Asia Open: “One more serious try” on US fiscal stimulus

Market Analysis / 5 Min Read
Stephen Innes / 01 Oct 2020

US equities closed out Q3 with another up day on Wednesday, the S&P rising 0.8%. Helping sentiment was a commitment from Treasury Secretary Mnuchin for "one more serious try" on a fiscal stimulus deal after more talks took place overnight. European equities were weaker, and Asia mixed. There was also some movement on US10Y yields, up 3bps for 0.68%. 
The Keystroke 1.5 trillion continues to get bandied around by Republicans. And Erik Wasson, a Bloomberg reporter, tweeted that while Treasury Secretary Mnuchin's counter-offer will be similar to the previous $1.5tn, there may be an escalator clause that allows for it to go up to $2tn if the coronavirus persists.   
Indeed, the escalator clause could be the special sauce and maybe how the Republicans try to meet the Democrats where they are, and House Speaker Pelosi can still feel like she can claim victory in getting the number closer to her $2.2tn target.
The stimulus deal is very much needed and will come as a massive relief to many unemployed Americans who were having a vision of that proverbial lump of coal in their holiday stocking this year. Mind you, more than a few traders were too.
Global risk appetite benefited from positive noises around a stimulus deal from Washington as the market was still soggy from the debate debacle and put investors back on to the comfort of the stimulus rally train as equities got boosted with e-minis setting a new high for the day.
Yesterday turned even more bizarre when the Chicago PMI data got leaked early, leaving trading "Zoom crews" worldwide scratching their head. I wish I’d taken a "what the XXXX" screenshot of my crew from Tokyo to Toronto: it was priceless. The data did print much better than expected, but the traders then started fretting that sentiment was too strong and may deter the stimulus bill with the cat out of the bag. How on earth can sentiment be too strong? The issue at hand is not the ones driving the sentiment but rather the ones that can't feed their families! Come on, folks – get with the game plan, pull that moral compass out of your pocket, and start gaslighting Congress!
But there were numerous moving parts overnight as the US's bellwether housing market remains alive and kicking. For August, pending home sales were surprised to the upside at 8.8% vs. an expected 3.1% deceleration from 5.9% in the prior month. 
The big kicker here is that as house prices are buoyed, consumers feel wealthier and they’ll be more prone to spend elevated savings levels; it’s super for the economy and provides a considerable growth impulse.
Currency Markets  

The FX market is pricing an excessive amount of variance for the US presidential election, which is clouding the viewfinder. 
Outside of the Pound, which is all about going into the secret meeting tunnel, there was no clear bias to G-10 FX flows overnight – which isn't abnormal into the month-end. Sometimes we get the WM FIX noise, other times we don't, and yesterday there was too much going on in the background which tamed the month-end USD buy signal.  
As we wrote about on yesterday’s close, I thought the only clear cut view was USDCNH lower, given its carry to vol dynamics and positive macro backdrop, further supported in the near term by China's September PMIs, while the long time resonates loud and clear via the 'Dual Circulation' mandate. It will also support China's trade-sensitive proxies like the AUD, TWD, KRW and MYR. Anything with a beta pulse to the Yuan is a fair trade. Indeed, the street is in no hurry to trim USDCNH shorts even although it’s one of the most widely held trades by fast money types.
Higher oil prices, improved risk sentiment and sturdy beta to the Yuan should see the Ringgit trade well as the local equity market stabilizes and should continue to push higher. Golden Week suggests reigning in your bullish ambition, but there’s certainly no need to cash in your long MYR positions just yet. 
The dollar is still holding a bid today, even with risk sentiment flourishing as traders appear content to sit on the long dollar hedge to cover the prospect of contested US election results.
The post-debate traders are still focused on the vol market rather than spot or any other signpost. The gap between 1m and 2m USDJPY implied vol – highest in the time series' history – is a case in point, reflecting concerns about a delay in a definitive result after election day. And the fear of what could lie ahead makes it difficult to lather up long currency risk. 
Political challenges on the nonstop flight corridor from Tokyo to Washington challenge the Yen view in either direction these days. 
Price action has been choppy. EURUSD was briefly back below 1.17 after two consecutive days of gains, but 1.1690 was held again. Flow has been relatively light, as month-end was a bit of a dud.
The street so desperately wants to get long EURUSD on dips. But it's not 100% clear to me that the uptrend remains intact. We’ve decoupled from the absolute bullish uptrend (ECB more dovish, FED less dovish).
Attempts to finalize the EU Recovery Fund's text are running into a few snaps. 
But the main dead weight for the EUR is that European inflation is falling hard. Still, with Germany in deflation and France about to cross from positive to negative YoY CPI, ECB may need to react and Legarde is already laying to the ECB version of AIT.
Finally, the 1.1750 support level, which has become resistant, is held correctly. But keep an eye on that level as the week goes by.


Gold's energy was sapped by firmer USD and didn't gain on the US presidential debate, but there is sufficient uncertainty on the street to hold prices in check.
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.

For more market insights, follow me on Twitter: @Steveinnes123 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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