Stephen Innes Head of Trading at OANDA APAC tells Michael Switow what oil, the RMB, gold and Netflix have in common. And the rest of the market movers
Stephen Innes Head of Trading at OANDA APAC tells Michael Switow what oil, the RMB, gold and Netflix have in common. And the rest of the market movers
A tenuous and unstable state of affairs
The prospects of another round of US tariffs directed at China have resurrected fears that the trade skirmish between Washington and Beijing could escalate with some investors now fearing a full-blown global trade war could be a reality. But the most damning signal is that dialogue between the two superpowers is pretty much non-existent, and with a diplomatic solution appearing more unlikely as the days go by, markets will remain on the defensive.
But with about seven weeks before the new tariffs kick in, if there is a will there could be a way. However, with no senior-level discussion scheduled on the near-term horizon, markets will likely remain in a very tenuous and unstable state of affairs until officials get back at the negotiating tables.
As for woeful Wednesday, Trade war headlines continued to exact a full court press on stocks, oil and EM FX. But the day also provided an unexpected turn of events on USDJPY which bucked conventional risk off wisdom and surged higher as US Treasury yields moved north, but with USDCNH adjusting convincingly higher, the USDJPY now appears trending in sympathy with the broader $/ASIA basket. Indeed, Japanese investors are not in the repatriating haven mood but may be increasingly looking toward the US markets as their essential investment vehicle which could support USDJPY even in a risk-off environment.
An extremely active session in commodities overnight with Crude prices spilling lower across the board as USD200bn of additional tariffs on Chinese goods took its toll. While Oil prices are following the risk-off move but adding more fuel to the fire was Presidents Trump’s comments on Germany’s energy policy which he is suggesting is being ” held captive by Russia”. Also weighing on prices was the lifting of the force majeure at Ras Lanuf, Es Sider, Hariga and Zueitina suggesting that Libyan exports from its eastern ports will quickly resume to previous levels and this report has exerted pressure on bullish sentiment overnight. But the .6% rally in the USD is also weighing on commodity sectors
West Texas Intermediate crude oil moved lower in sympathy with a weaker Brent market on even after the DOE reported a much larger-than-expected draw , but with imports falling by 1.6 million barrels per day but the decline in imports could be writing off due to July 4th holiday hangover and the deluge in the Texas coast due to heavy rains. But still not a particularly bullish signal.
The metals complex is getting hammered with copper plummeting to one-year lows. Of course, trade tensions are harmful to the base metal complex, but the fear that an escalating trade war will severely dent global growth assumptions is inflating the sell-off. Predictably the Aussie dollar is taking it on the chin given it precarious position in the base metal supply chain into China.
In the Gold sector, there has been nary a haven bid to be found as the surging USD has driven gold lower and within an eyeshot of the critical 1240 level. But with a broader equity sell-off failing to materialise in US markets, there has been a real scarcity of defensive allocations into Gold overnight.
What’s hot what’s not? Well, I’m glad I reminded myself that trade wars are good for the USD while holding an unwavering conviction that USDCNH has no place to run but higher on any escalation.
CNH: Yes, this 200 billion is a significant escalation in the trade war between China and the US, and yes, the RMB complex should remain to be the epicentre of currency trade where the visible big-picture developments should see a bullish skew for the USD. And while it’s entirely possible the Feds may enter the equation at some point denting the $’s appeal, we’re nowhere near meltdown level just yet, suggesting there is more juice to be squeezed on the long USD RMB complex.
JPY: it will be tough for traders to change gears from depending on the risk aversion signals to the reality of shifting Japanese inventor behaviour which may be looking outbound for yield. It might be time to start viewing USDJPY strategy through a different lens.
MYR: The BNM held a very even tone at yesterday’s MPC favouring policy continuity. A very sharp move by a Central Bank veteran knowing full well that keeping policy measures at hand for possible darker days ahead makes perfect sense especially with no real reason to signal a dovish shift at this stage.
But more aggressive trade war fears are coming home to haunt as the fear that an escalating trade war will severely dent global growth assumptions and trigger a commodity market rout. Oil markets are not immune to this calculus, and the sudden drop in oil prices overnight is weighing on the MYR sentiment.
