OVERNIGHT DATA AND HEADLINES
• Global risk sentiment remained high into the weekend as the market continued to digest the positive rhetoric from the ongoing trade negotiations as well as the first signs of a potential Brexit deal.
• US Import Prices for September rose 0.2%, up from a positively revised -0.2% and better than expectations of no change.
• The University of Michigan Sentiment Survey for October printed at 96.0, up from 93.2 and better than expectations of 92.0. The Expectations and Current Conditions sub-indices both easily beat forecasts though inflation figures did come in lower than the previous survey.
• Canadian payrolls increased by 53.7k in September with the full amount coming in the full-time sector (+70k) as the part time sector lost 16.3k jobs. This was down from the bumper 81.1k in August though smashed expectations of 7.5k. The unemployment rate unexpectedly fell 0.2% to 5.5% against expectations of no change with the participation rate steady. Hourly wages rose by 4.3% to beat estimates of 3.8%.
• U.S. stocks came off their highs in late trading after U.S. President Donald Trump announced a partial trade deal with China that could be signed within weeks, with the boost from NY enough to give stocks across the globe their largest daily gain in two months. Dow Jones +320 points (1.21%) to 26,816.59, S&P 500 +32 points (1.09%) to 2,970.27 and the Nasdaq +106.27 points (1.34%) to 8,057.04.
• Adding to the risk on move, President Trump tweeted positively about the ongoing trade negotiations with China while sources report suggested a partial trade deal could be announced in the coming hours. Sources indicated that it included a currency pact and a delay to tariffs scheduled to be levied from October 15 (would take up to 5 weeks to get it completed and signed before further negotiations would take place). It was said to be conditional on the meeting between Trump and Lui scheduled for later in the day. Risk briefly higher though settling essentially unchanged. Late in the session, Trump said that a substantial phase one deal had been reached that covered intellectual property, financial services and agricultural purchases while progress had been made on other important structural issues.
• Noted Fed dove Kashkari said that the time for a 50bp cut has now passed and that rates were close to neutral though would probably be in favour of a cut in October.
• The EU’s Barnier commented on a constructive meeting with Barclay. News wires were soon reporting that Barnier had received the green light from the EU27 to enter tunnel negotiations. However news wires reported Donald Tusk as saying “The UK has still not come forward with a workable, realistic proposal”. Further details of Tusks comment/tweet emerged as he mentioned “promising signals” that a deal is possible.
• Little reaction with markets attention elsewhere as UK PM Johnson indicated that there had been progress though more work was needed to secure a Brexit deal. He did however say it was best to let the negotiators get on with it. An EU official meanwhile said the hope was to get a deal done by the EU Summit.
• The U.S. DXY dropped to a three-month low, as safe-haven buying eased and risk sentiment improved. DXY index was down 0.4% at 98.318 after earlier declining to a 3-1/2-month low of 98.197.
• China's yuan extended gains and was set for its best weekly performance in nearly four months. Onshore spot CNY opened at 7.0950 and rose to a high of 7.0870.
• USDCAD gained on positive data, falling from 1.3280 to hit lows of 1.3166.
• GBPUSD saw a massive jump higher on the positive Brexit news, jumping up from 1.2450 to briefly trade a 1.2705 before falling back towards 1.2615.
• EUR also saw a benefit from the positive risk on news – jumped up from 1.1000 to a 1.1062 high.
• The strength in the AUD/USD continued on its way to a high of 0.6810 from 0.6770.
• NZD was also upbeat as risk appetite was whetted by expectations of a trade deal. NZD high 0.6353.
• The U.S. yield curve un-inverted for the first time since mid-July, as progress in U.S.-China trade talks boosted the U.S. economic outlook. The spread between three-month and 10-year Treasury yields widened by the most since May 6 and moved into positive territory (the Fed has identified the spread between three-month bills and 10 year-notes as a more accurate recession indicator than the gap between two- and 10-year yields).
• Irish government bonds rallied, outperforming their euro zone peers on hopes that a Brexit deal was now in sight.
• Japanese government bond (JGB) prices fell across the yield curve. Benchmark 10-year JGB futures fell 0.39 point to 154.61.
• Gold fell over 1%, en route to its biggest weekly decline since March, as easing concerns about the U.S.-China trade conflict and Britain's exit from the European Union renewed appetite for riskier assets. Spot gold fell 0.8% to $1,482.85 per ounce, after slumping as much as 1.4% earlier in the session.
• Shanghai steel futures slipped, with hot-rolled coil hitting its lowest in six weeks, as worries about demand prospects and excessive supply in China weighed on prices.
• Copper rose to its highest in more than two weeks as investors hoped that U.S.-Sino trade talks would result in a partial deal at least. Three-month LME copper added 0.2% to $5,795 a tonne.
• Oil prices rose more than 2% after Iranian media said a state-owned oil tanker was attacked in the Red Sea near Saudi Arabia, while optimism surrounding the U.S.-China trade war lifted sentiment. Brent crude futures gained $1.41 (2.4%) to settle at $60.51 a barrel. WTI crude futures $1.15 (2.2%) to settle at $54.70 a barrel.
ECONOMIC EVENTS TODAY
• No Australian Economic data today
• China - September trade balance (tensions with the U.S. continue to take their toll).
• Singapore - MAS Monetary Policy decision
• Europe - August Industrial Production (manufacturing weakness is worsening).
• International – Annual IMF meeting
Commodity currencies performed exceedingly well over the Friday night session with AUD jumping up towards 0.6810 highs on positive trade talks.
AUD opens this morning a little weaker at 0.6785 with no Australian data to digest today.
We do have Chinese trade balance first up today. Expectations are for trade growth to remain weak on slowing global growth, as evidenced by the manufacturing PMIs of the major advanced economies falling in September. Indeed, the US manufacturing ISM and Eurozone and Japanese manufacturing PMIs are all now sitting at their lowest levels in several years.
Tomorrow we have Australian RBA minutes which will provide further detail around the October decision to cut rates.
The ongoing trade negotiations between China and the U.S will continue to dominate this week’s directional flows in financial markets and will certainly have an immediate implication for currency direction into the week. If the current level of optimism continues expect AUD demand to lie around 0.6740 while offering interest should materialise if it grinds higher toward 0.6850.
AUD longs stay the course, show little fear. AUD 16-day high is set on upbeat risk sentiment.
The 0.6810 level (61.8% Fib of 0.6895-0.6670 & Sep 20 high) pierced as stocks and yields rally over the Friday night. JPY sales drive AUD/JPY up near 74.00, helps AUD hit 0.6810.
Technical outlook for the AUD remains bullish, RSI rise, Fibonacci’s break & AUD is solidly within the cloud.
Shorts have lots to fear if risk sentiment remains buoyant – next solid resistance levels @ 0.6827 & 0.6842. Immediate support at the 0.6770 21 day moving average followed by 0.6743.