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After much volatility this week, Yen and Dollar are staying as the weakest one for the week. Receding concerns over US-China trade war boosted risk appetite in the US and Asia in general. It seems that Trump's administration and Republicans are feeling heavy pressure from business to stop any trade tension escalation, even though Trump may like the opposite way. As long as Trump refrain from starting the new 25% tariff on USD 200B in Chinese goods, Dollar and Yen could stay soft for a while. Focus will turn to US retail sales today first.

On the other hand, Sterling is so far the strongest for the week. Looking through all the noises, it's rather clear that both Prime Minister Theresa May's government and the EU want to make a deal. The biggest risks actually come from within the Conservative Party. The Pound will likely be supported even though it will remain headline sensitive.

In other markets, DOW closed up 0.57% overnight at 26145.99. S&P 500 gained 0.53% to 2904.18. NASDAQ added 0.75% to 8013.71. S&P 500 has realistic chance of challenging record high at 2016.50 soon. Treasury yields were mixed with 10 year yield closed flat at 2.963. 3.000 level is so close yet so far. Asian markets trade higher today with Nikkei up 0.93% at the time of writing. Hong Hong HSI is up 0.81%. Singapore Strait Times up 0.71%. However, China Shanghai SSE is fluctuating in gain and loss, down -0.13% currently. Gold failed 1214.30 resistance yesterday but may have another take on this level if Dollar suffers another round of selling today.

Technically, GBP/USD took the lead in rise resumption earlier this week. But EUR/USD is held below 1.1733. USD/CHF is kept above 0.9640. These two levels will now be in focus today. USD/JPY broke 111.82 resistance yesterday to resume the rebound from 109.76. Further rise is expected for 113.17 resistance. But as both Dollar and Yen are soft, the process could be "gradual".

Atlanta Fed Bostic: Rate hikes to continue over next few quarters, but unsure on Q4

Atlanta Fed President Raphael Bostic said in a speech yesterday that the economy is "doing well and standing on its own". He supported monetary to move towards a neutral stance. And that means "a gradual increase in nominal interest rates over the next handful of quarters." However, later he clarified that there is still "some uncertainty" to whether US is "really at full employment". If there is "not a risk of overheating then we have the possibility to be more patient."

Bostic is taking a "wait and see" approach to the fourth hike in 2018 in December. That is, to several rate hikes in the coming quarters doesn't mean rate hikes in every quarter. While it may sounds a bit confusing, his comments have been consistent. Bostic is one of those who are more cautiously on the outlook. In particular, just a few weeks ago, he vowed not to vote for anything that knowingly inverts yield curve.

On trade tensions, Bostic said "an uncertain outlook can cause firms to delay investments while they wait to see how the situation unfolds. Such a development could grow to have macroeconomic ramifications the longer the uncertainty remains." But he also noted that a recent survey shows trade war fears have had "only a small negative effect on US business investment so far."

BoE Carney: House price could fall 25-35% on no-deal Brexit

BoE Governor Mark Carney gave some "chilling" warnings in Prime Minister Theresa May's cabinet meeting on no-deal Brexit preparation yesterday. There he compared a disorderly effort to 2008 financial prices. And more importantly, BoE wouldn't be able to avert the crisis by cutting interest rates. Inflation and unemployment are expected to surge according to Carney's expectation. And, in the worst case scenario, house price could fall be 25-35% over three years. On the other hand, Carney noted that if a deal is struck based on May's Chequers plan, the economy could overshoot current forecasts as it's an outcome that's better than BoE assumed.

However, it should be noted that Carney has been constantly accused by Brexiteers as being part of the "Remain" camp, together with Chancellor of Exchequer Philip Hammond. And, both have been inaccurate in prediction Brexit economic consequences. Leader of the Brexit camp European Research Group Jacob Rees-Mogg called Carney "the high priest of Project Fear" last month.

Canada Trudeau: Working on the right NAFTA deal as quickly as we can

September 30 is seen by some as the deadline for completing US-Canada NAFTA negotiation. The legal text has to be produced by October 1 so as for the current Mexican government to sign before leaving office on November 30. But Canadian Prime Minister Justin Trudeau brushed off the deadline.

