Fed Rhetoric to Dictate Dollar Direction

Friday February 23: Five things the markets are talking about

Ahead of the U.S open, Euro equities are struggling for direction after a positive Asian session as the market debates the outlook for central banks ‘normalizing’ their policies.

Euro bonds have gained along with Treasuries, while the dollar steadies after yesterday’s drop.

With no U.S data on the docket today, the market will shift its attention towards a plethora of Fed speakers doing the rounds.

First up will be New York Fed Chief, William Dudley, who kicks off proceedings at 10:00 am EDT as he addresses the “Monetary Policy Forum” in Chicago.

Note: Dudley is making his final rounds of appearances before his retirement.

Appearing at the same conference shall be Boston Fed President Rosengren, who is one of the Fed’s more “dovish” members, but who is not a “voter” this year.

Ms. Mester, the President of the Cleveland Fed, will be speaking at the same conference this afternoon at 1:00 PM EDT. She is a “voter” this year and a “hawk.”

Finally, Mr. Williams, the President of the San Francisco Fed, a “voter” on the FOMC this year and generally considered a “moderate,” will be speaking to a group on the west coast on the economy and monetary policy at 03:40 pm EDT.

1. Stocks gain in thin trading

In Japan, stocks rallied in light trade as receding fears of more aggressive U.S interest rate hikes boosted sentiment. The benchmark Nikkei ended +0.7% higher. For the week, it was up +0.8%.The broader Topix gained +0.8%.

Down-under, Australia’s S&P/ASX 200 closed +0.8% higher to cap its best week since Oct. In S. Korea, the Kospi had its best day since Oct. 10 rising +1.5%.

In Hong Kong, stocks rose overnight, capping a holiday-shortened trading week, as main indexes managed to recover much of the damage done during the recent rout. The Hang Seng index rose +1.0%, while the China Enterprises Index gained +1.7%.

In China, shares extended their rebound overnight, on sign’s that the Chinese government is once again supporting the stock market. The blue-chip CSI300 index ended up +0.5%, while the Shanghai Composite Index gained +0.6% in a holiday-shortened week. Both indexes have rebounded over +7% from a low print on Feb. 9.

Note: One of China’s largest insurance companies, Anbang Insurance Group, was seized as it violated laws and regulations that could seriously endanger the solvency of the company.

In Europe, regional indices trade mixed this morning with strength in the Italian MIB offset by weakness in the Spanish Ibex and FTSE.

U.S stocks are set to open in the ‘black’ (+0.3%).

Indices: Stoxx600 flat at 380.4, FTSE -0.2% at 7238, DAX +0.1% at 12470, CAC-40 flat at 5310, IBEX-35 -0.2% at 9858, FTSE MIB +0.4% at 22541, SMI -0.6% at 8917, S&P 500 Futures +0.3%

2. Crude oil prices rally, gold little changed

Crude oil prices remain better bid and range bound following the release of this week’s EIA inventory report, which showed a somewhat surprising decline in crude oil inventories on the order of -2.3m barrels compared to the average increase of +3.4m barrels in the previous five-years.

U.S oil production last week was steady at +10.27m bpd, a record level, while crude exports jumped to more than +2m bpd, close to a record +2.1m hit in October.

Crude bulls are beginning to ask if the “bull” rally could fade away as the U.S. oil production undermines the OPEC production cut commitments.

Note: The decline in crude inventories was particularly acute in Cushing. U.S oil refineries averaged approximately +15.8m bpd during the week ending February 16 or about -330k fewer bpd than last week previous.

Ahead of the U.S open, gold prices are little changed, but the ‘yellow metal’ remains on track for its sharpest weekly drop in nearly three-months. Spot gold is down -0.1% at +$1,329.16 an ounce.

Note: Prices gained +0.6% Thursday, their biggest one-day percentage rise since Feb. 14. The precious metal remains on track for its biggest weekly fall since the week ended Dec. 8, 2017.

