Weekly Trading Notes – Will China’s US Treasuries sales knock the Fed off course?


  • Market sentiment continues to revolve around two main stories, the pace of the Chinese economic slowdown and whether the FOMC will hike rates in September. This week we have China dominating the economic data releases with the markets moving sharply on the trade data today, whilst looking ahead to inflation on Thursday could provide further volatility. The big question is whether the economic slowdown in China will be enough to blow the Federal Reserve off its rate tightening course? Next Thursday the announcement of the Fed’s monetary policy could produce a seismic shift in global financial markets which have been for so long been addicted to the injection of cheap money.


  • The decline in Chinese exports have continued today and on Monday there was the news that in August, China sold $94bn of US Treasuries out of its $$3.6 trillion of forex exchange reserves in an attempt to stabilize the yuan. This is in effect the reverse of quantitative easing, or in other words “quantitative tightening”. The Federal Reserve could see this and be concerned that it is going to start tightening monetary policy into a tightening environment.
  • The Non-farm Payrolls report last week showed 5.1% unemployment (now back to within the Fed’s full employment range) and improving wage growth. This means that the September decision is in a fine balance. I have been of the opinion for some time that the Fed would shun September and be more likely to move in December. My conviction is wavering a touch in the wake of the latest payrolls report, but the actions of the People’s Bank of China could give the FOMC pause for thought again. For this reason I am still favouring December (but only just) and it will be a close call next week. The yield on the US 2year Treasury (which is considered to be a good gauge of what the Fed will be thinking) is back above 0.700% again this morning and is back within range of the 0.750% key resistance again. This suggests that the market confidence in a rate hike has picked up. According to Fed Watch from CME, there is a 19% chance of a September rate hike.
  • The US dollar is once again trading back to around the 0.963 key pivot level on the Trade Weighted Dollar. This level equates to $1.1050/$1.1100 pivot band on Euro/Dollar, so it does seem to be in the balance. There are several major central banks giving monetary policy updates this week, with the Bank of Canada, Reserve Bank of New Zealand and Bank of England. Only the RBNZ is expected to do anything, with a rate cut of 25 basis points expected. The Bank of England gives minutes at the same time as the policy update and as with last month there is only one MPC member expected to dissent and vote for a rate hike. This is also the first policy meeting of Gertjan Vlieghe who is an old speech writer for former (dovish) Governor Mervyn King and is expected o vote on the dovish end of the scale.
  • Commodities remain choppy in their performance, although the oil price does appear to have bottomed, at least I the near term. The movement of the oil price is a third major factory on how market sentiment has been moving. Just for the near term, the precious metals prices are settling down but the outlook remains generally negative.
  • On the data front, there is little major US data to get worked up about, but certainly the China inflation data will be watched. If the producer prices inflation continues to disappoint then market sentiment could again take a hit. Michigan Sentiment will be interesting, as a forward looking indicator and will include the fallout for the man on the street from the recent market turmoil, which could see how much of a hit the US economy could take as a result.
  • Watch for: China inflation, US Michigan Sentiment



EUR/USD – Support above the pivot band $1.1050/$1.1100 remains key for the medium term outlook       

  • The concentration will begin to turn to next week’s crucial meeting of the FOMC and this would begin to drive a choppy consolidation with the decision seemingly finely balanced.
  • The market is settling down with the retreat to the $1.1050/$1.1100 pivot band. Technical indicators show a slightly corrective bias and this should help keep a lid on any euro gains before some significant volatility next week.
  • Watch for: China inflation, US Michigan Sentiment

GBP/USD – Play the range and go with a rally above $1.5420

  • The minutes of the Bank of England’s monetary policy will cause more interest than the release itself. Any increase on one dissenting voice (Ian McCafferty) would be a surprise and would drive sterling strength). .
  • The range play came back into force as the market rallied strongly off $1.5170. Cable has a tendency to move strongly when it does go, so a break back above $1.5420 would re-open the upside again.
  • Watch for: Bank of England monetary policy, China inflation, US Michigan Sentiment

USD/JPY – A choppy market and strong gauge of risk appetite  

  • There is still a lack of trend on the pair as market volatility continues to play out on this pair. The slight upward revision in Q2 Japan GDP has been overlooked due to the general improvement in market sentiment.
  • The floor of support now comes  in between 118.30/118.65 with momentum still showing a slight bearish bias. A move above 120.70 would improve the outlook once more, but only above 121.75 would open bullish control again.
  • Watch for: China inflation, US Michigan Sentiment

Gold – Bearish bias towards a test of $1109.10

  • The lack of safe haven demand despite the ongoing volatility remains a concern for the gold bugs. This could also be because the US dollar has been consolidating too in recent days and without dollar direction the gold price could also struggle.
  • The deterioration in the momentum indicators and slow drift lower puts the outlook in a negative configuration. This means likely pressure on the support at $1109.10 in due course with a breach opening $1080 again.
  • Watch for: China inflation, US Michigan Sentiment

Indices – Performance remain dependent on China and the oil price  

  • S&P 500 – The huge volatility continues and there is still a negative bias which will remain now whilst trading below 1975. Momentum indicators are also in bearish configuration still. Wall Street continues to trade on general market sentiment, so for now is being driven mostly by the China sentiment.
  • DAX Xetra – The DAX actually has the best outlook of all of the three major market areas and a move above 10,428 would open for a recovery once more. Strong German trade data is helping, although negative sentiment on China still acts as a drag.
  • FTSE 100 – The big volume spike at the bottom 5768 suggests it was indeed an exhaustion move, but the market has fallen in to a volatile consolidation mode with no real direction. A move above 6250 re-opens the prospect of a recovery towards the first resistance band 6430/6500.



Wednesday 9th September

  • UK – Industrial Production
  • UK – Trade Balance
  • Canada – BoC monetary policy
  • US – JOLTS job openings
  • New Zealand – RBNZ monetary policy

Thursday 10th September

  • Australia – Unemployment
  • China – CPI
  • UK – BoE monetary policy
  • US – Weekly Jobless Claims
  • US Crude Oil Inventories

Friday 11th September

  • US – PPI
  • US – University of Michigan Consumer Sentiment (Prelim)



Sunday 13th September

  • China – Industrial Production

Monday 14th September

  • Eurozone – Industrial Production

Tuesday 15th September

  • Australia – RBA meeting minutes
  • Japan – BoJ Monetary Policy
  • UK – CPI
  • Eurozone – German ZEW Economic Sentiment
  • US – Retail Sales
  • US – Industrial Production

Wednesday 16th September

  • UK – Unemployment and Average Earnings
  • Eurozone – CPI (final)
  • US – CPI
  • US – NAHB Housing Market Index
  • US Crude Oil Inventories
  • New Zealand – GDP

Thursday 17th September

  • Switzerland – SNB Monetary Policy
  • UK – Retail Sales
  • US – Building Permits & Housing Starts
  • US – FOMC Monetary policy + Press Conference

Friday 18th September

  • Canada – CPI


Leave a Reply

Your email address will not be published. Required fields are marked *