He said yesterday that "we have seen various deadlines put forward as markers to work for." And, "we'll do the work and try and get there as quick as we can, but we're going to make sure that we're doing what is necessary to get the right deal for Canadians."

Also, Trump appeared to have mused about renaming NAFTA to USMC, and said the "C" could be dropped if Canada didn't sign on. Trudeau said there were "things that we're working on very seriously, rolling up our sleeves on. I don't think we've spent much time talking about what the name or potential name or renaming could be."

On the data front

New Zealand Business NZ manufacturing PMI rose to 52 in August up from 51.2. China retail sales grew 9.0% yoy in August, beat expectation of 8.8%. However, industrial production grew 6.1% yoy, below expectation of 6.2% yoy. Fixed assets investment few 5.3% yoy, below expectation of 5.7% yoy.

Looking ahead, Eurozone trade balance will be featured in European session. But main focus will be US retail sales later in the day. US will also release import price index, industrial production, business inventories and U of Michigan consumer sentiment.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.1632; (P) 1.1667; (R1) 1.1725; More.....

Intraday bias in EUR/USD remains on the upside for 1.1733 resistance and above. For now, we'd still expect strong resistance from 38.2% retracement of 1.2555 to 1.1300 at 1.1779 to limit upside. On the downside, break of 1.1608 minor support will turn bias to the downside for 1.1525 support. Break will indicate completion of whole rebound from 1.1300. However, firm break of 1.1779 will extend the rise to 100% projection of 1.1300 to 1.1733 from 1.1525 at 1.1958.

In the bigger picture, a medium term bottom should be in place at 1.1300, on bullish convergence condition in daily MACD and some consolidations would be seen. But still, note that EUR/USD was rejected by 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. That carries some long term bearish implications. Thus, we'd expect fall from 1.2555 high to resume after consolidation completes. Below 1.1300 should send EUR/USD through 61.8% retracement of 1.0339 to 1.2555 at 1.1186. And, in that case, EUR/USD would head to retest 1.0339 (2017 low).

Economic Indicators Update

STOCKS

Dow (26145.99, +0.57%) is overall stable and trying to move up from here. The index is in the near term up trend and may move up towards resistance near 26500. Immediate support is seen at 25750.

Dax (12055.55, +0.19%) has moved up in the last 2-sessions and may continue to rise towards 12200-12300 in the near term., Initial support near 11900 has held well for now and could keep the index higher for at least the next 4-5 sessions. Channel resistance is visible near 12300 on the daily candles.

Nikkei (23042.83, +0.97%) has moved up sharply and is heading towards 23000 resistance. This would be the 4th time that the index is approaching 23000 since May’18. Failure to break above 23000 could take it back towards 22200; else a break above could trigger a sharp upmove in the medium term.

Shanghai (2683.38, -0.12%) bounced back from 2650 but a break above 2700-2750 levels is necessary for the index to continue to rise in the near term. Unless a sustained rise above 2750 is seen, we cannot negate further bearishness in shanghai in the near term.

Nifty (11369.90, +0.73%) while above 11200, may move up towards 11800-12000 in the near to medium term. View is bullish for the next few sessions.

COMMODITIES

Brent (78.34) has resistance near 81 on the 3-day line charts and an eventual rise to test the resistance is possible in Brent. A fall below 78 just now could possible lead to a short term correction before resuming the upmove.

WTI (68.84) has also dipped slightly but looks bullish while above support near 66. A test of 72 or even 74 looks possible in the medium term.

The Brent-WTI spread (9.71) is coming off from resistance and could fall towards 8 in the medium term. This could indicate some corrective fall in Crude prices in the medium term.

Gold (1209.50) has also risen sharply and needs to break above 1220 to rise higher in the near term. Above 1220, we could see a test of 1240/50 soon.

Copper (2.6915) has risen sharply, respecting the long term support. While above 2.65, the prices could move up towards 2.75-2.80 in the near term.