3. Sovereign yields fall

Capital markets remains somewhat sceptical that the recent streak of data on wage growth, consumer prices and producer prices points to a rapid acceleration in inflation on either side of the Atlantic.

Data this morning from the Eurozone showed that consumer price growth slowed slightly last month (see below), but the core-measure edged a tad higher for the first time in months.

The ten-year U.S yield has eased, but remains atop of their 2014 high print, while those on German bunds dropped to the lowest since early January.

The yield on 10-year Treasuries decreased -2 bps to +2.90%. In Germany, the 10-year Bund yield has fallen -2 bps to +0.70%, the lowest in four weeks. In the U.K, the 10-year Gilt yield has declined -2 bps to +1.546%. In Japan, 10-year JGB’s yield has dipped less than -1 bps to +0.05%, the lowest in more than seven-weeks.

4. Dollar on the back foot

The U.S dollar is modestly weaker as the market is apparently ready to accept as a given that the Fed shall move at least three times this year to tighten monetary policy and to raise the overnight fed funds rate. The only question is whether the Fed shall move for a fourth time and by how much?

For the ‘single’ unit, it’s not only next weekend’s Italian general election (Mar 4) that poses a risk to the EUR (€1.2313), but also Sunday week is the same date that Germany’s SPD party members will vote on the proposed CDU/SPD coalition. The market is currently pricing in a +40-50% chance of a rejection, a result that could see Chancellor Angela Merkel step down.

Elsewhere, the pound (£1.3950) has edged a tad higher after U.K’s PM Theresa May won the backing of her divided Brexit “war cabinet” to ask for an ambitious trade deal with the E.U.

The SEK (€10.0388) is a tad softer outright as the market felt that the Riksbank Feb minutes this morning were on the softer side with concerns lingering over inflation and the exchange rate given the recent negative surprise with Jan CPI data.

5. Eurozone Jan CPI unrevised, but still a distance from target

Eurostat said consumer prices in the 19 countries sharing the ‘single unit’ fell -0.9% m/m in January for a +1.3% y/y increase.

Ex-food and energy, or core-inflation, fell -1.3% m/m and rallied +1.2% y/y, accelerating from +1.1% in the previous three months.

An even broader measure of core inflation, which in addition excludes alcohol and tobacco prices, also increased to +1.0% y/y in January from +0.9% in the previous three-months.

Forex heatmap

24 hours of reconciliation

24 hours of reconciliation
It took all of 24 hours for the results of the rationality test to kick in after traders took time to the read the minutes from Wednesday. Not a heck of a lot has changed in the Feds view. The minutes were far more balanced than the equity market sell-off suggested. The discussions about their inflation target being symmetric indicate that the Feds are less concerned about the updraft from inflationary pressures than current market pricing. Overall there were few if any significant hawkish shift and traders have started to nimbly re-engage the US dollar downside not waiting until Powell’s key Humphrey Hawkins testimony which should clear up more than a few policy concerns.

The Feds will raise interest rates in March on the back of two strong inflation prints post-January meeting, but the market remains comfortably parked in the three rate hike camp for 2018.
This new Fed Chair will be as data dependent as his predecessor so, in reality, no one knows for sure what the Feds will do other than hike somewhere between two and four times in 2018.

Bond Markets

The bond markets continue to trade from a bear market bias, and this is unlikely to change anytime soon given the burdening supply issues which are compounded as the Feds delicately and gingerly pull back on QE largess.