But equally concerning, is the lunge higher in USDCNH which should continue to exert pressure across regional currencies.
I’m always looking for a silver lining in the Ringgit cloud, but everything is looking ever so tarnished today suggesting we could press higher as regional sentiment wanes.
When the going gets tough, the tough get going
U.S. stocks are trading off their intraday highs late in the NY session weighed down by financials profit-taking ahead of the deluge of bank earnings reports on Friday, robust US economic data had temporarily overshadowed fears over global trade disputes. That was until a late NY session headline suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter. But a list is a list and not an actual tariff, so lots to be ironed on this one. But regardless, it will put the markets back on the defensive for the time being
Until that point, the market was indeed embracing the raft of outstanding US economic data, and despite the apparent downside risks from an escalating trade war the fact investors continue to plough cash into equities, that was a central dictating market theme. And given the likelihood of a strong earnings season, and at one point investors were heard yelling down Wall Street “what trade war”?? Indeed, when the going gets tough, the tough get going. That was until the latest headline when much of the tough slogging was quickly unwound in minutes as the SPX shed 100 points in the flash of an eye reminding investors we are in tricky markets, and nothing can be taken for granted.
The currency markets, however, are a different kettle of fish where the market risk is relatively light with Forex traders doing little more than rotating from what currency pair is hot from what is not. In other words, chasing the fear of missing out seems to be a common theme among G-10 trades after a considerable volume of USD long positions have been culled over the past few weeks, especially against the EUR and AUD. There is a reason why risk is so low in currency land; it’s the real fear of getting sideswiped by trade war headline risk.
Oil prices continue to gain on yet more production outages with Brent briefly breaching the $ 80 per barrel high water mark as strikes by workers in Norway and Gabon added to global production outages.
Without question, supply risk continues to dominate trader psyche and after the API reported another massive draw traders are now positioning for another sizeable drop in today’s EIA weekly report.
ON the bigger picture, the markets continue to access the intermediate-term supply impact as the Nov. 4 US-imposed deadline for allies to halt Iranian imports moves nearer. All the while the Libyan disruptions continue to run on.
At the end of the day, supply concerns and more disruptions continue to skew bullish for oil prices
After a brief peak above 1265 Gold prices resumed its downward path as global stock markets trade well. However Gold prices pulled came off session lows on NATO concerns as the EU countries are worried about possible side agreement between Putin and Trump which could profoundly weaken the alliance. Also, the latest tariff headlines suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter should keep a bid under the market. Gold dips remain attractive especially for investors knowing that gold should be an essential part of any diversified portfolio, especially in these highly charged political times.
With this morning’s tariff headline risk, I need to remind myself that the trade war is good for the dollar, as the US has the upper hand in negotiations and whichever way this issue gets resolved it’s likely to be positive for the US current account.
GBP: Cable remains the land of the brave requiring a sharp eye and quick trigger given the plethora of Brexit headline risk. But indeed, in this muddied UK political landscape it does suggest the endgame will be the UK never leaves the EU, and in this scenario, the Pound is ” cheap as chips”. When the UK political malaise subsides, Sterling will be the shining star of the market
JPY: The USD did look poised to break out topside given the fading of trade rhetoric and a real risk-on environment developing. US equities have held up remarkably well as the bull market keeps marching her despite the reams of negative news thrown at the benchmarks. Long USDJPY is entirely under-owned as risk-off trades are still prevalent vs the JPY, and on a break of 111.50-75 levels, dealers will be forced into a risk on trade. But as usual, nothing ever works out as planned so we may have to re-explore this scenario later once we iron our fact from fiction over the latest US trade escalation headline.
MYR: It was an up and down day for the Ringgit which was in high demand and dare I say outperformed early on Bond related inflows as investors position for dovish pause for the BNM. The MGS curve was in firm demand particularly the attractive long end yields which are usually the domain for real money investors and pension funds. Indeed, last weeks Bond market awakening was the real deal!!
