Profit Taking sets in
There are lots of moving components for the markets to manage and the week has merely begun.
Global bond yields continued to ratchet higher as the bell weather US 10-year Treasuries traded as high as 2.53%, but eventually settling around 2.49%.
Commodity markets are firmer with oil and industrial metals leading the charge, adding momentum to the reflationary trade. WTI traded above $54.00 at one stage on the OPEC deal euphoria and as the Saudi energy minister said that his country might cut production to below the target agreed last month, it just added to the fervour.
Global equity markets reversed momentum slightly yesterday, on a combination of higher US yields and year-end profit taking, but the outlook remains robust.
The final USD move for the year will fall on the heels of the FOMC, as traders will be keenly monitoring for signs of a dovish or hawkish tilt. While a hawkish lean in the rhetoric could drive both US yields and the USD higher, given just how cautious this sitting Fed has been in the past, my best view is that they will err on the side of caution and wait until the much-ballyhooed US fiscal spend becomes policy before adjusting dot plots.
Despite a general lack of conviction and tepid participation on the Australian Dollar in yesterday’s APAC trade, it is hard to ignore surging Iron ore prices, which have become the hottest commodity on the block to close out the year, after making 24 month high’s overnight. Bucking the strong US dollar spectacle, the Aussie dollar remains underpinned by surging Iron ore prices as the currency tug of war plays out between higher US yields and rising industrial metal prices.
With the key short-term drivers, Hot Money and Rising Physical Demand, showing little sign of cooling off the AUD is once again pressing the significant .75-.7525 resistance level. The key 200 DMA currently sits at .7533, which should continue to provide considerable headwinds, but with the USD longs in profit taking mode and commodity prices surging, a significant battlefront may soon play out.
Much of the AUD near term fortune may lie, however, in Thursday’s Australian employment data. Given that the Australian data beat has been weak of late, a definite employment uptick may provide the Aussie with a near-term shot of adrenaline and muster some year-end moxie.
Surging US Treasury yields were the primary driver behind the overnight test of 116.00 with global equities providing another layer of support. However, after touching significant technical levels, the USD has come off the boil in a move, which was initially driven by UST’s, sliding back below the critical USDT10’s 2.50%; which also positions squaring ahead of the FOMC. Since many of the upper-end targets have been achieved and since this is likely the final liquid trading week of the year, investors will be in profit taking mode as we make the final turn for year-end.
The underlying movements are very much reflective of current global reflationary trade and the broader moves in the USD. As we near year end there will be a gradual erosion of liquidity as participation will drop off.