FOREX

The Turkish Lira (6.127) strengthened after the Turkish Central Bank raised interest rates by 625 bps. Moreover Draghi's optimism on Euro zone inflation has increased chances of Euro breaching the crucial 1.17 resistance. Could be bullish for INR too.

Euro (1.1692) breached the 1.165 resistance after Draghi sounded optimistic about the Euro zone inflation trajectory post the ECB meet yesterday. It is now at crucial resistance near 1.17. A breach could make it bullish towards 1.180-1.185. Looking at the bounce from 1.13 on weekly candles, the chances of a breach of 1.17 are high now.

Dollar Index (94.51) broke below support near 94.8 yesterday as US CPI in August came out below expectations. It has support now at the 21 weeks MA (94.40). A break below it would make it bearish towards 93.5-93.2, chances of which are quite high.

Dollar Yen (111.90) has breached resistance on daily candles. A rise towards resistance near 112.5 on weekly candles could now take place in the next week. A breach of 112.5 would then open up the upside towards 113.20.

Euro Yen (130.85) is breaching resistance near 130-131 on daily and 3 day candles. It could move higher towards the 55 weeks MA near 131.41 now. A rise towards 1.175 on Euro and 112.5 on Dollar Yen (as forecasted above) would make it breach the 55 weeks MA, which would be very bullish.

Pound (1.3113) has breached resistance near 1.31 on daily candles on broader Dollar weakness. It could now have some resistance provided by the 21 weeks MA near 1.3207 - a breach above this level would be very bullish for the Pound, making it target 1.34 in the weeks ahead.

Aussie (0.7189) has bounced from the long term support @ 0.71 and has important resistance on weekly line chart near 0.72. A breach of 0.72 could quickly take it towards resistance on 3 day candles near 0.73 - a breach of 0.72 could also suggest that it has bottomed out at 0.71.

Dollar Rupee (Wednesday Close: 72.19; Current Offshore NDF: 71.60) With the Turkish Lira and Euro strengthening yesterday, we might see a gap down opening in USDINR near 71.80-60. Increasing possibility of 72.91 having been the top.

INTEREST RATES

Although the ECB maintained status quo in its policy yesterday, Draghi's optimism on the inflation trajectory has made the markets start expecting a rate hike in Sep 2019. Hence, inspite of the dovish policy and reduced growth forecasts, German bond yields haven't dipped much.

German 10 year yield (0.42%) still looks like it could rise towards 0.45% in the near term. The German 5 Year yield (-0.15%) also looks bullish towards -0.10%. The 30 year yield (1.09%) could rise some more towards resistance coming up near 1.15%.

US CPI for August was below expectations with the month on month growth in Headline CPI being 0.2% instead of the expected 0.3%. However, this hasnt resulted in a sustained dip for US yields - maybe due to news on Wednesday suggesting that the US might be looking to reignite trade talks with China. More developments on this front could take the US 10 Year yield (2.97%) to the psychologically important 3% resistance. We currently don't prefer the 3% level to be breached. Given the prevailing risk aversion amongst investors globally, we have been saying that the May high of 3.125% might have been the top for the US 10 Year yield for 2018 - currently we hold on to this view.

Atlanta Fed President Raphael Bostic said in a speech yesterday that the economy is "doing well and standing on its own". He supported monetary to move towards a neutral stance. And that means "a gradual increase in nominal interest rates over the next handful of quarters." However, later he clarified that there is still "some uncertainty" to whether US is "really at full employment". If there is "not a risk of overheating then we have the possibility to be more patient."

Bostic is taking a "wait and see" approach to the fourth hike in 2018 in December. That is, to several rate hikes in the coming quarters doesn't mean rate hikes in every quarter. While it may sounds a bit confusing, his comments have been consistent. Bostic is one of those who are more cautiously on the outlook. In particular, just a few weeks ago, he vowed not to vote for anything that knowingly inverts yield curve.