As for the BNM policy decision, we anticipate no actual shift in rates, Nor Shamsiah is a BNM veteran, and it would suggest policy continuity, but the markets will be more focused on forwarding guidance. Given the political and fiscal struggles ahead, I think it’s easy to assume this will not be a hawkish pause.
Oil prices continue to flourish and should push higher given the bullish supply skews which should go a long way in supporting the government coffers.
We’re tracking the market movements with Oanda Asia-Pacific Head of Trading Stephen Innes. We explore Brexit developments, Asian economic numbers as well as whether trade fears have eased.
All is quiet on the western trade war front
For a change, all is quiet on the western trade war front as the drop in aggressive US tariff posturing and the nonfarm payroll after effects have propelled US equity market to the third consecutive day of substantial gains. While traders sit tight awaiting the next US trade salvo, but for the time being robust US economic data is offsetting concerns about rising trade tensions. In addition to the strong payrolls report, Federal Reserve Board data showed that consumer borrowing picked up in May with total consumer credit increasing $24.6 billion to a seasonally adjusted $3.9 trillion, up 7.6%. Indeed, this incredibly strong pace of credit growth points to a resilient US consumer while continuing to highlight an extremely robust US economy despite growing trade concerns.
But markets remain deceptively tricky and could be even more so as we enter the US dog days of summer.
In Asia markets, all eyes were on Xiaomi Corp IPO but the coming out party was less than a hit and didn’t exactly attract the feeding frenzy expected from high tech investors. Indeed, global high-tech investors continue to feel more comfortable investing in global stalwarts like apple as opposed to debutantes like Xiaomi who have more of an Asia centric presence. Of course, escalating trade war concerns weighed on sentiment but being the first of many prominent Chinese tech names coming to market seeking IPO in coming months, investors may have thought Xiaomi valuation a tad “toppish” in current market conditions. And are perhaps looking for more significant fire sales as more of China’s glittering tech giants swamp the IPO markets in the months ahead.
Indeed, there’s a bullish undertone in the markets with the Iranian supply question expected to support and eventually push prices higher. The Brent market climbed amid ongoing concerns regarding Libyan supplies while treader weighed the bullish medium-term impact of Iran sanctions.
While WTI was under some early pressure after Syncrude Canada announced it would be restarting production from its Fort McMurray oil sands upgrader earlier than expected, but prices remained firm and started to rally after API showed another major draw of 4.50 million barrels.
Looking to Libya, the head of their state energy producer warned that output would keep falling day by day if significant ports remained closed because of clashes last month that lead to a standoff. Mustafa Sanalla, chairman of the Tripoli-based National Oil Corp, stated that “Today, production is 527,000 barrels a day, tomorrow it will be lower, and after tomorrow it will be even lower, and every day it will keep falling.” But keep in mind, current levels are less than half what the country was producing in February pre-political deadlock levels.
Even under the supposition that production from Saudi Arabia and Russia is sufficient to offset declining output from Venezuela, Libya and Iran, keeping the market in an approximate physical equilibrium, the stream of supply disruptions will continue to upset those dynamics.
The weaker dollar had gold bulls charging but the run of stop losses above $ 1261 cleared a path for Gold to touch $ 1265 overnight after political turmoil reared its ugly head in the UK when Boris Johnson resigned. But technically, gold has a long road to travel before breaching the more relevant technical levels around $1300 suggesting it remains ever so prone to the stronger USD. But the robust US economic data, fading of trade war rhetoric and extremely buoyant US equity markets turned golds tide overnight as “risk on ” saw gold prices fall from interday peaks and retreat before eventually finding support at around $1258 levels.
In the currency market, Political unravelling in the UK has provided the best trading opportunities.
GBP: Another roller coaster ride on GBP overnight as Brexit markets got very uneasy after Boris Johnson resignation and the thought he could force a party coup which all but unwound the positively from Friday Brexit Chequers meeting. Long Sterling is arguably the G-10 most crowded trade so any Brexit hic up will likely trigger an outsized move as weaker near-term stops get triggered. But overall the long Sterling trade remains bruised but not broken.
AUD: The lack of trade drama is underpinning the AUDUSD. But the Aussie was arguably the most subscribed USD dollar long play in G-10, so players were mercilessly squeezed as ongoing China/US trade skirmishes are showing nascent signs of easing.
