Early Tuesday morning in Asia, The Sun came out with the news suggesting the 5p increase in the fuel duty by the UK Chancellor Rishi Sunak in his November month budget proposal.

Key quotes

He is considering ending a ten-year freeze on the tax in his autumn ­Budget to help pay for Covid-19.

The move would automatically add 2p a liter at the pumps, as the price would go up in line with inflation. But a Treasury source says it has plans for an extra 3p on top.

Fed-up motorists urged the Chancellor to scrap plans for the tax hike.

Critics said it would be “madness” to raise the cost of driving while the Government tries to coax people back to the office. 

A Treasury source said officials were also told to look at the impact of a double-digit increase as part of more extreme measures that could be used to raise funds. But a 5p hike was put in the “realistic” category of options.

FX implications

Despite being a price-negative factor for the GBP/USD pair, the news failed to witness any major market reaction considering the lack of activity of the Cable traders amid the early Asian session. That said, the quote seesaws around 1.3370 by the press time.

US Treasury Secretary Steve Mnuchin recently crossed wires, via Fox Business, while speaking on the coronavirus (COVID-19) stimulus discussions between the American policymakers. The Trump administration member blamed House Speak Nancy Pelosi and the Democratic Leader of the Senate Chuck Schumer for the deadlock. The diplomat also said to discuss the much-awaited aid package with the Senate Republican leader Mitch McConnell and other party members.

Key quotes

Continuing to discuss coronavirus aid with McConnell, other Congressional Republicans.

We can always do more if a trillion isn’t enough.

Federal Reserve has done an extraordinarily good job on COVID-19 response.

Hopes McConnell will introduce another coronavirus relief bill next week.

FX implications

The news helps to rebuild the market sentiment while helping AUD/USD to bounce off 0.7380 towards 0.7390. However, cautious sentiment ahead of a busy day in Asia keeps the risk-tone pressured after Monday’s sluggish performance.

• USD net long positioning dropping as markets bet against the US dollar.
• Kiwi makes a fresh high vs the greenback despite the prospects of RBNZ action.

NZD/USD is currently trading at 0.6731 following a day of dollar weakness again as investors scale back positioning in the currency and take note of the out of control spread of the virus in America.

US COVID cases have now topped six million, with infection rates among college campuses accelerating and presenting challenges on the containment front. 

Leveraged funds sold USD for the seventh straight week while asset managers bought it after seven consecutive weeks of net selling.

The DXY weakened on Fed Chair Powell’s Jackson Hole address, indicating a dovish-for-longer shift in US monetary policy.

RBNZ out-doved by the Fed

This will allow for flexibility in inflation targeting towards achieving their maximum employment goal.

The adoption of average inflation targeting and tolerance for inflation overshot suggests a number of bearish factors for the markets to consider when seeking a fair value in the greenback.

The markets are of the mind that it is now clear that interest rate increases are a very distant proposition and right away, markets will not be expecting a higher yield from the dollar for which it had enjoyed for so long.

Also, real USD rates will likely remain low if the Fed succeeds in generating higher domestic price pressures, something which has been supporting the price of gold which is negatively correlated to the US

This has been (and looks set to continue to be) a key feature of the market, and speaks of the NZD performing less well on crosses than against the USD, analysts at ANZ bank explained, adding:

Having been “out-doved” by the Fed, the RBNZ is likely going to up its own dovish rhetoric in coming weeks as it does what it can to lean into the NZD, which is so crucial for growth and inflation. Tomorrow’s speech by RBNZ Governor Orr thus presents downside risks for the Kiwi.

 

NZD/USD levels

• The Dow Jones Industrial Average lost 230.01 points, or 0.8%, to 28,423.86.
• The S&P 500 dropped 8.11 points, or 0.23%, to 3,499.9.
• The Nasdaq Composite added 79.82 points, or 0.68%, to 11,775.46.

US stocks were elevated on Monday following the Federal Reserve’s tolerance of higher inflation levels, Chinese industry expansion, hopes for a vaccine and a firm tech sector.

On the other hand, there were the usual geopolitical concerns, but overall, the start to the week was positive in term of risk appetite despite lower closes for both the DJIA and S&P.

While the S&P boasted its steepest August percentage gain in more than three decades, the index was unable to hold on to the lofty positive territory and ended lower.

Unofficially, the Dow Jones Industrial Average lost 230.01 points, or 0.8%, to 28,423.86.

The S&P 500 dropped 8.11 points, or 0.23%, to 3,499.9 while the Nasdaq Composite added 79.82 points, or 0.68%, to 11,775.46, rallying thanks to high-flying stocks including Apple Inc.

China bouncing back

Helping to lift sentiment at the start of the week, the Chinese data arrived with a strong composite PMI number which raises prospects of a faster global recovery.

China’s official manufacturing Purchasing Manager’s Index (PMI) for the month of August came in at 51.0 as compared to 51.1 in July, according to the National Bureau of Statistics.

Services moved at a faster clip in August with the official Non-manufacturing PMI coming in at 55.2 as compared to 54.2 in July.

PMI readings above 50 indicate expansion which we have now seen in manufacturing activity and industrial output for the fifth straight month.

TikTok poses a risk 

On the geopolitical front, reports that Beijing will need to approve the sale of TikTok to a potential US buyer was weighing on risk appetite. 

Hopes of reaching a deal to sell the US operations of its TikTok video app in the coming days have been thrown into doubt after Beijing announced new rules governing technology exports.

The FT reported that ”China’s Ministry of Commerce revealed late on Friday that the government had expanded its list of technologies subject to export controls to include new rules related to artificial intelligence.”

The updated list of controlled exports, which had not been changed since 2008, added restrictions for ‘personalised information recommendation services based on data analysis’. Inclusion on the list means companies must obtain additional government approvals for the export of certain technologies.

ByteDance-owned TikTok is built on algorithms that analyse user behaviour to push personalised content.

People close to the TikTok sale negotiations said the Chinese government’s decision could derail ByteDance’s plans to reach a preliminary agreement, which was expected as early as this week. Any deal would now take longer to assess in light of the export control changes, the people said.

US data surprises to the upside

The Dallas Fed manufacturing index surprised on the upside in August lifting 11 points to +8 (mkt: 0.0).

Analysts at ANZ Bank explained that the results were mixed across the sub-components with production and capacity utilisation falling slightly and new orders ticking up.

Employment made further gains and the 6-month ahead outlook lifted 9.8 points to 20.4. This time tomorrow we’ll have a read on nationwide manufacturing activity with the ISM manufacturing index out overnight. Market expectations are for a lift of a little more than 2 points. But fair to say that ongoing virus risks and possible winding back of fiscal support to households, could see the pace of recovery slow over the latter half of the year.  

S&P 500 levels