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News & Views: Thursday, October 2

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What you need to know for today's trading day.

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This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time.

Draghi's Buying Spree for the ECB Might Start Modestly (Bloomberg)

Bank of England Asks Government for New Powers Over Housing (WSJ)

Putin says sanctions will not stop Russia becoming economic power (Reuters)

WTI Crude Slips Below $90 for First Time in 17 Months (Bloomberg)

Bank of Russia Intervened to Slow Ruble Slide, Nabiullina Says (Bloomberg)

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The US Dollar showed its first sustained period of weakness last night, dropping as much as 50bps, but has recovered about half of those losses. This will be a major test for investors now. The dollar strength persisted throughout the entire third quarter and positioning is already very long. If the market is ready to defend this dip, then the upward trend will continue. In September, dedicated curreny funds had their best month in the last 10 years, and a major reason for that is the Dollar strength - they may be ready to exit that position and real money investors would have to be ready to take up the slack.

There are two fundamental, short-term headwinds standing in its way. For quite some time, investors have been looking past any shortcomings in action from Mario Draghi to continue selling the EUR, not to mention corporations and participants alike using it as their funding currency. In Japan, nearly every business lobby is pushing back against the 110 level of Dollar Yen. And finally, local Japanese retail traders, presumably the engine behind the Yen weakness over the past two months, had a change in sentiment, which was manifest in the USDJPY's key reversal day yesterday.

A new voice also emerged last night. Former Japanese Finance Minister Fuji, in an interview with Bloomberg last night, said that a further decline in the Yen would trigger an intervention by the Bank of Japan to strengthen the currency (perhaps they were the ones sitting on the bid Monday night?) by far the most strongly worded case by any public official that the weakness is unwarranted. He also stated that the connection between the recent Yen weakness and the potential for further monetary policy easing from the BoJ is a mistake.

Between all of the above, the US dollar is vulnernable to some short-term weakness.

The true risk asset currency gauge, EURJPY, continues to remain in a downward trend after peaking alongside the S&P 500 (SPX) on Sep 19.

Brent crude oil is showing the largest negative risk-adjusted return across all assets overnight with "Texas Tea" not far behind. Taking a look at a daily chart (CLX4), following yesterday's weakness, where it looks like WTi broke down from its bear flag, the selling just intensified. A chart of the continuous future (CL1) shows no real support for at least another $1.50. Many analysts I've spoken to in the past few weeks have highlighted that the market is underestimating how much US production will increase, and the dollar strength will cut into demand even further, creating a toxic combination. We should begin to find both fundamental and technical support around $85/barrel.

The Nikkei was the worst performing equity index overnight on a risk-adjusted basis in sympathy to the weakness in US stocks yesterday, and continued Yen strength. USD-denominated Nikkei futures were 1.2% worse between the US close and the end of the Japanese session.

Chinese equity markets remain closed for the second straight day due to Golden Week. Pro-democracy protests continued last night with more than 200,000 people gathering. The main question on everyone's mind today is whether or not these protests continue once the holidays end tomorrow, when presumably a large chunk of the crowd would return to work.

Data:
- Australia trade balance (Aug) narrows to -787M AUD vs -800M expected, prior -1075M
- UK construction PMI up to 64.2 vs 63.5 exp, prior 64.0

Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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