JPY: US yields and equities were soundlessly trended higher which have propelled USDPY to within striking distance of the 111 level. With investors running very neutral USD dollar exposure vs the JPY, short-term traders are boarding the risk- on wagon and buying USDJPY. If US equities continue to stabilise let alone move higher and US 10-year yields continue dribble north, we could eventually test the key 111.40 support line that has proved to be an impenetrable force for months.
MYR: The relief rally on the toned-down trade rhetoric continues to take hold of ASEAN markets. Risk on sentiment in US equity markets should play out positively for local bourses. Asian currencies are trading stronger aided by a sharp move lower in $RMB, robust equity performance and improved risk sentiment which is in complete contrast to last week’s markets tumult.
However, Malaysia registered another 1.65 billion in June outflow all but wiping all the reported 8 billion in fixed income flow from March 2017-2018 which tells the real tale of the election’s impact.
The next crucial focus will be the MPC on the July 11th This will be the first policy meeting chaired by the new BNM governor and with no real drive for BNM to adjust interest rate policy at this stage, however, given all the political uncertainty their remains a chance the BNM could offer up a dovish pause.
In the meantime, the MYR is benefiting from positive regional risk sentiment and rising oil prices all the while the Chinese RMB continues to unwinds last weeks trade induced tantrum.
CNH: For me its a case of know when to hold them and know when to fold them. While I think the RMB will eventually come under renewed pressure as China risk continues to wobble, markets have read far too much into the China economic slowdown which will likely be modest at best. Still this week tier one China economic data will continue to supply food for thought.
Stephen Innes, Head of Trading in Asia-Pacific, OANDA, Singapore
For the USD, it’s all about this week’s CPI.
Markets dismissed the opening salvo of the US -Sino trade war as dated news.
However, after another Goldilocks NFP, US stock markets traded positively in the green while the US dollar bears begrudgingly came out of hibernation after US bond market yields knee-jerked lower.
The NFP report showed the US economy continues to add jobs at a robust pace (+213k). There was a 0.2pp rise in the participation rate to 62.9%, with the expansion in the labour force helping lift the unemployment rate to 4.0%. AHE were softer than expected at 0.2% m/m (consensus: 0.3% m/m). An undershoot in hourly earnings with the participation rate moving higher suggests there is still more room in the labour market to go before wage pressure passes through to the data. But none the less, it does keep the Fed on track and shouldn’t alter too much from that perspective. But the tepid US wage growth inflationary data does lend tentative support to the fresh recovery in EM and G10 high-beta currencies versus the USD
However, for the USD to get back on track and reverse this negative momentum, it’s all about this week’s US CPI print. With the big dollar apparently in retreat, the Greenback will need a shot in the arm with inflationary “pick me up juice” to reverse this nascent sell-off
The market will be incredibly focused on Fed chatter this week as downside risks from tariffs were discussed by Fed officials as indicated on the Jun 13 FOMC meeting minutes released last week. Currently, the duties on $34 billion of Chinese goods, remain primarily at the Walmart level as far as escalation runs and will have limited economic impact, However, should the Administration follow through with the threat of a $200 billion + duties on Chinese goods, indeed this would have some negative implication for both the US and global growth prospects.
Remember that while Powell recognised the dangers of escalating trade war in his Sintra comments last month, but he was insistent the Fed would need to assess incoming data. Early warning signs usually come from sentiment surveys and if we recall it was China and EU sentiment indexes that had led investors into the tank in those key markets. So, traders will key on this week’s University of Michigan consumer sentiment index to see if there are any signs that consumer sentiment is starting to fray from trade war fears.
Of course, Oil traders are wholly perplexed by President Trumps demands to cut off 2.4 million barrels of Iranian oil while admonishing OPEC to keep prices stable if not have them go down! But it’s the White House’s zero-tolerance policy to Iran which is supporting oil markets given the fragile state of global supplies as spare oil capacity hovers near zero. In this scenario, of supply reality versus wishful thinking, there is only one direction for the oil price to move, and that is higher over time
Oil benchmarks went in opposite directions Friday afternoon, with WTI running higher and Brent trading lower as fears of the escalating U.S.-Chinese trade war and increased production by Saudi Arabia, and Russia bumped against supply disruptions from Venezuela and Libya as well as the sanctions on Iran.
