While the pre-referendum polls were on call, the results were even more assertive than expected. However, after falling to a low of 1.0506 in Asia yesterday, the euro has roared back, trading back at Nov 15 levels and touching just shy of the critical 1.08 levels.
US yields moved lower overnight, while equity prices moved higher as long USD dollar positions are tapering. Global risk sentiment roared back after falling prey to the initial Renzi fallout. Whatever negatives Italy creates for the Eurozone, yesterday was not the time for a euro implosion.
After falling to 113.10 posts, Renzi the USDJPY is trading just shy of the 114.00, caught in in the wave of risk reversal after the markets breathed a sigh of relief when it became apparent that there was no imminent collapse in the Eurozone, as fallout was mostly contained.
However, year-end correction signals are growing in amplitude as the USD global position squeeze is starting to take hold. The DXY is trading below the key 110.50, which may be convincing enough for dealers to quicken the pace of profit-taking as we look to turn the final pages on 2016.
We have had an outsized move on USDJPY in November on yet to be confirmed Trump administration policy; and with Friday’s sombre Average Hourly Earnings Data weighing negatively on the reflation trade (Short Bonds), USD momentum is faltering early this week. This, despite good economic news in the US, with the non-manufacturing ISM composite index rising 2.4pts to 57.2 in November.
If US yields continue to falter this week, Yen traders could ultimately fall prey to the broader ¥110-115 range mentality, if the long USD position squeeze accelerates.
Because of the expensive Yuan funding, USDCNH has been trading discount 100 + discount to on shore which has everyone watching Tom Next and One Month forward rolls. Also, there’s some concern the widely publicised Shenzhen-Hong Kong stock connect, which opened yesterday, may be adding to the markets funding woes, but at this stage it is impossible to quantify and is only conjecture at this juncture.
Also, the markets are trying to factor in Shenzhen-HK forex impact, as Shenzhen is Asia’s most active exchange, running over a reported whopping 1 trillion in USD per month.
In the meantime, President-elect Trump’s call to Taiwan and subsequent Twitter outbursts have had a little market impact on the currency landscape.
The Australian Dollar has been the beneficiary of positive risk sentiment overnight amidst broader based USD weakness.
The RBA meets today, and the markets are convinced that the announcement will be disappointing, maintaining steady policy and delivering a similar statement to the last meeting. The landscape down under has been far more optimistic of late, with little in the way of a rate cut bias priced in through 2017. Now some are even suggesting, the next RBA policy move is higher. Overall, Aussie price action has been unexciting within the near term .74-.75 level, and with all the talk of an imminent strong USD dollar breakout failing to actualize, the AUD continues to trade constructively with risk remaining supportive.
While the tail risk is for a mild dovish lean, I expect traders to pivot to Wednesday’s Australia 3 Q GDP quickly.