Stock Markets
US equity market rebounded as concerns over rising US interest rates abate. If you were confused by Wednesday 50 pips downside adventure on the S&P post-FOMC minutes, you were not alone. However, until the dust is settled on the Fed policy debate, we should expect more back and forth ahead of Jerome Powells Humphrey Hawkins testimony.
Oil markets

Oil market bid was boosted by DoE inventories which saw a draw of -1.616 million barrels which far better than consensus and more profound than the -.9mn print by the API. While the market continues to communicate concern over rising levels of shale production, this bullish inventory data coupled with a slightly softer USD profile, it’s easy to see why oil prices are finding fresh session highs going into the NY close.
Gold Markets

Gold continues to act as less of a haven hedge and more as a proxy for USD sentiment. Given the greenback is trading within a restricted range as the stage is getting prepared for new Chair Jerome Powell, gold will remain supported by the $ 1324-25 levels given the markets ubiquitous bias to sell the USD.  But the topside should also stay in check as most traders will opt to only aggressively re-engage in  USD downside after Powell clears the policy airwaves in his Humphrey Hawkins testimony.

The Japanese Yen

No need to jump the gun, today’s CPI data will be a crucial driver in JPY sentiment. Post data comments to follow.

The Euro
Fact of fiction, the Euro remains a point of contention, but topside conviction remains low ahead of the Italian election compounded by softer EU economic data.

The Malaysian Ringgit 

The USDMYR landscape is a bit muddled, and this air of uncertainty could extend, more so if opinion on the soft dollar narrative become less reliable. Rising US interest rates and the markets growing sensitivity to local economic data presents some near-term challenges for the Ringgit. Ultimately we believe that US rates are in the process of topping but until we get a definitive signal from the New Fed chair, hopefully, next week, we should expect offshore flows to remain light in the short run.

None the less the Ringgit is getting support from higher oil prices and given we are far removed from the USDJMYR 4.0 danger zone, longer-term investors should continue to look for opportunistic levels to re-engage long MYR posting

The Chinese Yaun

Markets in China return from a week-long holiday only to discover the US has initiated another anti-dumping probe.. This time for rubber bands. Certainly sounds more bark than the bit, but non the less trade war discussion is picking up.

Continue to favour a constructive view on the Yuan given the markets negative USD bias. But he RMB complex will most certainly benefit from expected bond inflows which should accelerate as we move through 2018.

Confusion reigns

Confusion reigns

In a market starved for significant news, the FOMC minutes provided just enough talking points to keep the dollar bid as US bond yields nudged towards crucial resistance levels.However, the Feds assortment of views on wage growth suggests the FOMC remains pliable during the transition phase from Yellen to Powell. In other words, the Feds stay in wait and see mode regarding inflation.

Of course, the market latched on to the dovish stuff as traders were partial to sell the dollar, but as is so often the case when interpreting the Feds exercise in verbal gymnastics, the market got it wrong. The FOMC minutes were eventually deemed slightly more hawkish after suggesting economic growth will surpass their estimates which caused STIRT traders to nudge rate hike expectations higher through 2018  and providing a bump to dollar sentiment. But given the lack of follow-through, the jury remains out.

The exciting part of the equation today will be the return of China investors which should provide a spark to regional sentiment. But the jury is out on the currency markets and in particular USDJPY which remains the primary vehicle to express currency sentiment.

So there lies the debate,  interest rate hawks preach the FOMC had not seen last week’s sharp inflation report while the doves suggest a need for a string of convincing inflation prints before moving to the four rate hike camp.

Bond Markets

The bond market is confused, but as my first boss on the BondDesk was always quick to remind me, when in doubt Sell.
Oil prices

Tumbling oil prices got a reprieve at the end of the day after American Petroleum Institute data showed a drop of 0.907 million barrels in US crude inventories. Given all the noise about a shale production ramp, Traders were expecting an increase in the warehouse when in reality improved pipeline infrastructure to the Gulf coast and the decreased supply via TransCanada’s Keystone pipeline, sent Cushing inventories tumbling.But the firming dollar continues to thwart investor sentiment despite the bullish inventory data.  By no means is the dollar returning to form so this upbeat inventory data could have some legs.