There has been some interesting discussion over a note issued by Sanford C. Bernstein & Co. suggesting the lack of reinvestment in oil production could lead to a price spike.“Investors who had egged on management teams to reign in capex and returned cash will lament the underinvestment in the industry,”, And that falling behind the production curve in favour of paying out shareholder dividends runs the risk of prices spiralling much higher in the future.
Baker Hughes reported an increase of 5 in the number of active oil rigs in the United States matching the June high water mark.
For the better part of June and early July, US dollar strength and the dollar-bullish outlook continued to weigh on gold as stronger than expected US data and a hawkish Fed weighted gold prices down like an anchor.
Buyers of physical in Asia have been few and far between despite the pullback, as local currencies have been taking it on the chin due to the stronger USD. But the Goldilocks NFP print which could deliver a softer US dollar profile this week, suggests opportunistic investors may return which should support gold prices. After all, in this highly political and geopolitically charged environment, gold remains a very suitable component in any diversified portfolio.
While China response to the US administration trade policy is keeping the headline tickers working overtime, growth remains mainland’s biggest priority hence the markets will be extremely focused on this week’s China tier one economic data dump which will provide some exacting signpost for evaluating Chinas economy. While US-Sino Trade will continue to dominate the headline ticker tape, this week’s critical set of growth data will be a massive test for local markets. Frankly, by all metrics, growth in China remains more than adequate, but a subpar reading and Main Street might eventually take notice and realise all is not well in China.
Many confusing signals to deal with but none more so than why the PBoC waited so long on the currency front before verbal intervention which has left just enough uncertainty in the air over what their actual motivation was. With some arguing that policy choices are going to be robust and will have the effect of intentionally causing the currency to weaken. However, authorities have made clear their intent on domestic monetary settings, and this would suggest that growth and not trade war will be the determining factor in policy decisions
Indeed, there is Big Trouble in Big China as authorities continue to grapple with pulling back stimulus created by a state-run banking machine which operated with wanton disregard for risk management. Add in the prospects of an economic slowdown, escalating trade wars all wrapped in a shrinking population, and it does suggest Main Street is missing the bigger picture. China risk continues to be underpriced from my chair indicating at a minimum; the Yuan will resume trending lower as the mainland administrators continue to deleverage China, keeping in mind in a wobbly China scenario, CNH should move more than CNY (which is fixed)
There have been massive portfolio outflows from Asia that have resulted in markets tumbling to fire sale levels (SHCOMP -20% on the year). The big dollar – which triggered a lot of the recent round of EM troubles – seems to be consolidating but, there is a lot to be still much to be worried about as the US is not easing its aggressive trade posturing. But this extended period of capital outflows in ASEAN markets does suggest this was more than event-driven risk but more of a structural shift. Whether this shift was all about the strength of the US dollar and risk around China, or more likely a combination for both, this week tier one China data will go along way to confirm this view.
The first round of US tariffs has come into effect with little fanfare. But this contained reaction has given a boost to local risk assets led by the SHCOMP trading 2.5 % higher w. USD ASIA along with the broader G-10 complex in general, traded lower into the weekend as the Goldilocks NFP has given a boost to the nascent EM Asia rally and the USDMYR was no exceptions piggybacking regional risk.
But MYR bonds are trading very neutral into weekend due to the NFP influence, but activity should pick up today ahead of the MPC on on on the 11th which could read neutral to dovish and given support to local bonds. However a more dovish MPC USDMYR trading defensively next week again, but the currency pairs will be hard pressed to take out the 4.05 level given the significant ( USD) dollar could be on the retreat after Friday tepid US wage growth-inflation .. And with OIL prices poised to move higher, the Ringgit should get some support from the commodity sector.
