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The Australian dollar has added 50 pips today in the third day of gains. It’s at the highest since July 18 and also at levels that would be the highest since January excluding the June-July ramp.

What’s particularly impressive is that AUD is rallying despite all the poor indications from China, including the recent plunge in iron ore prices.

Unfortunately, that’s what I also think will cap the rally. For more than two decades, the Australian dollar has been tied to China and I can’t see that changing. I think that eventually China will turn and maybe the market is sensing that but I would like to see clear signs of real Chinese stimulus before chasing AUD returns. Moreover, I’m concerned about Australian real estate.

On the technical front, the quick rebound from 0.64 is a good sign for the buyers but it will take a real catalyst to break the July high near 0.6800 and that leaves a thin risk-reward now, if any.

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

In general, I think politics are wildly overrated a source of investing opportunities, particularly elections. Promises are often made by politicians but rarely fulfilled and in a three-tier system like the US, it’s rare to get enough alignment to craft game-changing policies.

At the moment, Kamala Harris is leading Trump 55-45 on PredictIt and she recently outlined proposals on home building. I think there is a decent consensus around the need to build more homes in the US, so there is an opportunity to do something even if Democrats fail to win the House and/or Senate (I assume Senate will be Republican almost under any election outcome).

Here is what she has proposed:

(1) the construction of 3M new housing units; (2) a tax incentive for
homebuilders building starter homes; (3) a $40B innovation fund for
local governments to build housing; and (4) $25k in down-payment support
for first-time homebuyers, provided rent was paid on time for two
years.

She also spoke about removing zoning restrictions at all levels.

If most of that gets done, it will move the needle.

But the most-effective lever is interest rates. It’s increasingly clear that we’re back in the same disinflationary dynamic as prior to the pandemic and I think that will be underscored as fiscal stimulus fades (from a deficit of 7% of GDP) under almost any election outcome in the US.

I don’t take that for granted but so long as spending at least stays where it is (hopefully a safe assumption) then the Fed is on its way back to 3.00% Fed funds with risks to the downside in any slowdown.

To summarize:

1) A plan for subsidies

2) Tax breaks for builders

3) More momentum for zoning reform than ever

4) Public desire for home building

5) Bi-partisan consensus on increasing home building

6) Interest rate cycle has peaked

That’s a compelling setup. It’s also not some kind of secret. Home builder stocks have done very well at a time when they would usually struggle.

The opportunity right now I think is in housing-adjacent trades and sectors. Think: lumber, building materials, mortgage refi, land.

I’m sure there are others and I also expect it will ultimately be a tailwind for the US because where there is such a strong consensus and the US gets focused; it can get things done unlike any other country. At the same time, I see some bigger headwinds for the dollar so I certainly wouldn’t make this trade in the FX market.

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

MUFG emphasizes that this week’s US yield and USD movements will largely hinge on two critical events: the release of the FOMC minutes from the July 31 meeting and the upcoming Jackson Hole Symposium, particularly Fed Chair Powell’s speech.

Key Points:

• FOMC Minutes:

  • The FOMC meeting on July 31 marked the first time since ending its tightening stance that Fed Chair Powell explicitly put a rate cut on the table for the next meeting.
  • Powell’s dovish tone led to a 10bps drop in the 2-year yield on that day, making the upcoming minutes crucial for gauging the support for a possible September rate cut.
  • Recent comments from Fed officials, including Fed President Goolsbee and San Francisco Fed President Daly, suggest increasing support for rate cuts due to economic and labor market concerns.

• Jackson Hole Symposium:

  • The symposium is titled “Reassessing the Effectiveness & Transmission of Monetary Policy.”
  • Powell’s speech at the symposium could be another opportunity for the Fed to signal its readiness to begin cutting rates, particularly if he emphasizes the effectiveness of current restrictive policies.

Conclusion:

MUFG expects that both the FOMC minutes and Powell’s speech at the Jackson Hole Symposium could provide critical insights into the Fed’s readiness to commence rate cuts, potentially influencing US yield and USD movements this week.

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

Down the elevator and back up the escalator:

On the day:

• Stoxx 600 +0.6%
• German DAX +0.6%
• Francis CAC +0.8%
• UK’s FTSE 100 +0.8%
• Spain’s Ibex +1.4%
• Italy’s FTSE MIB +0.7%

The round trip is nearly completed.

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

The breakout in gold is looking increasingly secure.

A pullback to $2486 today has been bought and it’s now trading back above $2500.

Everyone’s watching China right now. On Friday, a Reuters report indicated fresh quotes for domestic banks. They had halted the quotas earlier, around the time that the PBoC stopped buying. Could the PBOC be coming back too? Despite warnings that they were now price sensitive?

While China’s banks act as middlemen between investor demand and jewellery demand, the current surge has been driven by investors. The situation in China is critical to understanding this rally. With a weak economy, Chinese domestic investors have lost faith in property and equity markets. They can’t easily move their money out of the country, and the currency is falling. So gold is one of the few alternatives that are working and demand is tough to meet; it’s the main driver I gold’s rally.