Gold Prices

It was a  meltdown in Gold markets overnight, and I’m not talking about scrap prices. But in reality, this should provide Gold investors with another opportunity to re-engage as the Fed fell well short of confirming a 4th rate hike in 2018. The minutes were more balanced in my view as the recent uptick in volatility will have as much bearing on Fed policy decision as the subtle rise in inflation.

G-10

The Euro

Disappointing price action from the long perspective continues to weigh on sentiment; bullish views continue to be challenged ahead of the Italian elections, as near-term convictions turn neutral to slightly bearish

The Japanese Yen

There remain substantial offers between 107.50-108 levels that are providing a cap on USDJPY, but Traders remains exceptionally cautious in either direction despite increasing signals for a structural demise in USD sentiment.While fiscal stimulus looks good on paper, we’re entering uncharted territory as the Fed pares back bond purchases while the Treasury issues absurd amounts of debt.
Malaysian Ringgit

We should anticipate more liquidity coming back to the market as mainland investor return. While we’re nowhere near a make or break scenario for the Ringgit, short-term sentiment remains tarnished by an unexpectedly faster rise in US bond yields. While this is mildly negative for local opinion, the main issue is investors are growing increasingly concerned about a quicker pace of interest rate normalisation from the Fed which could trigger regional capital outflow.

The FOMC minutes served up little more than a plate of confusion last night, so I expect G-10 along with Asia FX to remain in a state of limbo until Fed Chair Powell takes the podium later this month.

Yield-o-Mania

Yield-o-Mania

Global yields ratcheted higher after a stronger than expected jump on Germany’s PPI which bolsters the hotter than expected comprehensive inflation narrative. But it was the jump in US 2-year note yields that provided the extra boost to the US dollar as shorter-dated tenors provides investors with better goalposts for determining how the market is viewing Fed sentiment

However, the lukewarm demand for two-year notes at auction and with supply concerns expected to weigh heavy on investor bond appetite this week, we could see the dollar back under pressure. Of course, traders are erring on the side of caution ahead of the release of the FOMC Jan 30-31 minutes and given the short dollar bus had reached standing room only portions, the short-term pause in this year’s grand dollar sell-off was not too unexpected.
US stock markets

US equity markets fell overnight on the back of higher US Treasury yields which are providing investors with more income than dividends on the S&P 500 Index. While the prospect of higher interest rates will keep investors on edge, it’s not like we’re returning to double-digit levels or the Fed is moving its terminal rate.So even the uptick in ten-year yields to 3 % or even 3.25 % is unlikely to kill the equity market rally as the benefits from fiscal stimulus should continue to feed through the markets. Investors are banking on much higher returns from equities than bonds again in 2018.

Oil markets

Amid OPEC supply compliance, WTI markets are focusing on dwindling inflow of Crude from Canada to Cushing due to limited accommodation on the Keystone pipeline.The disruption is providing a fillip to WTI prices while the stronger dollar has Brent prices falling and narrowing the WTI-Brent spread. Also, WTI is getting a boost from rising exports attributed to better infrastructure connecting the Permian Basin to the Gulf Coast. But of course, we are tapering expectation on WTI rally as the USD continues to find firmer footing.

Gold markets

A tough week for the Gold market so far as the dollar has rebounded and US Bond yields have jumped higher ahead of the FOMC minutes. Traders are hedging for a possible shift in guidance given the uptick in inflation, so this presents a significant market tail risk which could cause traders to reprice rate hike expectations in 2019 aggressively higher. A quicker and steeper slope of interest rate normalisation offers the most prominent near-term threat to gold prices as this outcome will send the USD surging.
G-10

The Euro

The lack of demand for EUR Monday certainly opened the door, and predictably on the first sign of abject news, we dipped to the low 1.23’s after the German ZEW survey plunged. The market is forever a discounting mechanism and given the extremely disappointing price action from the long perspective; it triggered one-way position squaring ahead of the FOMC minutes. And while the bullish EUR narrative continues to resonate, both bearish and bullish views will be inevitably challenged with Italian elections, January NFP and an ECB meeting due over the next few weeks so near-term convictions could turn neutral and tarnish the EUR appeal