On the MPC front, economic growth will slow to 5.5 per cent this year from 5.9 per cent, while inflation will cool to 2.5 per cent from 3.9 per cent, which will give new Governor Nor Shamsiah Mohd Yunus cause to pause. But for fear of triggering more outflows and denting the local capital market appeal due to to the resulting weaker Ringgit, the BNM will likely refrain from being overtly dovish. With very little priced into rate hike expectations, the market has done most the BNM repricing with Bloomberg data showing the market implied policy rate for one year’s time has declined to 3.28 per cent from 3.41 per cent in May, so why rock the boat.
NZD: The metals complex has recovered from the worst of the sell-off for now and has seen something of a relief rally in AUD & NZD.But given the antipodean position in the global supply chain, they will be the first pairs to buckle on a further escalation of trade war rhetoric.
EUR: The Euro has seen a decent relief rally from the low 1.15 handle, and after last week when some ECB members advocated a sooner rather than later rate hike and a Goldilocks NFP print we could see some more EUR short covering. But it does feel like we are entering the summer doldrums on currency markets as desks are more apt to cover what orders need to be hedged and little else.
JPY: This remains a painfully dull range trades, and levels are clear with the downside at 109.90 and topside resistance in the 111.20
It was a predictable snoozefest in FX overnight as global holiday sessions crimped activity. And adding to the void, there was scant data during European hours which severely nipped action as traders had few if any fundamental guideposts.
But the markets interlude included the usual holiday- liquidity induced mystery move as the dollar went bid at the NY open. But the step was humble and little more than an attempt to trigger some stops in low liquidity market conditions. But all near-term support levels held and the move and quickly retracted as there was no news to support the quickstep sell-off. Chalk it up to the ghosts of presidents past.
Currency markets have remained relatively muted with few if any headlines to sink one’s teeth into but as the markets pivot to Fed speak and the FOMC minutes this week, “deficit mania” is sounding a few decibels lower this morning.But none the less, ongoing concerns about swelling deficit’s and the Feds sequence of interest rate normalisation should be the markets key focus this week and the primary drivers of near-term volatility.
Oil prices have started the week on a positive note.With risk aversion abating, equity markets have remained guardedly positive. Also, an escalation of middle east tensions on the back of Israeli Prime Minister Benjamin Netanyahu beating the war drums by suggesting that Isreal could act against Iran alone has nudged prices higher. Predictably this warmongering has put the region on a state of readiness fearing a head to head incident and boosted oil prices due to the fear of sizable supply disruptions. Of course, when Isreal comes into the equation it could spark contagion across a region
Also, convincing signals from OPEC and their partners to extend production cuts continues to resonate with investors.
Gold prices slid lower overnight on a drop in volatility and a slightly stronger dollar. Selling pressure emerged after USD speculative buyers emerged along with some position short covering ahead of the plethora of critical Fed speak and of course the FOMC minutes. But given the late-January Fed meeting was primarily interpreted as Hawkish; the bar is high for the minutes to sound an even more Hawkish note, but they will still attract the lions share of attention.
Given that the sun seldom shines on a capital hill along with escalating middle east tension, on the first sign of a dollar downdraft gold with ratchet higher.
The Japanese Yen
Markets are focusing on Friday’s crucial Japan CPI print, and with all the recent chatter about the BoJ extending YCC in perpetuity given the stronger Yen, short-term traders are paring back bearish dollar bets. And with a relative sense of calm in overall volatility, dollar bears are taking an interlude in holiday thinned-trading conditions
Very little buying interest yesterday after Friday’s sell-off so given the lack of demand the Euro could fall to low 1.23 on even minor unexpected hic-up on news flow given thin liquidity conditions. But dips should look attractive for long-term players.
The Malaysian Ringgit
Very quiet trading session to start the week with local trader biding time until the FOMC minutes release. In the meantime, the broader USD sentiment will dictate the pace of play for regional currencies and imparticular the USDJPY which is moving towards 107 which is mildly negative for the MYR
On a favourable note, Oil prices remain robust on the escalation of middle east tension and production cut compliance among OPEC members which should provide support for the MYR.
