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News & Views: Thursday, September 25

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

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Fed's Fisher says rates may rise 'sooner rather than later' (Reuters)

Air France-KLM Scraps European Expansion Plan (WSJ)

Islamic State Oil Refineries in Syria Hit in Airstrikes (Bloomberg)

China Watchdog Finds $10 Billion in Fake Currency Trade (Bloomberg)

Apple releases iOS 8 workaround to fix dropped cell service (Reuters)

Views
First and foremost, aside from some of the lessor currency crosses, the USD is showing the largest risk-adjusted return across all asset classes overnight. The fact that it happened in the overnight session is impressive in its own right.

The reason behind the strength is due to the New Zealand dollar or "Kiwi." This is showing the largest negative risk-adjusted return thanks to a published statement from Reserve Bank of New Zealand (RBNZ) Governor Wheeler on the central bank's website saying that the Kiwi's exchange rate is unjustified and unsustainable (emphasis his). The RBNZ also goes on to list the reasons behind why it thinks the exchange rate is too high and how it will be negative for growth and inflation. In his statement, Wheeler goes on to say that he would welcome a significant depreciation in the exchange rate and is considering whether conditions in the FX markets are conducive to an intervention having an impact on the exchange rate. Recall at the RBNZ meeting earlier this month that we believed the central bank would have to directly intervene in the markets to lower its currency, because changes to interest rates would not be appropriate.

Another takeaway comes in Australia. I also believe that the Reserve Bank of Australia (RBA) will have to take similar steps to lower the price of the Aussie dollar, because they cannot lower interest rates further - aside from the mining sector its economy is strong and inflation is running hot. It also has a minor headwind from China's increasingly reduced demand for iron ore. The AUDUSD FX cross is the second worst performing asset overnight on a risk-adjusted basis.

Iron ore futures are showing the largest negative risk-adjusted return in commodities overnight. The reason is due to an investigation by China's currency regulator - the State Administration of Foreign Exchange (SAFE) - finding an almost $10bln fraudulent trade that allowed hot money to be fake invoiced as imports from Hong Kong (see CNYCNH debacle earlier this year). The internal financing company would use commodities (usually copper or iron ore) to bring in foreign investment through Hong Kong using the offshore Yuan. It's important to realize that many of these problems have already bubbled to the surface earlier this year thanks to the PBoC's actions, and we're just seeing some more dead bodies float up - this is not an unknown catalyst anymore. However, iron ore has likely seen its high prices for quite some time until the market can figure out a clearing price that does not include this phantom level of demand (possibly as much as 40%).

US and Arab airplanes attacked 12 oil refineries in Syria last night that are controlled by the Islamic State, in an attempt to reduce the group's income. Both West-Texas and Brent crude oils are showing minor gains this morning, and including the gains in the dollar you can acknowledge that the market is viewing the potential of further supply disruptions from the Middle East. Palladium, for example, is down as much as 2% in trading this morning.

Overnight Data:
- Eurozone money supply YoY (M3) up 2.0% vs 1.9% expected, prior 1.8%
- Hong Kong trade deficit (Aug) narrows to -31.5B vs -42.2B exp, prior -42.1B

US Economics (Time Zone: EST)

08:30 Initial Jobless Claims, exp. 300k, prior 280k
08:30 Continuing Claims - exp 2440K, prior 2429k
08:30 Durable Goods Orders (Aug) - expected -17.9%, prior 22.6%
08:30 Durable Goods ex Transports - exp 0.7%, prior -0.8%
08:30 Cap Goods Shipments Nondef Ex Air - exp 0.7%, prior 1.5%
08:30 Cap Goods Orders Nondef Ex Air - exp 0.5%, prior -0.5%
11:00 Kansas City Fed - exp 6, prior 3
1:00 Treasury selling $29b 7-year notes
 
Fedspeak
 
1:20pm Lockhart (moderate, nonvoter) speaks in Jackson, Mississippi

Earnings

After:
Nike (NKE)
Micron Tech (MU)

Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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