The Lack of Fanfare

What’s particularly interesting about this new all-time high is how little attention it’s receiving. Gold is outperforming equities and the rest of the commodity complex, yet there no one seems to have noticed. There is a tough battle for attention right now if AI wasn’t such a gamechanger and volatility wasn’t so high but I would be less bullish on gold if it was on the front page of CNBC every day.

Fed Policy and Dollar Dynamics

The fact that gold has breached $2,500 before the first Fed rate cut is significant. I believe gold still has a long way to go. The last leg of the gold rally will likely be driven by a declining US dollar, though the timing is uncertain. I’m encouraged though by the USD softness since last week’s retail sales-driven pop.

Eventually though, congress will cut back on US spending and high rates will bite. That might take until 2025 or 2026 when Congress finally addresses spending cuts but it will come eventually and will be a tailwind for gold.

Powell’s Jackson Hole Speech

This Thursday is Fed Chair Powell’s Jackson Hole speech; I don’t expect any major surprises. The messaging has been clear that they’re preparing to cut rates. Look for generally dovish comments suggesting they have improving confidence on the path of inflation. A risk is that Powell stomps out any 50 bps pricing but I think they prefer to keep options open if nonfarm payrolls data comes in weak.

Is it too early to start talking about $3000?

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

US equities are at the highs of the day across the board and it’s being led by a wide range of names today, including consumer-sensitive American Airlines and Expedia.

The Russell 2000 is leading the way with a 0.5% and the Nasdaq isn’t far behind. For the Russell, it continues to chew into the opening gap from August 2 but still has a long ways to go to recoup the August declines.

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

The US dollar is at the lows of the day against the euro, pound and commodity currencies. That’s a continuation of the price action from late last week.

The dollar ran higher on retail sales and WMT commentary last week but has slowly retraced (and more). That’s a concerning sign for the dollar bulls as it’s failed to rally on good news. The bond market is also signaling lower yield despite the rethink on the rate path in fed fund futures.

This could be two things:

1) Broader dollar deleveraging

I think that many in the market were frightened by the early-August episode and believe it’s a sign of things to come. There are so many examples in the past 20 years in markets where an August scare materialized into something real in the autumn and those memories are tough to shake. Many people are also anxious out the election and sitting on nice year-to-date gains so there is a real temptation to de-gross and cut exposure.

2) Looming economic weakness

If you look at the entire globe, it’s clear that higher interest rates have done their job. A slowdown is baked into most currencies but the US has defied that. One big reason is 30-year fixed mortgages and another is higher US fiscal spending. Eventually though, high rates will do their job, even if rates are slowly ratcheted down from here. The message is that: High rates still work. So there is a slowing coming to the US economy and retail sales numbers are backward-looking.

I can sympathize with both of those explanation, though I can also poke holes in them. It’s also August and a quiet week so it’s fanciful to try to explain every move.

All that said, these moves could well be part of a trend that’s just getting started.

Let’s see if cable can get back above 1.30:

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

Fed’s Waller does not comment on the economy or monetary policy in his welcoming remarks at the 2024 Summer Workshop on Money, Banking, Payments, and Finance, Washington, D.C.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Federal Reserve Governor Christopher Waller is giving “Welcoming Remarks” at the 2024 Summer Workshop on Money, Banking, Payments, and Finance, Washington, D.C.

He’s been a key Fed governor because he’s been a “leading indicator” for changes in Fed’s policy.

He might comment on monetary policy but I’m not sure if the markets are going to react given that we already know that at least three rate cuts are coming by the end of the year.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

This post on X by @lisaabramowicz1 just crossed my timeline and reminded me of the posts I’ve been seeing right after the events at the start of August.

In fact, one of the things people have been pointing to when we got the growth scare was the widening of the US credit spreads. A “credit spread” refers to the difference in yield (interest rate) between a US corporate bond and a US Treasury bond of the same maturity.

These spreads serve as a measure of the additional risk that investors perceive in lending to corporations compared to lending to the US government, which is considered to have a very low risk of default.

There are many factors that can influence the spreads but the main one is the perceived risk given by the economic outlook. In fact, in times of economic uncertainty or downturns, credit spreads typically widen as corporate bonds are seen as riskier and get shunned for Treasury securities.

As we can see from the image above, we got a spike at the beginning of August triggered by the ISM Manufacturing PMI and then exacerbated by the weak NFP which might have been also responsible for the rout in the Nikkei on Monday morning. We can argue on the exact catalysts but anyway the spike has been fully reversed and we are now back at the levels seen before August 1st.

This is just another piece of the puzzle which should calm the markets and keep the positive sentiment going as we head into a Fed’s easing cycle with resilient growth. (at least until the next scare)

This article was written by Giuseppe Dellamotta at www.forexlive.com.

I’m hosting a special webinar at 9 am ET (1300 GMT) on ‘7 Common Trading Traps and How to Avoid Them’

It’s
an especially notable topic right now given the moves in the yen and
equities this month.

Register here

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