On trade tensions, Bostic said "an uncertain outlook can cause firms to delay investments while they wait to see how the situation unfolds. Such a development could grow to have macroeconomic ramifications the longer the uncertainty remains." But he also noted that a recent survey shows trade war fears have had "only a small negative effect on US business investment so far."

BoE Governor Mark Carney gave some "chilling" warnings in Prime Minister Theresa May's cabinet meeting on no-deal Brexit preparation yesterday. There he compared a disorderly effort to 2008 financial prices. And more importantly, BoE wouldn't be able to avert the crisis by cutting interest rates. Inflation and unemployment are expected to surge according to Carney's expectation. And, in the worst case scenario, house price could fall be 25-35% over three years. On the other hand, Carney noted that if a deal is struck based on May's Chequers plan, the economy could overshoot current forecasts as it's an outcome that's better than BoE assumed.

However, it should be noted that Carney has been constantly accused by Brexiteers as being part of the "Remain" camp, together with Chancellor of Exchequer Philip Hammond. And, both have been inaccurate in prediction Brexit economic consequences. Leader of the Brexit camp European Research Group Jacob Rees-Mogg called Carney "the high priest of Project Fear" last month.

September 30 is seen by some as the deadline for completing US-Canada NAFTA negotiation. The legal text has to be produced by October 1 so as for the current Mexican government to sign before leaving office on November 30. But Canadian Prime Minister Justin Trudeau brushed off the deadline.

He said yesterday that "we have seen various deadlines put forward as markers to work for." And, "we'll do the work and try and get there as quick as we can, but we're going to make sure that we're doing what is necessary to get the right deal for Canadians."

Also, Trump appeared to have mused about renaming NAFTA to USMC, and said the "C" could be dropped if Canada didn't sign on. Trudeau said there were "things that we're working on very seriously, rolling up our sleeves on. I don't think we've spent much time talking about what the name or potential name or renaming could be."

Key Highlights

• The US Dollar recovered nicely after testing the 110.00 support against the Japanese Yen.
• There are two key bullish trend lines in place with support near 110.80 on the daily chart of USD/JPY.
• The US Consumer Price Index in August 2018 increased 0.2%, compared with the +0.3% forecast.
• Today, the US Retail Sales for August 2018 will be released, which is forecasted to rise 0.4% (MoM).

USDJPY Technical Analysis

This past week, the US Dollar declined, but it found support above 110.00 against the Japanese Yen. The USD/JPY pair moved higher this week and it could continue to move higher towards 112.80 in the near term.

Looking at the daily chart, the pair started a fresh upward move from the 110.40 swing low. It seems like the 110.00 zone is a strong support along with the 100-day simple moving average (red).

More importantly, the pair found bids near two key bullish trend lines in place with current support near 110.80 on the same chart. The pair moved above the 111.50 resistance and the 50% Fib retracement level of the last drop from the 113.17 high to 109.82 low.

If the pair accelerates above the 112.00 and 112.10 resistance levels, there could be a test of the 76.4% Fib retracement level of the last drop from the 113.17 high to 109.82 low at 112.38. Above 112.40, the pair will most likely retest the last swing high at 113.17.

On the flip side, if there is a downside correction, the 111.00 level is an initial support, followed by the trend lines at 110.80.

Fundamentally, the US Consumer Price Index for August 2018 was released by the US Bureau of Labor Statistics. The market was looking for a rise of 0.3% in the CPI compared with the previous month.

However, the result was disappointing as the CPI increased 0.2% and the yearly change came in at 2.7%, less than the forecast of 2.8%. Looking at the Consumer Price Index (CPI) Ex Food & Energy, there was a rise of 2.2% (YoY), less than the 2.4% forecast.

The report added:

The energy index increased 1.9 percent in August; a 3.0-percent increase in the gasoline index was the largest factor, but the other energy component indexes also rose. The shelter index increased 0.3 percent in August, the same increase as in July. The food index rose only slightly in August, with the index for food at home unchanged.

There was a slight increase in selling pressure on the greenback as EUR/USD and GBP/USD extended gains. However, major dips in USD/JPY towards the 110.80 level remains supported.