The Japanese Yen

The USDJPY should be the best game in town this week especially if traders interpret the FOMC minute’s  colour as bold. However, the risks are balanced entering the FOMC minutes as the recent uptick in volatility could have as much bearing on Fed policy decision as the subtle rise in inflation

But until the market takes out the significant 108.15 level I continue to view the current move as little more than a pre FOMC meeting squeeze driven by yields and positioning and believe there will be substantial resistance between 107.50-108 levels.
The Australian Dollar

Pre-data comments. Given the RBA has been very vocal on wage growth as the missing piece of the economic puzzle, today’s Wage Price Index will attract an unusual amount of focus. Unfortunately, everyone is looking at this trade so the news reading algorithms will likely get there well ahead of everyone on a surprise uptick.

The Malaysian Ringgit

Riskier currencies are trading on poor footing given the firmer dollar and negative global equity sentiment. And of course, we can not overlook higher US yields which are driving opinions this week. This package of coincidences does not make a very conducive environment for regional risk.

Higher Yields Pushing Dollar Up

Tuesday February 20: Five-things the markets are talking about

Overnight, global stock indexes have declined along with U.S futures, while the ‘big’ dollar has rallied a tad as U.S Treasury yields back up towards their four-year highs.

No central bank meetings are scheduled for this week although minutes from the latest FOMC (Wed) and the ECB meetings (Thurs.) will be published.

Note: Given the forthcoming March FOMC meeting (March 20 -21) when markets expect another +25 bps increase, dealers will be looking for signs that the majority of the committee is aligned for the increase. They also will be looking to see how the FOMC’s views on inflation have evolved.

In the U.K, there will be two major releases – the labor market report (Wed) and the second estimate of Q4 GDP (Thurs.) Elsewhere, Canada will post December retail sales (Thurs.) and consumer prices for January (Fri).

With little to no economic U.S data on tap, the markets focus now turns to the U.S Treasury department, which opens its auction floodgates beginning with today’s record supply of +$151B of three- and six- month bills (Total new debt supply is +$258B this week).

The U.S debt sales should provide a better market understanding of how steep yields can back up in the short-term.

Note: Fed policy makers speaking this week include NY Fed President Dudley and Atlanta Fed President Bostic and Cleveland Fed President Mester is among speakers at the U.S Monetary Policy Forum in NY.

1. Global stocks see ‘red’

Asian equities took their cue from Monday’s European bourse direction as U.S stocks and Treasuries took a break for the Presidents’ Day holiday.

In Japan, the Nikkei fell -1%, surrendering some of its early-week rise thanks to weakness in its electronics and banking sectors. Selling came despite a slip in the yen outright (¥107.10). The Topix fell -0.7%.

Down-under, the Aussie’s S&P/ASX 200 ended flat. In S. Korea, the Kospi fell -1.1%, dragged lower by index heavyweight Samsung Electronics, which dropped another -2% after falling -1.3% on Monday.

In Hong Kong, the Hang Seng Index pared an early slide, down -0.2%, on its first full day of trading in nearly a week. The main benchmark in Singapore fell -0.2%; while Indian’s Sensex was last up +0.4%.

Note: With Chinese and Taiwanese markets still closed for the Lunar New Year holiday, investors should be cautioned against reading too much into recent price action due to thin volumes.

In Europe, indices trade mostly higher across the board following the weakness seen yesterday, with the FTSE under performing being weighed on by HSBC and BHP Billiton following results.

U.S stocks are set to open in the ‘red’ (-0.8%).

Indices: Stoxx600 flat at 378.3, FTSE -0.5% at 7213, DAX -0.1% at 12373, CAC-40 flat at 5257, IBEX-35 +0.2% at 9829, FTSE MIB +0.1% at 22582 , SMI flat at 8907, S&P 500 Futures -0.8%

2. Oil markets mixed, Brent and WTI move in opposite directions

U.S crude prices are still carrying momentum from Friday’s gains due to yesterday’s President Day’s holiday while international Brent prices have eased.

