The Washington Sinkhole

The Washington Sinkhole

Currency markets kicked into overdrive as a massive political sinkhole forms in Washington sending a strong bid across US fixed income and hauling the US dollar lower.

The market has been waiting for the Trump failure cascade to begin and yesterday’s health care headlines once again bring into question the administration’s ability to enact on their key legislative promises leaving investors in limbo and the USD sagging.

But factoring in doubt about the US economy,  over reaching equity markets and inflation that seems to have gone missing in action, uncertainty rages at so many levels it’s  no wonder investors look for cover under the  US Fixed income umbrella as storm clouds gather overhead.( The latest JPMorgan Treasury Client Survey showed the lowest levels of shorts in  longer-dated US Treasuries since April 17.  Bloomberg)

Australian Dollar

Besides the all consuming US political quagmire, currency speculators continue to pin their hopes on hawkish central bank follow through. And this bias saw the Aussie dollar propel to a two year high on the back of RBA minutes which were interpreted hawkish by the markets. Unquestionably one of the best Aussie dollar frenzies in a while as dealers took the panel’s discussion of a neutral rate of 3.5% cash rate as a signal the RBA is joining the G10 central bank policy U-turn.

There’s been much debate over night and even this morning the first call was regarding the scope to which the RBA was hawkish. I suspect the move is as much about trend following as it is about dealers falling for the seductive allure of catching a central bank policy shift.  Nevertheless,  price action can not be ignored and if the RBA wants to push back on this move, Debelle will be on the wires Friday and Lowe early next week. The buzz on the street is tactical shorts are building ahead of the RBA speeches  

Euro

The ECB “sources”  were back at it overnight signalling limited appetite to shift policy language at this meeting. Regardless, the market does not want to be late to this party and although the likely timing of the policy change is September meeting or even Jackson Hole, the broader droopy USD narrative is supporting Euro risk appeal. The big question going into this week’s ECB  meeting is whether or not any governing council’s  eyebrows are raised about the elevated Euro level.While there may be some pushback, it’s more likely the sagging USD narrative wins out.Regardless traders are pretty giddy about the tactical trading opportunities that the ECB meeting does offer.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and specialises in Asian currencies at OANDA. After having started his trading career with NatWest Bank, he is based in Singapore as the Head of Trading Asia Pacific with OANDA.Stephen's market views focus on the movement of G-10 and ASEAN Currencies. Stephen has an extensive trading experience in Interest Rate Futures, Money Markets and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Garvin Guy Butler, Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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