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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 25 September 2015 at 2:00 GMT

Morning Report APAC: Rate liftoff not written off

APAC Sales Trading Desk / Saxo Capital Markets
Singapore

 

  • Fed chair Janet Yellen's comments seemed to support a strong USD
  • Commodity currencies reversed their early weakness amid a late-day rally
  • Shockwaves from the VW scandal continued to run through European markets

 

By Saxo APAC Sales Trading

Economic data of the day (Singapore Time)

  • 0730 (2330 GMT): JPY – Natl CPI YoY (Exp. 0.1%, Prev. 0.2%), Ex Food and Energy (Exp. 0.7%, Prev. 0.6%) 
  • 0750 JPY – PPI Services YoY (Exp. 0.5%, Prev. 0.6%) 
  • 1300: SGD – Industrial Production SA MoM (Exp. -0.2%, Prev. 1.0%), YoY (Exp. -5.0%, Prev. -6.1%) 
  • 2030: USD – GDP Annualised QoQ 2Q (Exp. 3.1%, Prev. 3.1%)
  • 2030 USD – GDP Price Index (Exp. 2.1%, Prev. 2.1%), Core PCE QoQ (Exp. 1.8%, Prev. 1.8%) 
  • 2145: USD – Markit US Composite PMI (Prev. 55.7) 09.45pm: USD – Markit US Services PMI (Exp. 55.5, Prev. 56.1) 
  • 2200: USD – Univ. of Michigan (Exp. 87.0, Prev. 85.7)  

Speeches

  • 2115: USD – Fed’s James Bullard to Speak On Monetary Policy in St Louis

Overnight news

  • Fed Chair Janet Yellen sounded dovish in a speech this morning; remaining relatively optimistic about the US economy. Her comments seemed to support a strong USD, and the Feds will keep a fluid monetary policy environment. The comments support a gradual pace of tightening and highlight that if the world remains uncertain, there is still some risk around expectations of a ‘liftoff’ this year. 
  • US durable goods orders fell 2% in August, offsetting July’s 1.9% gain. Core orders ex-defence and aircraft fell 0.2% following July’s strong 2.1% gain. The modest trend recovery in capex remains intact. August new home sales rose 5.7% m/m to 552,000, a new high. Strong and improving consumer fundamentals are supporting the recovery in the housing market.
  • The German IFO index for September rose to 108.5 from 108.4 in August, with no spillover from the Chinese-driven volatility in August detectable yet. Importantly, the expectations component rose to 103.3 from 102.2. 
  • Norway and Taiwan both eased policy overnight: The Norges Bank cut its policy rate by 25bps to 0.75%, as did the Central Bank of the Republic of China (Taiwan’s central bank), who cut by 12.5bps to 1.75%.  


Foreign exchange

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It was a night of consolidation for most currency pairs, though the NZD continued to outperform after a more upbeat assessment of the dairy sector from Fonterra.

Commodity currencies were the main focus with early weakness reversed amid a late-day rally. The USD finished lower ahead of Yellen’s speech, and the speech itself failed to give the USD much of a lift, however it did give the US dollar a solid backbone.

Emerging markets had a better night though official intervention drove much of the rally there. The PBoC was reported to have intervened aggressively in USDCNH, just adding to the flow of cross-currents in markets.


Foreign exchange movements

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Volatilities were bid yesterday before Yellen’s speech as risk sentiment remained poor. AUDJPY spot touched 83.00 lows, which triggered another squeeze higher in volatilities and risk reversals. 

USDJPY volatilities also saw a slight move higher yesterday as spot went under 119.50 and front-end risk reversals were quickly paid for the downside. With USDJPY spot back above 120.00, we should see some easing back of the volatilities curve as implied are still much higher than actuals. 


Rates
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US and UK yields declined overnight, which was attributed to equity weakness, while European yields rose modestly. Importantly, the spread between US inflation protected and nominal bonds, a good measure of inflation expectation, is at a new low.


Commodities
 

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Equities

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Shockwaves from the VW scandal continued to run through European markets. As auto stocks tumbled, the DAX fell 1.9% (lowest level of the year) and investors failed to take heart from the closely watched German IFO Index, which showed business sentiment rose in September. 

The FTSE 100 ended roughly 1.2% lower, as the bleak outlook for the resources sector weighed on the commodity-heavy index. US stocks closed lower Thursday as investors awaited the post-close speech from Fed Chair Janet Yellen. 

Caterpillar was the greatest weight on the Dow, closing 6.3% lower as the firm will cut up to 5,000 jobs by the end of 2016 and lowered guidance.    

dfd

  Dark days ... auto stocks continued to be driven lower
 as a result of the VW scandal. Photo: iStock

 
– Edited by Gayle Bryant


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