. All right, thanks very much and have a good week.