Don’t go barking up the wrong tree in the Year of the Dog
A predictable wave of profit taking and risk reduction, as is standard form ahead of US long weekends, dominated Friday session leading to USD gains as US yields pulled back. And while the broader US dollar negativity continues to seep through capital markets, some traders are suggesting of potential shifts in conviction levels while others believe Friday to be little more than pre-weekend risk reduction. But one thing that’s clear, even the most prolific purveyors of price action are baffled regarding the breakdown of historical correlations across most asset classes.
One telling feature, however, is long-term investors continue to shun the greenback and this should continue to weigh on near-term sentiment. So no don’t go barking up the wrong tree in this Year of the Dog, stick to the basics and follow the flow.
By way of the ordinary course of developments, the various market holiday observances might challenge liquidity conditions. Golden Week celebrations continue across Asia through Wednesday, while both the US and Canada take holidays Monday. Still, it could be an actionable week with numerous Fed speakers on tap and the FOMC minutes are sure to liven things up. Keep in mind; March rate hike is all but entirely priced-in so the markets will be keying on forwarding guidance.
As the markets pivot to Fed speak and the FOMC minutes this week, “deficit mania” is sounding a few decibels lower this morning.But none the less, ongoing concerns about swelling deficit’s and the Feds sequence of interest rate normalisation should be the markets key focus this week and the primary drivers of near-term volatility.
And while US Bond yields eased on Friday, traders see icebergs ahead suggesting Friday’s price action was little more than a reprieve amidst a bear market.
Equity markets continue climbing the wall of worry despite inflationary fears gaining momentum and Bond Yields moving higher.Eventually, something has to give, but so far investors are betting on corporate earning rather than the shifting macro narratives.
Oil prices finished modestly higher on Friday to chalk up a weekly gain as prices continue to see-saw between the binary descriptions from OPEC’s ongoing efforts to blow out the worldwide glut against the indications of rising U.S. production.Although Fridays price movements were likely position sensitive amid USD risk reduction and book squaring ahead of tomorrows Oil contract expiration
We should expect the WTI whipsaw to continue as debate rages between US shale and OPEC, but we’re starting to carve out near-term ranges as longer-term oil bulls remain in dip buying mode with shale oil hedger looking to sell upticks.
Gold prices eased late Friday as the dollar tentatively lifted off the canvas, despite taking a standing eight count earlier in the session when the DXY hit a three year low. A couple of hours USD short covering is unlikely to change the broader USD negativity, but when coupled with inflationary concerns heightening and a probable follow-up correction in equities markets around the corner, golds haven demand should continue to glitter.
On the physical side of demand, China Lunar New Year has seen few gold bars change hands despite physical premiums easing as futures prices continue to grind higher.
G-10 Currency Markets
Although the reappointment of Kuroda and the reshuffle of deputy governors is slightly more dovish BoJ, it is hard to reverse USDJPY downside given that continuous USD weakness could further drag USDJPY into the abyss. With the tables turned upside down on ten year US yield to JPY correlation and the US ” deficit mania. ” likely to return, USDJPY is in a precarious position.
Predictably we heard from Japan as Currency Chief Asakawa that he’s readying the necessary action to prevent “one-sided” currency moves, but with the Buck getting pounded against all major currencies, Japans verbal intentions are falling on deaf ears.
The pace of the EURUSD rally post-CPI last week surprised everyone but none the less if not for timely comments( seems always to happen when EUR rallies) from ECB Cœuré, we should have closed closer to the 1.2500 rather than 1.2400 handles. His remarks spooked the markets in pre-weekend risk reduction mode after he suggested policymakers are unanimous in sequence when market positioning was suggesting the Hawks were gaining the upper hand. But at some juncture, the market will ignore this verbal balderdash, and in reality, 1.3000 shouldn’t be unimaginable before long predicated on strong fundamentals, the realisation of more hawkish ECB guidance but also the mechanics of the taper could reverse bond outflows.
External drivers and specifically the broader USD moves will dictate the Ringgit momentum this week with the critical focus on USDJPY 106 level.But on the positive side of the equation, one of the primary headwinds that we considered to be a negative for the Ringgit was higher US yields which typically and historically have supported the USD. But the US interest rate to FX correlation broken, and despite USD bond yields pushing much higher t, the USD continues to sell off.
