Everyone's a USD bull ahead of Q3 GDP

Another fairly tepid lead from Wall Street provides Asia with little in the way of inspiration.

Amazon fell 5% in after-hours trade after posting Q3 earnings that were well below consensus earnings per share estimates, while its Q4 outlook was also wholly uninspiring. However, don’t look to the S&P 500 and more towards the FX and fixed income market, because there is a strong story here.

The USD has made modest strides higher as traders now focus on tonight’s (11.30pm AEDT) US Q3 GDP report, with the big mover being USD/JPY. USD/JPY had been consolidating for most of October, but convincingly broke out above the key September high of ¥104.32 yesterday and looks destined for the ¥107 level. A further five basis point gain in the US ten-year treasury has been the backbone behind the USD gains as traders position themselves for a GDP print that’s most likely going to be above the markets consensus of 2.6%. For what it’s worth, the economist’s range of estimates is between 3.6% to 1.3%, so it’s quite a spread, with the Atlanta Federal Reserve’s model suggesting downside risks with a call of 2.1%. As mentioned, given the moves in the USD and selling in various developed market bond markets, I feel traders are now positioned for a number north of 3%. The risk of disappointment seems elevated.

How to hedge bond selling, USD buying

There are a number of ways to hedge (or protect) against a move higher in US treasuries and the USD. Specifically, I have been suggesting looking at US financials (try the XLF ETF) who benefit from a sell-off in the US 10-year treasury (as it helps boost margins), while shorting the TLT ETF (iShare 20+ Treasury Bond ETF) has been a great trade and again is a play on selling in the bond market. Shorting US (and Aussie) REITS has also been profitable of late. In the equity indices space, the Nikkei 225 is a preferred vehicle to trade this macro thematic as the index benefits from the higher USD/JPY.

With the moves seen in USD/JPY overnight, we expect the Japanese market to open into the 17450-17500 area and the strongest levels since April.

The ASX 200 has gone the opposite way of Japan, with the Aussie index down 2.4% this week. Rising bond yields in developed markets is and will continue to be a huge headwind for the local market, which is why traders have been far happier to be long material stocks, which are bought for growth as opposed to income. High bond yields reduce the attractiveness of the income streams from dividend payments.

Technically (in the ASX 200) we saw a nice move back and rejection of the August lows on Monday and the selling has really manifested on itself from here. We can expect a slightly stronger open today, with our call currently sitting at 5306. But to close the week in positive territory (ie. above 5430), we subscribe a mere 1% probability. The more pertinent question is how traders react after 10.30am AEDT when the market has been open for 30 minutes and traders can assess Macquarie’s results (consensus is for cash earnings of $994.5 million) and various other factors. I would not be surprised if we saw traders looking to sell into the modest opening bounce and this could tell a lot about semantics as we head into the new week, with traders eyeing more bank earnings in Australia, central bank meetings from the Reserve Bank of Australia, Bank of Japan, the Federal Reserve and Bank of England. We will also be into the final stages of the US election and while a Trump victory seems unlikely it appears he has been getting some traction and this may start to unsettle markets, although looking at a number of investment banks flow data, most institutional clients are already well hedged against a spike in uncertainty.

Looking at other considerations for today, the AUD has been sold overnight, with AUD/USD trading from a high of $0.7652 to a session low of $0.7584. US crude prices, copper and iron ore futures are a touch higher, with BHP likely to open 1.4% higher.

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