U.S West Texas Intermediate (WTI) crude futures are at +$62.31 a barrel, up +63c, or +1% from Friday’s close. Ongoing supply reductions from Canada to the U.S due to pipeline reductions are supporting WTI prices.

Brent crude has eased on the back of a dip in Asian stocks and a stronger dollar. Brent crude futures are at +$65.54 per barrel, down -13c, or -0.2% from yesterday’s close.

Note: Oil markets remain well supported due to supply restraint by the OPEC. Yesterday, OPEC Secretary-General Barkindo said the organization registered a +133% compliance with agreed output reduction targets in January.

However, soaring U.S production is threatening to erode OPEC’s efforts. Last week, the amount of U.S oilrigs drilling for new production rose for a fourth consecutive week to +798.

Ahead of the U.S open, gold prices have slid for a third consecutive session as the ‘mighty’ buck rebounds from its three-year lows, while the market waits Wednesday’s Fed minutes for clues on the outlook for U.S interest rates. Spot gold is down -0.2% at +$1,343.22 an ounce.

3. Sovereign yields trade atop record highs

This is a huge week for bond investors, as the U.S Treasury prepares to sell +$258B worth of new debt, starting with today’s record sale of +$151B of three- and six- month bills. These debt sales should provide a better understanding of how steep U.S yields could back up in the short-term.

After building up a record “short” position in U.S 2-year futures and historically large short positions across other maturities, higher volatility this month has seen a sharp reduction in these record shorts over the past week.

The biggest reversal was in two-year product – net short positions were slashed by +76,772 contracts to -133,986.

The U.S 10-year is now at +2.92% ahead of the first trading day this week after yesterday’s holiday.

In Japan, BoJ Governor Kuroda did not discuss monetary policy during an appearance in parliament. Speculation has been swirling about the possibility the BoJ might scale back its stimulus since they reduced their purchases of JGB’s last month.

Down-under, the Reserve Bank of Australia (RBA) reiterated in its minutes of this month’s policy meeting that inflation is expected to “only gradually” accelerate as the economy strengthens and wage pressures increase.

4. Dollar gains against most G7 pairs

Ahead of the U.S open, the U.S dollar has seen some steady gains outright versus G7 currency pairs, aside from sterling. The gains are reflective of U.S yields pushing a tad higher.

Sterling has jumped from its overnight low of £1.3934, to again trade north of the psychological £1.4000 handle on news that the European Parliament is putting a document together outlining its desire for an “association agreement” with post-Brexit Britain. This is a break from the position of the chief E.U negotiator Barnier and could allow Britain to retain “privileged” access to the single market.

5. German ZEW Survey moves off from record highs

Germany’s ZEW Indicator of Economic Sentiment recorded a decrease of 2.6 points this month and currently stands at 17.8 points.

The indicator remains slightly below the long-term average of 23.7 points. The assessment of the current economic situation in Germany decreased by 2.9 points, with the corresponding indicator currently standing at 92.3 points.

Comments from ZEW President Wambach: “The latest survey results continue to show a positive outlook for the German economy. The assessment of the current economic situation is still on a very high level and the economy is expected to improve in the coming six months. Economic growth in Germany is substantially driven by the very good development of both the global economy and private consumption. Inflation expectations for Germany and the Eurozone have also started to increase.”

Forex heatmap

Intermezzo

Intermezzo
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 Markets

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 Markets

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.

G-10

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

The Euro

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

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

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 markets 

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 Markets

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

Japanese Yen

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 Euro

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.

Asia FX

Malaysian Ringgit 

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.

