Articles

• 1 bps tail
• Bid to cover at 2.61 vs 2.43 prior

The sale was a touch soft but I don’t see much reaction in the nominal market.

This article was written by Adam Button at www.forexlive.com.

Goldman Sachs analyzes effective FX hedges in scenarios where both US equities and yields decline, highlighting the most reliable currency positions. Safe-havens JPY and CHF, along with shorts in MXN and AUD, are identified as effective hedges. However, the costs associated with certain strategies prompt a preference for shorts in AUD or GBP due to their favorable combination of responsiveness and lower carry.

Key Points:

• Safe-Haven Currencies:

  • Long positions in JPY and CHF emerge as the most effective hedges in scenarios involving declines in both US equities and yields.

• Emerging Market and G10 Shorts:

  • Shorts in MXN (Emerging Markets) and AUD (G10) are highlighted as effective hedges within the broader FX complex.

• Preferred Hedges Across Scenarios:

  • Short USD/JPY, USD/CHF, and long USD/MXN are considered the best hedges across multiple scenarios, demonstrating effectiveness regardless of oil price shifts.

• Cost Considerations:

  • While these strategies are effective, the elevated carry associated with them makes them relatively costly.
  • As an alternative, shorts in AUD or GBP are favored for their reliable response to recessionary shocks, minimal dependence on oil prices, and low carry costs.

Conclusion:

Goldman Sachs identifies JPY and CHF longs, along with MXN and AUD shorts, as effective FX hedges in declining equity and yield scenarios. However, due to the high cost of certain hedging strategies, shorts in AUD or GBP are recommended for their cost-effectiveness and strong responsiveness to economic downturns

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This article was written by Adam Button at www.forexlive.com.

Anxiety around Powell’s speech tomorrow has crept into equity markets, particularly in light of the comments from the Fed’s Schmid earlier today. He indicated that the Fed had time to evaluate before cutting rates and that was seen as a hawkish view.

But I just watched the full interview and it’s not has hawkish as the headlines read. He said he was sympathetic to moving before inflation got to 2% and didn’t really make a hawkish push.

That said, I understand the worry about Powell and pricing in aggressive rate cuts. There is also some anxiety building up about the August 28 earnings report from NVDA, which could upend the whole AI trade if there’s one hint of weakness.

This article was written by Adam Button at www.forexlive.com.

WTI crude oil is up $1.15 today in a rebound after four days of heavy selling. It was a particularly curious move in crude given that the dollar was falling and risk assets were broadly stronger.

Former Goldman Sachs chief commodity analyst Jeff Currie has weighed in with a theory that the selling was a result of the “oil carry trade”.

He describes it as a trade to borrow paper/physical barrels, convert into USD, and invest in US Treasuries.

It “squares a record weak financial oil market against a tight fundamental oil market, as the market is liquidating both physical and financial barrels for US dollars,” he writes.

That sounds like a stretch today but the recent oil move is certainly a puzzle.

h/t @ericnuttall

This article was written by Adam Button at www.forexlive.com.

The US dollar is higher today after two weeks of steady selling.

It’s been supported by a rise in Treasury yields of 8-9 bps across the curve and comments from the Fed’s Schmid, who didn’t sound in a rush to cut rates. Economic data today also underscored an economy that’s fine, with initial jobless claims and the S&P Global US services PMI both slightly better than expectations.

Yesterday the euro hit a one-year high against the US dollar but it was reeled back in today, falling 40 pips.

Tomorrow’s speech from Powell will surely be a market mover. What people are looking for is a sense of the cadence of cuts and the willingness to cut deeper if needed. We’re also looking for indications on where Powell thinks the terminal rate is.

This article was written by Adam Button at www.forexlive.com.

• Prior was -13.0

This is a small setback but there has been a steady recovery from 2022 and that’s starting to be reflected in the FX market with the euro yesterday touching the highest in a year.

This article was written by Adam Button at www.forexlive.com.

