The markets have continued to play off Wednesday’s press conference by US President-elect Donald Trump, as dealers appetite for US Dollars ebbed when US Treasury yields traded with a softer bias.
Commodity markets were again the stars of the day, as crude oil prices recuperated; WTI topped the charts above $53 per barrels, while gold continues to shine from safe-haven flows. Uncertainty over fiscal policies to be implemented by the incoming US administration, along with the fact Trump neglected to address them continued to weigh on market sentiment
Adding to a level of unwanted confusion, Fed Members took to the airways and as usual with this sitting Fed Board, offered little in the way of consensus. Uber-hawk, Patrick Harker, told his gathering that he projected three rate hikes in 2017. While at to opposite end of teeter totter, St Louis Fed’s James Bullard said that he would stick with his forecast of just one rate hike in 2017.
Dr Yellen, on the other hand, did not comment on Monetary Policy during this morning’s speech. While it is always a challenge is deciphering what is being implied, I suspect it means there is little to add to her current view and there is nothing majorly dollar negative.
In her follow-up Q&A, Yellen suggested that the US economy was doing well and she foresaw no major issues on the horizon. Tentative dollar bid back in the market.
The Australian Dollar has been the clear beneficiary of the yield-driven USD weakness along with underlying support from Iron Ore prices. What is interesting about the new yield induced USD dollar sell-off, and perhaps a better indicator of overall investor sentiment, is that risk assets have held up relatively well. Sure we have seen some Trump-related capitulation on US equities, but dip buyers emerged en masse, suggesting the investor’s outlook remains rosy.
The AUD breached the .7500 level, the first time since the recent Fed hike, but the Bulls are treading cautiously at these elevated levels as the risk reward above .7500 is shifting for the short positions. Current price action is suggesting this, as the Aussie is trading near the .7480 level in early trade.
Commodity prices, especially the industrial bulk subsection, have remained extremely well bid. It is a bit surprising, given the scepticism in the market over Trump’s fiscal spend. After all, it was Trump’s pledge to spend $500 billion on US infrastructure that stoked the commodity price furnace. However, new steel industry supply-side reform in China, to ensure lower quality steel will be eliminated, that which is produced by electrical furnaces is weighing on short-term supply.
Yesterday’s USD dollar sell-off was uncompromising at times as dealers did little more than hit bids, as the amount of USD coming to market was a clear indication that dealers had miscalculated the breadth of long USD positions and were grossly overextended on pent-up expectations going into the Trump Press Conference.
The slide in US rates has been the primary sentiment driver that saw USDJPY meltdown to a low of 113.75 in early London trade. Yesterday’s support levels of 115 -115.25 are now offering key resistance.
While the Tump Trade ship has sprung a few leaks, my view is that the reflationary trade remains intact and that recent events are more related to overextend positioning, rather than a US dollar sentiment reversal. The sharp dollar sell off was likely exacerbated by stop loss and some Japanese exporter panic selling.
While USD dip buying latter emerged in the NY session, it was driven by a combination of nimble long dollar re-engagements and fast money short cover profit taking. USD gains will likely be capped today ahead of US retail sales in what is shaping up to be a much higher risk event than expected as Investors are fretting about the possibility of back to back weaker data points on the core. Expectations are for a print of .5 vs. last month’s sour .2 reading.
However, I fully expect the market to reload USD long positions ahead Trump’s inauguration and State of the Union where once again traders will brace for confirmation on the Fiscal spend
The Chinese Yuan
The underlying tone continues to be driving on the weaker USD sentiment. However, offshore funding costs appear to be moving higher which is the major topic of conversation this morning on the CNH desk which could be extending the current Yuan momentum.
If investors were getting antsy about the increase in the mainland’s capital controls regulations, there’s unconfirmed chatter relating to cross-border CNY payments that suggest the ratio of inflow and outflow will be monitored under the 1:1 ratio (it was previously 1: 1.6). This suggests that corporates can only move 1 Yuan out of onshore when there is 1 Yuan flow into the onshore market. The clampdown on capital outflows continues.
The South Korean Won continues to perform well as bullish equity sentiment is lending support to the currency as USD long liquidation was the name of the game the past 24 hours. EM currencies, in general, have performed well since the Trump presser but I suspect this is merely a position event as opposed to an overall shift in sentiment. None the less South Korea issues $ 1 bB of forex stabilisation bonds at a record low spread to Government Debt. International investors are snapping up Captial Market broadcast suggesting foreign investor appetite for all things related to Korea economy
As widely expected, the BOK has kept interest rates on hold. South Korea’s exports-driven economy, seen as a bellwether for global trade, was hit hard by a slowdown in China last year. But with signs Chinas economy is improving and global inflation is rising, there was less incentive for the BOK to cut interest rates
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