Singapore Dollar

The US CPI fallout was somewhat unusual; triggering moves out of the dollar and into riskier currencies, so the SGD benefited as the CNH rallied hard this week.But  CNH could start to underperform. Let me qualify this next comment as no one, and I mean no one knows what the Pboc are going to do. So we can only make hay from innuendo and strategically placed criticisms from regulators in HK  press. But there seems to be a  pickup in debate onshore about the merits of further RMB appreciation which could dent SGD appeal. But in the mean times, we should enjoy the SGD strength ( not because I get paid in SGD, although that is always a welcome bonus). But there is some real value appeal that has emerged in SGD  ahead of this weeks budget, as a rosier outlook in the statement could be the precursor to monetary tightening.But also appealing to foreign investors is the government will take measures to cover the current operating fiscal deficit gap.

Dollar Regains Ground Ahead of Fed Minutes

Higher US inflation fails to spark dollar revival

The US dollar depreciated across the board versus major pairs despite consumer prices rising more than expected. Inflation anxiety had triggered a sell-off in global stock markets with the Fed expected to ramp up their interest rate hike path yet the dollar did not benefit as higher rates have already been priced in by the market. Fiscal uncertainty driven by political factors continue to confound investors with stock indices rebounding this week and the dollar hitting a 2014 low. The paradox in consumer spending and retail sales continues as Americans remain confident in the economic outlook yet core retail sales remain flat and taking into consideration auto sales they actually dropped by 0.5 percent. The dollar showed some signs of life on Friday as it gained against a basket of major pairs, but not enough to offset the losses earlier in the week.

  • Fed to release minutes of January meeting
  • Kuroda renominated as Governor of Bank of Japan (BOJ)
  • Lower trading activity with start of Chinese New Year celebrations and 3 day weekend in NA

Dollar Recovers on Friday But Still Underwater this Week



The EUR/USD gained 1.62 percent in the last five days. The single currency is trading at 1.2448 with the EUR recovering against the earlier losses versus the USD suffered earlier in the month. US inflation rose more than expected and US treasuries dropped in prices as investors sold them anticipating higher rates this year. Bond yields rose with the 10 year at four year highs (2.93 percent). The correlation between higher yields and a stronger currency is broken at the moment for the USD as the confidence in the stability of the US economy is up for debate. Fundamentals are strong and would point to a higher dollar, but political uncertainty around fiscal stimulus has made it hard to quantify the effects of actual and proposed legislation on the currency. The U.S. Federal Reserve will publish the minutes from its January Federal Open Market Committee (FOMC) meeting on Wednesday, February 21 at 2:00 pm EST. The meeting was the last presided by Chair Janet Yellen and is not expected to bring any surprises, but could prepare the market on what to expect in March when Chair Jerome Powell heads his first FOMC.

The USD went through a topsy-turvy week, with Wednesday’s release of consumer price index data providing the most volatility. The market forecasts were slightly improved with a 0.3 percent monthly gain. The employment report in February 2 was the first data point that suggested a stronger inflationary pressure. Stock markets had already suffered two difficult weeks and the dollar rose as the inflation data was released only to quickly give back all gains and end up in the red.

President’s day in the US will give some investors a much needed rest from a high octane trading week. The Lunar New Year celebrations will also affect trading volumes as Hong Kong and China markets will remain closed until Thursday. Stock markets had a positive week after stronger corporate results erased earlier losses.



The USD/JPY lost 2.38 percent during the week. The currency pair is trading at 106.19 as the JPY keeps gaining. The government issued a statement where it was clear there is no need for intervention and the market took it as a sign to keep buying the yen. The tone changed slightly on Friday as the currency kept appreciating and there were some warning that the trade is one sided. The softness of the USD and uncertainty about how the American government will deal with growing twin deficits and political drama has boosted the JPY due to some safe haven flows.

The reappointment of BOJ Governor Haruhiko Kuroda along with other nominations of economist who favour further easing did not factor into Yen pricing in the short term, but should impact the growing gap between rates in Japan and the United States. In the short term, lack of stability in politics and fiscal uncertainty are overriding higher growth and interest rate expectations in the US.



