Daily Market Outlook, September 7, 2023

Munnelly’s Market Commentary… 

Asian equity markets faced headwinds as they followed the negative lead from the US, where both stocks and bonds retreated in response to hawkish ISM Services data. Additionally, market participants analysed the latest Chinese trade figures. The Nikkei 225 index experienced a turbulent day, initially benefiting from a weaker currency and optimistic reports regarding the Japanese government’s plans to implement economic measures in October. However, as the trading session unfolded, the index succumbed to selling pressure. In line with the downbeat sentiment, the Hang Seng index and the Shanghai Composite both declined circa 1%. Chinese trade data revealed a persistent contraction in both exports and imports, although it didn’t reach the dire levels initially anticipated. Concurrently, the tech sector faced mounting pressure, triggered by tensions following the FCC chair’s call for US government agencies to address the threat posed by Chinese cellular connectivity modules. Additionally, a lawmaker’s request for an investigation into SMIC, citing potential violations of US sanctions by supplying components to Huawei, further weighed on tech stocks. Furthermore, China made headlines by reportedly banning government officials from using iPhones at work and expressing intentions to expand this restriction to state-owned enterprises and government agencies, adding to the overall geopolitical complexities affecting the market.

The US dollar maintains its dominant position against all major currencies, surging to a fresh 10-month high against the Japanese yen, even as warnings from the Japanese finance ministry persist. Against the euro, the dollar remains near the three-month high it reached on Wednesday. Traders appear more inclined to rely on economic data than on statements from European Central Bank officials, who suggest that the tightening cycle might not be over in advance of next week’s policy meeting.

Stateside Federal Reserve officials are set to address a fintech conference hosted by the Philadelphia Fed, though they will soon enter a blackout period on public comments as they approach their own policy meeting and notably ahead of next week’s US inflation data

Meanwhile, the G-20 meetings are commencing in India, providing additional opportunities to assess the global economic landscape. Notably absent from this gathering is Chinese President Xi Jinping, a development raising concerns. Not only is the Chinese economy a significant global risk, but this decision also continues the trend of China distancing itself from Western involvement; similarly, Russian President Vladimir Putin will also be absent from the event.

FX Positioning & Sentiment 

Understanding the positioning of FX traders is crucial, and one reliable source for unbiased insights is the Commodity Futures Trading Commission (CFTC) data. This data serves as a valuable guide for those seeking to assess the impact of speculation on currency markets. The rule of thumb is that the larger the wager, the more significant its influence, often leading to substantial market reversals. An illustrative example from 2018 demonstrates this principle when the EUR/USD currency pair experienced a decline after traders placed a hefty $23 billion bet on the euro’s appreciation. Conversely, the pair surged from its low in March 2020 when traders were heavily betting, with over $15 billion, on its depreciation. However, it took a downturn shortly after reaching a record speculative long position of $31 billion in August 2020. This year, the EUR/USD witnessed a drop as bets on its appreciation exceeded $25 billion. Notably, an anomaly occurred in the previous year when EUR/USD rallied from its September low, despite limited bearish bets from traders. This contrasted starkly with other surveys that indicated significant bets on a stronger US dollar. Broader estimates suggested that dollar bets and investments were exceptionally overcrowded, possibly constituting one of the largest long positions in history. The subsequent reversal in market sentiment validated these estimates. Nonetheless, it’s essential to acknowledge that traders were positioned long on the dollar, and this awareness, combined with the broader consensus regarding the overcrowded long positions, should serve as a cautionary signal for market participants.

