US political rollercoaster
The US political roller coaster is showing little sign of abating despite the House of Representatives and the Senate passing a 1-week Continuing Resolution funding the federal government until May 5 to avoid shutdown
The critical health care bill is still not scheduled, and the Hill is abuzz that the opposition is on the rise. Currently, 21 Republican House members are apparently voting No, and the repeal can only afford 22 No votes.
The US political scene is utterly confusing, and frankly, no one knows how the chips will fall, but one thing is for sure, expect headline anxiety to remain elevated.
The bar remains extremely low for any change in Fed forward guidance.Given the disappointments in US policy and economic data since the dovish Fed hike in mid-March, it’s unlikely we’ll see any shift in Fed forward guidance which will offer little if any support to the greenback.While the base case scenario for two rates hike this year remains intact, traders will continue to be cognisant of US policy kerfuffles, escalation of geopolitical tension and of course Friday’s Non-Farm Payroll in the build-up to June FOMC
Commodity currencies are coming off a terrible week, and there are signs things could get even uglier in the near term. The shift lower in the commodity bloc has been steadfast as momentum is gaining steam with the market warming up to the long USD-CAD positions which are dragging the Commonwealth currencies lower.
The Australian dollar has struggled to rally all week and continued to probe lower as headwinds pick up.
The CRB Index of commonly traded commodities continues to slide on a combination of let downs in US policy and economic data which have been the primary drivers of the recent unwinding of “reflation trades.” With US policies likely to underwhelm the lofty market expectations, we could see a further slide in the CRB which will weigh on the Aussie dollar and its Commonwealth peers.
NAFTA is still in focus as it becomes evident that President Trump’s first real challenge to the North American agreement was little more than a “test balloon “ and there will likely be contentious negotiations down the road. US protectionism will continue to make headlines so expect the Aussie bulls to remain at bay as antipodean anxiety runs high.
The RBA is widely expected to hold interest rates this week and will likely express little stomach for raising rates anytime soon as inflation concerns continue to disappoint. If anything the RBA may sound off more dovish than the current market lean which will pressure the Aussie further.
Risks surrounding Australia’s Federal Budget on May 9 will likely keep any top side momentum in check as there is a chance that it could bring about a credit downgrade which has been threatened over and over by S&P
Finally, beware of the crowded trade mentality as recent CFTC data indicates that the bulls are still holding longs. A clean break of .7400 may cause traders to bail and then add further downward momentum to the Aussie.
New Zealand Dollar
While the Kiwi is trading weaker in sympathy with the commodity bloc of currencies, but I’m taken aback by the recent waves of aggressive selling despite the domestic landscape looking more assured from the RBNZ standpoint. One could only assume that anticipated policy shifts should turn more productive for the currency over the medium term.With the market heavily invested in short NZD trade, it unlikely the momentum will continue as profit taking will likely set in ahead of the critical Q1 employment data and RBNZ inflation expectations on this week’s calendar.Watch for the Bear Trap to spring.
Focus moves to the FED this week and failing a risk meltdown there are few arguments to make for USDJPY lower pre FOMC. With the BoJ parked in neutral for the foreseeable future, the market will continue to focus on Fed and ECB developments. In a daisy chain effect, I think there is still room for the EURO higher and with EURJPY the traders choice as we move through the French Election second ballot I look for any upward momentum in EURJPY to underpin USDJPY.
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