We’ll undoubtedly see some action over NFP, but the tail risk is for a weaker jobs number as a positive print will have little to no bearing on FOMC policy over the near term, given the Fed-stated mandate for lower for longer. But with the market entirely consumed with US fiscal delivery, which is still stuck in the swamp, I’m not sure anything will matter until we clear that hurdle.
It’s been a choppy risk mood for the past 24 hours and it's finding an echo in EUR-USD as the market sits perilously perched, still hopeful for a US fiscal stimulus deal. With much of Asia closed and Tokyo suffering a power outage yesterday, G-10 signals were far and few, but I suspect we remain stuck in the mud until something breaks on the stimulus front.
There was a turnaround in risk appetite on negative headlines earlier from Politico on US stimulus. Although stocks have responded lower to the news, it was somewhat lackluster, suggesting investors are growing weary of this headline back and forth.
GBP is weaker this morning after the EU poured cold water on any signs of Brexit progress. According to Bloomberg, an unnamed EU official denies a landing zone's motion on either state aid rules or fisheries. Still, we could see a lift for sterling if the UK and EU confirm they are going into the 'tunnel' (meaning intense, secret negotiations) intending to hammer out a deal in time for the October 15/16 EU summit. That would mean sufficient progress had been made this week for a Brexit deal to come into sight and would represent a significant positive for both sterling and the Euro.
Japan's Q3 Tankan survey showed a slower than expected improvement and a further decline in inflation expectations. The headline index rose to -27 from -34 (consensus -24), which compares to a -8 reading in Q1 before the pandemic.
The BOJ is likely to be chiefly conscious of the decline in corporate inflation expectations within the survey. The 5-year inflation expectations reading of 0.8% is now the lowest since 2014. But other than rhetoric, it’s very unclear what the BoJ can do. But, ultimately, it’s domestic reflections that could drive the yen after we pass the US fiscal impasse.
The Yuan (et al)
Asian FX bounces off the lows after the better US jobs data and still thin holiday liquidity in major North-East Asian markets. USDCNH is back to 6.75 with the rest of the pairs following. Flows are still pretty light since the NY session open and there’s no real change of view on the CNH, which remains a favorable destination from a carry to vol perspective. Perhaps the Golden Week short carry on the Yuan may have influenced Yuan's momentum stronger earlier in the week? But it’s hard to make heads or tails of much at the start of Golden Week with no PBoC fix to judge the central bank's appetite for a stronger Yuan.
With oil getting hammered overnight, I expect the MYR to take on a more defensive posture, compounded by a drop in liquidity due to the Golden Week’s exaggerating price action on any orders going through. I suspected foreign investors would only be executing what needs to be done into the weekend, which suggests that failing a surprise US stimulus deal, so we could see some profit-taking on the ringgit.
While the US dollar hasn't moved anywhere over the past 24 hours, the bullish momentum has paused and that in itself has triggered some buying of gold from short-covering concerns, compounded by historical US election correlation; where volatility is still expected to pick up is always a strong signal to buy gold.
The currency market will decide the short term and possibly medium-term direction for gold where a US stimulus deal should weigh on the dollar and power gold higher. I suspect the dollar then gets viewed through the lens of even more significant twin deficits and is why the USD would lose its shine among reserve managers.
As we mentioned in previous reports, gold is often especially sensitive to EUR-USD developments. ECB President Lagarde's comments are a reminder that it’s not only the Fed that can send a message of a dovish tolerance for above-target inflation. Were the EUR to weaken, this could prove an additional burden on gold.
Is it time to start thinking about shiny objects in a big way? I’m not so sure, as "inflation is always and everywhere a monetary phenomenon" does seem to be finding an echo so far in a the Covid world; perhaps it’s in the post-Covid world where we get the inflation bounce?
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies