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  • Forex today was tracking the sentiment around the possibility of trade talks between the US and China starting up again at the end of this month and the dollar was mixed.
  • The focus for the euro is now turning towards Italy which hinders bullish prospects for the single unit while rate hike expectations are put on the back burner.

Ove this last week, especially, markets have been especially attentive to the performance in the broader EM-FX space with the focus moving away from Turkey over the last 72 hours and more on the CNH which has been en-route towards the psychological 7.00 of late – similarly, ZAR, RUB, BRL and the MXN are under scrutiny due to the greenback’s relentless march through the 95 and 96 handles in the DXY.  

However, Thursday was mixed for the greenback and the Chinese Yuan managed an impressive recovery from 6.9584 commencing in Asia on Thursday down to 6.8664 on the China /US positive trade headlines. This simultaneously capped the DXY at 96.98 and left the Us currency to trade against a basket of currencies between 96.3160-96.7650 overnight with a bearish hammer formed on the prior day’s stick and oscillating around its 20 4hr SMA which is back under pressure to the downside.  

With respect to US 10yr treasury yields, these rose from 2.86% to 2.89% with a rally on Wall Street but moved higher again to 2.89% and back lower to 2.88% for the close as stocks drifted sideways and a touch off from their highs for the close as investors noted that the US had pledged new sanctions on Turkey if the US pastor was not released and Trump’s pessimism over China being able to offer the US an ‘acceptable’ trade deal. The 2yr yields were solid around 2.62% while the Fed fund futures yields continued to price a hike on 26th September as effectively a done deal.  

Currency action

As for the euro, it climbed from 1.1360 to 1.1409 on the Chinese Yuan’s sharp correction although gave back some gains in the US session with a resurgence in the dollar on Mnuchin threatening Turkey with more sanctions and a widening of the DE/US spread, closing 0.3% higher for the day. The focus is now turning towards Italy which  hinders bullish prospects for the single unit while rate hike expectations are put on the back burner – (Italian government bond sales also weighing and DE-IT yield spreads were wider).

Sterling was closing the North American session at 1.2706 +0.06% and within the NY range of between 1.2754-1.2691. A no-deal Brexit remains a significant spanner in the works for the pound and the BoE are on hold for the foreseeable future. UK data that manages to turn out positive, (UK retail sales were much stronger than expected in July, cable bounced 30 pips into supply) are not mounting to any sustained bullish tradeoff vs Brexit uncertainty.  As for the cross, EUR/GBP ended flat for day, closing in North American trade at 0.8937 and reversed European gains over Italy and EZ banking sector vulnerability to Turkey, (possibility of further US sanctions and ongoing feud between the Trump administration and Turkey’s ErdoÄŸan over the pastor’s imprisonment on espionage charges). USD/JPY rallied to 111.12 on a strong performance on Wall Street, extending the Asia risk on bid to 110.92 and settled into a drift to close at 110.89. As for the commodity complex, the bounce here capped the CRB index’s bearish run which moved back tot he H&S neckline. However, copper’s correction was hardly impressive and it met supply on the rebound while gold continues to fall apart signalling more dollar strength and commodity sector weakness ahead. The Aussie retraced its European and CNH fuelled gains in NY from just below the 0.73 handle and slid back towards the 0.7245/55 short-term support zone closing there for the NY session. RBA’s Lowe appearance before House of Rep’s committee today has made no shakes so far, despite saying that he expects the next moves in the Aussie OCR should  be up – but markets are well aware that the RBA is on hold for the foreseeable future.  

Key events from US session

Key events for the rest of the week

Analysts at Westpac explained their outlook for the rest of the week;s key data and events as follows:

  • “RBA governor Lowe testifies to a parliament committee from 9:30am Syd/7:30am Sing/HK. He will deliver a prepared text (mostly backwards-looking), then take questions from MPs for about 3 hours.
  • In Asia, data releases include Malaysia Q2 GDP and Singapore Jul exports and unemployment rate.
  • The US data calendar is limited to preliminary August consumer sentiment. This index has been broadly rangebound in positive territory since its bounce in late 2016.
  • Canada July CPI is expected to match June’s 0.1%mth, 2.5%yr reading, though with the core rate at 2.0%. Markets price a ¼ chance of the Bank of Canada raising rates on 5 September.”