• Prior was 3.93m
• Sales +1.3% vs -5.4% prior (breaks a four-month losing streak)
• Sales -2.5% y/y
• Inventory 4.0 vs 4.1 months prior
• Median prices $422,600 vs $426,900 prior
• Prices up 4.2% y/y
• Full report

Supply is up 18% year over year.

“Despite the modest gain, home sales are still sluggish,” said NAR Chief
Economist Lawrence Yun. “But consumers are definitely seeing more
choices, and affordability is improving due to lower interest rates.”

This article was written by Adam Button at www.forexlive.com.

• Prior was 55.0
• Manufacturing PMI 48.0 vs 49.6 expected (prior was 49.6)
• Composite PMI 54.1 vs 53.5 expected (prior was 54.3)
• An improvement in service sector confidence
  was offset by a gloomier mood in manufacturing
• Employment fell in August, dropping for the first time in
  three months

The US dollar rose on these numbers. .

Commenting on the data, Chris Williamson, Chief Business
Economist at S&P Global Market Intelligence said:

“The solid growth picture in August points to robust GDP
growth in excess of 2% annualized in the third quarter,
which should help allay near-term recession fears.
Similarly, the fall in selling price inflation to a level close to
the pre-pandemic average signals a ‘normalization’ of
inflation and adds to the case for lower interest rates.

“This ‘soft-landing’ scenario looks less convincing,
however, when you scratch beneath the surface of the
headline numbers. Growth has become increasingly
dependent on the service sector as manufacturing, which
often leads the economic cycle, has fallen into decline. The
manufacturing sector’s forward-looking orders-to-
inventory ratio has fallen to one of the lowest levels since
the global financial crisis.

“At the same time, service sector growth is constrained by hiring difficulties, which continue to push up pay rates and
means overall input cost inflation remains elevated by
historical standards.

“The policy picture is therefore complicated, and hence it’s
easy to see why policymakers are taking a cautious
approach to cutting interest rates. However, on balance
the key takeaways from the survey are that inflation is
continuing to slowly return to normal levels and that the
economy is at risk of slowing amid imbalances.”

The ISM services number fell in June and that is looking like it was a misleading signal; that used to be one of the better forward-looking indicators but that’s 2-3 fakeouts from it now.

This article was written by Adam Button at www.forexlive.com.

The dynamic recently has been — weaker dollar, lower yields, higher stocks.

Today will be a challenge of that with yields down 4-6 bps across the curve and the dollar higher, particularly USD/JPY (up 75 bps).

Fed pricing shows a 28% chance of a 50 bps cut, which is back to where it was before the non-farm payrolls revisions. There is some focus on hawkish comments from the Fed’s Schmid.

Movers include Snowflake, down 9% while Urban Outfitters are down 15% after same store sales fell 9.3% in another sign that housing-related sectors are suffering from high rates and a lack of turnover in real estate.

This article was written by Adam Button at www.forexlive.com.

• Prior was +0.05 (revised to -0.09)

This is a composite of data that’s already released, so it’s not a market mover but it’s a view of the US economy.

This article was written by Adam Button at www.forexlive.com.

• Prior was 227K
• Continuing claims 1.863 vs 1.867m expected
• Prior continuing claims 1.864m (revised to 1.859m)

This is the report for non-farm payrolls survey week.

This article was written by Adam Button at www.forexlive.com.

Eyes are back on the economic calendar today with some notable releases for the US economy.

• Initial Jobless Claims at 8:30 ET: Expected to come in at 230K, slightly above last week’s 227K. The 4-week average will also be closely monitored.
• PMI data at 9:45 ET: S&P Global Manufacturing, Services, and Composite PMIs will provide insight into economic activity. Manufacturing PMI consensus is 49.6, in line with last month’s reading while services are expected to tick lower to 54.0 from 55.0.
• Existing Home Sales at 10:00 ET: Housing market health will be gauged, with expectations of 3.93M sales in July, down from 3.89M previously.
• EIA Natural Gas Storage at 10:30 ET: Consensus looks for a 24B build, compared to last week’s 5B draw (a rare summer draw)

Here’s when we’ll get the full agenda of the Fed’s Jackson Hole symposium

This article was written by Adam Button at www.forexlive.com.