The markets are still feeling the hangover effect from the Chinese Lunar New Year, and risk appetite is waning and with a plethora of Fed speak along with the FOMC minutes likely to cause an uptick in volatility this week, offshore demand could remain muted. None the less, 106 level USDJPY will be a crucial US dollar sentiment gauge, and if the market pushes through again this week, we could see the Ringgit move to 3.87 and below as traders would then set sights on the critical 3.85 level.
US Bond Auction TIPS the dollar
A dismal US 30year TIPS auction is weighing on dollar demand as the sagging bid to cover ratio of 2.31 is signalling dwindling investor appetite as inflationary headwinds build. The dollar is lower because no one wants to own US bonds despite the higher yield, knowing the inflationary headwinds will push yields higher and bond prices lower
The market remains nonplussed by the breakdown of FX /Interest rate correlations and while the debate still rages concerning Wednesday dollar sell-off. I think its time to throw textbook economics out the window as well as the so-called interest rate pivot point. G-10 yield differentials are so tiny that traders could care less about differentials as they become increasingly focused on the future outlook of the expanding US deficits and in particular the budget deficit
Another hot inflation reading as PPI showed a substantial gain but provided no bounce to the buck. When real money is taking the dollar to the woodshed and reluctant to own greenbacks in anyway shape or form, it matters little what the Feds are doing or yields for that matter. And by all indications, we could be in the early stages of protracted dollar sell-off.
Equity investors are in a happy spot as US stock markets carved out their fifth consecutive day of gains. Despite a midday swoon, markets roared back as investors view the uptick in inflation as non-threatening and remain in buy on dip mode as last weeks equity meltdown looks more and more like an illogical outlier than ever.
After the decent bounce on the back weaker dollar and Khalid al-Falih suggesting no imminent demise of OPEC and non-member compliance. Not unexpected the markets are becoming a bit more position sensitive heading into the weekend. The weaker US dollar has been a significant component driving market sentiment, and with the dollar entering oversold territory at weeks end, we could see short dollar position pared which could negatively impact interday oil prices.
Frankly giving the evolving vital narratives surrounding OPEC compliance vs Shale output I expect the WTI whipsaw to be as active next week as it was this week. But given the overly bearish outlook for the greenback, we may have printed a short-term floor and dips will remain supported.
There was very little follow through on the much hotter than expected US PPI print which convinced investors to book some profits after gold rallied hard the previous session. A while the weaker USD is underpinning gold prices, the short dollar speculators a bit overextend suggesting the market could pare back US short dollar risk which may temper topside expectations for Gold prices today. Medium-term bullish conviction remains intact given the higher US inflation profile and weaker USD narrative.
Bitcoin buyers were back en masse chasing the dream as the fear of missing ( FOMO)out propelled BTC above 10,000. It appears the recent wave or regulatory worries have been tempered as the massive South Korean market could roar back to life as rumours are circulating that Seoul is looking at licencing several exchanges adding a level of credibility and shoring up severely dented investor confidence.
The Japanese Yen
Talking about FOMO, is there anyone who is not short USDJPY? Of course, “the crowded trade theory” did cross my mind overnight, for second or two, as USDJPY powered back to 106.80 overnight on the Wakatabe headline, before pressing the sell button again. Dovish or not the market cares little about centeral bank policy these days while looking for any and all opportunities to hammer the dollar mercilessly. With very little chance of intervention at these levels, the JPY bulls should continue to have their way near-term.But short-term speculators are a bit stretched so now is not the time to get greedy.Let’s see what fortunes next week brings.
It looks like the grind higher is back in fashion, and the upticks have been relentless over the past 24 hours. But unlike the recent test of 1.25 positioning is much lighter so we could punch higher as traders continue moan over not buying the dips to the low 1.22’s
The Malaysian Ringgit
Powerful bullish signals are falling on deaf ears as investors are far and few between due to Chinese Lunar New Year and quite frankly it’s not worth paying the holiday liquidity premiums to put on risk. Very little offshore interest today so expect the market to remain quiet.