Economic Releases to Watch Today

• US Retail Sales August 2018 (MoM) – Forecast +0.4%, versus +0.5% previous.
• US Industrial Production August 2018 (MoM) – Forecast 0.3%, versus +0.1% previous.
• US Capacity Utilization August 2018 – Forecast 78.2%, versus 78.1% previous.

Super Thursday, indeed

Super Thursday for some but a Topsy-Turvy one for others. Of course, much of that had to do with what side of the US dollar coin you were on.

Hope springs eternal for emerging markets anytime the US dollar weakens and yesterday was no exception. As indeed the stars aligned for emerging markets (EM) assets after an astonishing interest rate hike from the Central Bank of Turkey (CBT) of 625bp and an exceedingly soft US CPI data. And for beleaguered emerging markets, the timing could not have been any better as traders were coiled and ready to strike after the past fortnights of intense EM bloodletting. Meanwhile, the BoE meeting proved a total non-event but the ECB, more constructive.

Not surprising, interbank EM currency volumes surged as a solidarity rally by proxy ensued, much to the relief of just about everyone quite frankly, as US stocks pushed higher with the technology sector rebounding as participants took a more calming view of the US-China trade dispute while emerging market assets rallied on the weaker US dollar which supported a very bubbly risk environment.

Indeed, we could see this “risk on”shift that was set in play in early Asia yesterday extend throughout today’s APAC session. Mind you, chasing short covering rally can be fraught with danger.

With that in mind, let me do my best spoil the party by suggesting that much of this rally will depend on what level of diplomacy that can be reached from the US-China talks and if President Trump is willing to fold a strong hand and not impose 200 billion in tariffs? But failing any progress on these fronts, the Pboc will be less incentivised to keep the RMB complex in check, and we could be in for another EM fracas if the Pboc guides the Yuan incredibly cheaper. And of course, there that small matter about rising US yields which generally sounds the death knell for EM currencies, but let’s leave that one alone until next week.

Oil Markets

Topsy Turvey Thursday indeed!!

Oil futures markets gave back Wednesday’s gains, but there must be more to it than a realisation that last weeks inventory reports included a significant increase in product inventories that more than offset the US crude inventory draws. That’s second nature for the Willey oil trading community, so the issue does run deeper Specifically, those same Willey veterans latched on to International Energy Agency report which indicated daily crude-oil output in the Organization of the Petroleum Exporting Countries climbed in August by 420,000 barrels a day, to average 32.63 million a day.

So, while the anticipated production drought from Venezuela and Iran could be an issue in the future, it’s not an imminent one as OPEC total crude production came in the right on top of estimates and triggered a bearish correction on both WTI and Brent prompt contracts.

So, in a nutshell, the market came off aggressively as Crude Oil supplies are not tight, well not yet anyway. But when you look at in the context that EM countries crude demands are at risk from an economic slowdown( tariff impact) coupled with the sturdy supply report, there are some concerns that increases from OPEC and non-OPEC producers can offset the Iran sanction concerns.

Gold Markets

A convincing snap in the XAU-DXY correlation overnight suggesting that the de-escalation in US-Sino trade dispute is having a calming effect on overall risk, and despite the dollar trading considerably weaker after the soft US CPI data, the tight correlation snapped.

Of course, from a hedger perspective, the focus has been on US equities as opposed to the US dollar so with global equities back on the boil there is little demand for gold in general. At the heart of the matter, ETF flows remain stagnant, and gold continues to be little more than a dead money trade at this point.

But the enormous tail-risk remains in play as when dollar strength return sand that tight XAU-DXY correlation will come back with a vengeance with a high degree of certainty.

Currency Markets

Oh my, what a carry!!

The CBT set the one-week repo to an astonishing 24%! (+625bps) And that sigh of relief you heard out of Japan, was from Tokyo’s fervent carry traders who now have 24% annualised wiggle room to manoeuvre. We did see more TRYJPY buying this week than average, so there will be more than a few happy Japanese investors this morning especially after being nearly toppled when USDTRY rose more than three per cent yesterdy on President Erdogan who was bizarrely advocating for a rate cut.