Oil prices advanced during the week. The price of West Texas Intermediate is trading at $61.21 with most of the gains in energy coming from dollar softness. Oil prices suffered losses earlier in the month as higher production in Canada, Brazil and the United States is anticipated given the high prices and producers in those nations not bound to the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement. Lack of traction of the US currency is keeping prices above $60.

A small rise in oil rigs in Baker Hughes was not enough to derail energy prices specially with an underlying weak US dollar. The OPEC agreement with other major producers has stabilized oil prices after the freewill caused by overproduction. The question remains if demand for energy has recovered to the point that even after the agreement timeline runs out supply will not once again outweigh demand causing another drop in prices.

Market events to watch this week:

Monday, February 19
7:30pm AUD Monetary Policy Meeting Minutes
Wednesday, February 21
4:30am GBP Average Earnings Index 3m/y
9:15am GBP Inflation Report Hearings
2:00pm USD FOMC Meeting Minutes
Thursday, February 22
4:30am GBP Second Estimate GDP q/q
8:30am CAD Core Retail Sales m/m
11:00am USD Crude Oil Inventories
4:45pm NZD Retail Sales q/q
Friday, February 23
8:30am CAD CPI m/m

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

US Bond Auction TIPS the dollar

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 Markets

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.

Oil Markets

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.

Gold Markets

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.

Crypto Markets

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.
Currency Markets

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.

The Euro

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.

US/German Bond Yield Gap Hits 10-month high

The gap between German and U.S. 10-year borrowing costs reached its widest point since April 2017 on Thursday after a higher-than-expected inflation print in the United States led to a sharp sell-off in U.S. Treasuries.

While investors also shed European government bonds on the data – bond markets in the world’s major developed economies tend to track each other as many investors switch between them – political risks kept a cap on yields.

The yield on 10-year U.S. Treasuries, which moves inversely to price, touched a fresh four-year high of 2.94 percent in European trade, after data on Wednesday showed consumer prices rose more than expected in the world’s largest economy in January.

This raises the pressure on new Federal Reserve chief Jerome Powell to prevent a possible overheating of the economy.

“The inflation data weighed on the U.S. Treasury market, and now you will have fiscal stimulus when the economy is running at full employment,” said Commerzbank strategist Michael Leister, referring to U.S. President Donald Trump’s $200 billion infrastructure spending plan.

“But in Europe the risks have become a bit more balanced and there’s still some demand for Bunds,” he said.

Though European bond yields have risen sharply since the start of December, this move has lost some steam as concerns around German coalition talks and an upcoming Italian election renewed the bid for “safe haven” bonds.

In addition, while most expect the European Central Bank to reduce extraordinary stimulus sooner rather than later, rate hikes are still a good distance away with a booming European economy yet to leave a lasting mark on inflation.

But while German 10-year government bond yields also rose after the release of the U.S. consumer price data – they were 3 basis points higher at 0.78 percent on Thursday – this was still below the recent 2-1/2 year high of 0.81 percent.

The “transatlantic spread” between U.S. and German 10-year government bond yields opened Thursday at 216 basis points, a level last seen ten months ago.

Most other euro zone government bond yields were also higher by 3-4 bps, partly driven upwards by large bond sales by Spain and France on the day.

AUCTION STATIONS

The move towards higher yields across the euro zone has certainly boosted demand in some quarters, and this was on display on the French and Spanish auctions on Thursday.

France in particular was swamped with demand as investors put in enough orders to cover an 8 billion euro sale of bonds twice over, while Spain also generated strong demand, particularly for its shorter-dated debt.

“I have been watching to see at what point these positive yields on semi-core bonds start attracting international investors, and so for me this France result looks pretty interesting,” said Mizuho strategist Antoine Bouvet.

Spain’s bond auction result was also positive, especially given that Italy and Portugal have already conducted sales this week, he added.

Reuters