Trading news

USD advance slows, December expectations are now back

- After better than expected NFP, another set of good data would be a sufficient catalyst to bring an end to the zero interest rates policy
- EURUSD: We think that a rate hike is largely overestimated and we expect a retracement at 1.0900
- USDJPY,  Friday's Impressive rally may support short-term Nikkei buying
- Fed's Williams comments indicate USD bullishness should continue
- Current back drop keeps us negative on commodities currencies
USD domination in the G10, after Friday’s strong US payroll report, faded slightly in the Asian session. However, the USD was marginally higher against EM FX Asia as US 10-year yields rose to 2.332%. EM Asia bond yields moved higher across the board as expectations for Fed lift-off in December have forced investor selling. Friday’s surprise US October non-farm payroll data, which printed at 271k and strong 2.5% y/y wage increase, reflects a healthy and broad-based economic expansion. Rates market is now pricing in 68% probability of a 25bp Fed rate hike in December. 
Asian regional equities indices were mixed as the Nikkei and Shanghai composite rose 1.96% and 1.52% respectively, while the Hang Seng fell -0.14%. Friday’s impressive rally in USDJPY supported Nikkei buying today. In a win for Japanese Prime Minister Shinzo Abe, regular wages increased 0.4% in September, while labor cash earnings, which include overtime and special payments, increased by 0.6%y/y against 0.5% expected. This was the seventh consecutive rise as Abe has been pressing business to raise salaries (part of third arrow). From Australia, ANZ job advertisements rose 0.4%m/m in October, slowing significantly from downwardly revised 3.8% increase in September. Finally in India, the National Democratic Alliance (NDA), led by Prime Minister Modi faced a setback as state elections in Bihar saw the party taken only 58 of 243 seats.
There were mildly hawkish comments from the President of the Federal Reserve Bank of San Francisco John Williams indicating that the USD bullishness should continue. The Fed’s Williams indicated that at least one measure of full employment has been reached, stating on Saturday: “on one hand, the US economy continues to grow and is closing in on full employment. On the other, in large part due to developments abroad, inflation has remained lower than we’d like.” CFTC IMM data indicates that speculative position saw an increase in USD longs to the highest level since mid-August (EUR net shorts rose and GBP longs were cut).
***Yann Quelenn, Market Analyst: “Last Friday’s jobs report printed at an astonishing 271k, while it was expected at 185k. Markets was already pricing in a weak read as what happened in September. Better Jobs data is what the Fed is looking for as this should fuel inflation. The unemployment rate is still very low at 5% but has failed to drive up inflation for now. This good jobs report has increased the probability for a rate hike in December, which has jumped to almost 68% according to Bloomberg.
Fed member John Williams said in a speech that was held Saturday that a rate hike should be the next appropriate step. According to him, another set of good data, as we have seen last Friday, would be sufficient to meet the Fed’s forecast and would could bring an end to the zero interest-rate policy in place since the end of 2008. Yet, Williams also confirmed its concern about the current low inflation. Indeed, we also remain cautious as inflation is still way too low regarding the Fed’s target of 2%. In addition, the global outlook remains uncertain, in particular global growth that is likely to have a deeper impact in the United States economy. In other words, we consider that U.S growth is still vulnerable. Meanwhile, the dollar has soared on new Fed expectations and the euro is now holding below 1.0800 dollar. We think that a rate hike is largely overestimated we expect a retracement to 1.0900.”***
In China, data showed the monthly trade balance widen to $61.6bn, the highest level on record. October exports contracted -6.9% y/y against -3.2% expected. Imports were also weaker, dropping -18.8% y/y against -15.2% expected. In addition, the persistently weak commodity prices continued to take their toll as commodity imports contributed 8.1% to the whole -18.8% fall. The weak commodity imports indicates that Australia's hopes of renewed appetite supporting their growth look premature. AUDUSD recovery rally to 0.7066 has already run into significant supply and will likely retest intraday lows at 0.7017. The current backdrop keeps us negative on commodity currencies. Elsewhere, China foreign reserves unexpectedly improved to $3525.5bn in October from $3514.1bn in September. While no clarification has come from the PBoC its likely that the rise was due to valuations adjustments.
Today’s light economic calendar will see ECB Yves Mersch speaks, Boston Fed President Rosengren speaks and Mexico CPI.

Monday, 09 Nov, 2015 / 9:20

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