And as expected on this decisive policy shift, it has triggered concurrent relief rally across EM.

EURO

Draghi was steady on headline inflation but a tweak in the core which is easily interpreted in the less dovish context that the ECB does expect inflation to concenter at its target as monetary accommodation is reduced at the fringe. A bit of a tough pill to swallow for EUR bears but, price action must be respected, and with US CPI providing little relief for the nascent dollar correction, I suspect the EUR bears will remain sidelined until more definitive signals emerge.

Australian Dollar

Price action was telling as indeed short position was much cleaner after the yesterday’s short Aussie squeeze, so we didn’t get that outsized reaction on positive EM development nor the weaker US CPI print that many had expected. But since we get to do this all over again next week, “Prudence”, suggests its time for the sidelines and to fight another day.

Malaysian Ringgit

Regional risk should trade positively today, suggesting the MYR will be mildly supported, but with Oil prices falling overnight, it will likely balance out the EM solidarity knock-on effect from the astonishing 625 bps CBT rate hike, so we could expect the MYR to trade neutral bias given the mixed signals.

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Yen and Dollar are trading as the weakest two today. On the other hand, Sterling and Euro are the strongest ones, with Australian Dollar trailing behind. There are a couple of underlying themes today which triggered much volatility.

Firstly, the story of restarting US-China trade negotiation continued to develop. White House economic advisor confirmed yesterday after the bell that there was an invitation to China for trade talks. China also confirmed they received that invitation and both sides are already in discussion on details of the meeting. China SSE ended up 1.15% at 2686.58 today even though it failed to reclaim 2700 handle. Australian was originally the biggest gainer as also helped by strong employment data. However, later in the US session Trump tweeted that China is the one who's under pressure to make a deal. And "we will soon be taking in Billions in Tariffs & making products at home." Apparently, he's trying to re-escalate the tension. That's a main factor knocking Aussie down against Euro and Sterling.

Secondly, Turkish central bank CBRT delivered a massive rate hike, by lifting the policy rate from 17.75% to 24%. That triggered a strong rebound in the Lira, with USD/JPY now trading down around -4%. It also eased worries of re-emergence of Lira crisis and contagion to Europe. That's a strong factor supporting Euro and to a certain extent Sterling.

Thirdly, US core CPI came in weaker than expected, slowed to 2.2% yoy in August, down from 2.4% yoy. While that shouldn't stop the Fed from raising interest rate to neutral, it could start casting doubts on whether Fed should continue beyond neutral. The data helped supported US equities and pushed USD/JPY through 111.82 resistance.

BoE and ECB rate decisions are indeed shrugged off by the markets. Here are some readings on ECB and BoE:

• ECB Review: For the Feinschmeckers – Part II
• Bank of England Review: Repeats Hiking Bias amid Brexit Uncertainties

In other markets, DOW is currently up 0.48%, S&P 500 up 0.54%, NASDAQ up 0.96%. FTSE closed down -0.43%, DAX up 0.19% and CAC down -0.08%. Gold hit as high as 1212.64 earlier today but is now down back at 1204 after failing to take out 1214.3 resistance.

Follow up on the quick comment here. Our AUD/JPY short was stopped out at break even (80.25) as the cross rebounded to as high as 80.79. A couple of factor went against the trade. The main one is definitely the chance to restart US-China trade negotiation. AUD/JPY initially hesitated a bit after breaking 4 hour 55 EMA. And even stronger than expected Australian employment data couldn't build sustained momentum.

But then buyers finally committed after China confirmed that they received US invitation for trade talk. Then, risk appetite were further boosted by Turkish central bank CBRT's rate massive rate hike, as well as weaker than expected US core inflation reading.

Technically, while 78.67 should be a short term bottom, there is no confirmation in trend reversal as long as 81.78 resistance holds. That is, down trend from 90.29 is in favor to resume later to 61.8% projection of 90.29 to 80.48 from 83.92 at 77.85. We'll wait and see if there is another opportunity to trade this one.