CFTC Data As Of 31-08-23

  • Tuesday close of Aug 30-Sep 5 spec IMM period saw $IDX +1.17%

  • Less-dovish Fed rate expectations stoke USD bid

  • USD rise hints Fri’s spec data may show reduced USD short

  • EUR$ -1.42% in period amid EZ growth concerns, end of hike cycle

  • Euro net spec long well off May high +187k contracts, now +147k

  • $JPY +1.23% in period; US-JY rate divergence keeps yen on back foot

  • Yen net short may have diminished after Kanda’s spec rebuke

  • GBP$ -0.68% in period, global growth concerns drag GBP lower

  • UK rate dominance in near-term tempers GBP$ decline

  • AUD$ -1.57%, China growth concerns, steady RBA view weighs on AUD (Source: Reuters)

FX Options Expiries For 10am New York Cut 

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

  • EUR/USD: 1.0675-80 (513M), 1.0700 (1.85BLN),

  • 1.0810-15 (555M), 1.0820-25 (480M), 1.0880-90 (661M)

  • USD/JPY: 144.95-145.05 (610M), 146.83 (200M), 147.20 (245M)

  • GBP/USD: 1.2550-55 (258M), 1.2575 (200M)

  • 1.2700 (1BLN), 1.2750 (561M), 1.2795-00 (602M)

  • EUR/GBP: 0.8570 (232M), 0.8600 (208M), 0.8630 (320M) 0.8705 (386M)

  • AUD/USD: 0.6400-10 (750M), 0.6480-85 (490M)

  • 0.6520 (450M), 0.6560 (510M), 0.6590-00 (802M)

  • AUD/NZD: 1.0850 (203M), 1.1050 (300M)

Overnight Newswire Updates of Note

  • US Futures Little Changed As Focus Shifts Back To Path Of Rates

  • Asia Markets Mostly Lower As Investors Assess China Trade Data

  • Fed’s Beige Book Shows Slower Activity Growth, Hiring In Summer

  • Two Senate Votes Advance Biden Goal Of Greater Diversity At Fed

  • Pres Biden Set To Woo Back Allies As Putin, Xi Skip G-20 Summit

  • China Hawk Kurt Campbell Leading Candidate For Deputy At State

  • PBoC Gives Yuan Unyielding Support For Record 54 Straight Days

  • Chinese Exports Tumble For Fourth Consecutive Month In August

  • BoJ Official Nakagawa: Call For Keeping Ultra-Easy Policy For Now

  • RBA Outgoing Lowe Says Productivity Boost Key To Tame Inflation

  • Australia’s Trade Surplus Narrows In July After Mining Exports Fall

  • Bank Of England’s Bailey Signals Rate Hikes May Be Near An End

  • Texas Declares Grid Emergency After Heat Stokes Power Demand

  • United Auto Workers Plan Counteroffer To Ford As Deadline Looms

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

Technical & Trade Views

SP500 Bias: Bullish Above Bearish Below 4500

  • Above 4500 opens 44540

  • Primary resistance  is 4450

  • Primary objective is 4266

  • 20 Day VWAP bullish, 5 Day VWAP bearish

EURUSD Bias: Bullish Above Bearsih Below 1.0810 / 1.07 Target Hit, New Pattern Emerging

  • Above 1.09 opens 1.095

  • Primary resistance is 1.1066

  • Primary objective is 1.0660

  • 20 Day VWAP bearish, 5 Day VWAP bearish

GBPUSD Bias: Bullish Above Bearish Below 1.2560

  • Above 1.2650 opens 1.27

  • Primary resistance  is 1.2750

  • Primary objective 1.23

  • 20 Day VWAP bearish, 5 Day VWAP bearish

USDJPY Bias: Bullish Above Bearish Below 146.50

  • Below 146 opens 144.90

  • Primary support 143.90

  • Primary objective is 150

  • 20 Day VWAP bullish, 5 Day VWAP bullish

AUDUSD Bias: Bullish Above Bearish Below .6450

  • Above .6525 opens .6575

  • Primary resistance  is .6620

  • Primary objective is .6320

  • 20 Day VWAP bearish, 5 Day VWAP bearish

BTCUSD Bias: Bullish Above Bearish below 26175

  • Above 28200 opens 30000

  • Primary resistance  is 28175

  • Primary objective is 23300

  • 20 Day VWAP bearish, 5 Day VWAP bearish