There is a lot to digest
Investors are nearing a dizzying state of maximum overload given the sheer volumes of headlines, rumours and market whispers, they need to digest.
US politics dominated investor focus.President Trump visited Senate Republicans for lunch on Tuesday, and predictably traders took note of the market whispers surrounding Tax Reform and The Fed Chair.
The big news is that House of Republicans is now scheduled to release a full tax reform bill to the public next Wednesday, but Senate mutter tempered the mood as Republican Sens. Bob Corker, John McCain, Rand Paul may not support tax overhaul.
Trump canvassed Senators for their Fed Chair preference from the shortlisted Taylor Yellen and Powell. According to Senator Scott, Taylor “appeared to win.”.
The markets were unvoiced on the tax reform muckrake, but US 10 year yields popped higher on the Taylor straw poll victory which precipitated a break of the hugely significant 2.4% level. Breaching the 2.4 % level is tremendously convincing from both a psychological and technical perspective, as this barrier has acted as the principal benchmark for gauging both Fed and dollar sentiment.
USDJPY moved on both storylines: down 30pips on tax reform news approaching 113.50 then but then recovered to 113.958 on Taylor headline. There is no escaping these storylines and investors will have a lot on their plate absorbing these evolving narratives as uncertainty continues to reign.
There was a lot of jostling on the market overnight, but the sum of all parts points towards US equities, yields and USD higher. And while the USD in mainly bid in early APAC reversing Monday dollar swoon, positioning remains light in a very cautious market . Predictably so as currency moves have been lightning quick and unmediated at times.
· AUD CPI, where consensus is for +2.0% YoY. We have virtually nothing priced in for November, and the first full hike is only by November 2018.
· And it should be a massive day for CNY as we’ll find out who the new Politburo Standing Committee consists of in a media rollout at 11:45 local time
Trade continues to be somewhat lacklustre ahead of what is widely perceived as the ECB’s non-event of the year. None the less, the ECB will have to reduce its assets purchases to avoid breaching legal limits, but the consensus is the reduction will be relatively currency neutral. For the most part, traders are tuning in for the slim chance Draghi and Co will provide some definitive forward guidance.
The Euro continues to take its cue from USD sentiment.
The Japanese Yen
Buying any dips in USDJPY seems to be a no-brainer given recent political developments should mean Abe/Kuroda Redux in their never-ending quest to ensure a slightly weaker JPY. With Tokyo buying the 113.25 dip yesterday more than a few traders were burned chasing the dollar lower as the 113.20-30 held firm like a rock
USDJPY is back testing the rarified air around the 114.00 level waiting for some concrete news on tax reform and or Fed Chair. But with the market increasingly pricing in tax reform, it’s likely coming down the Fed Chair nomination to ignite the rocket engine and shoot USDJPY higher.
The Australian Dollar
The Aussie is suffering at the hands of US yields and as a result, we are back testing 2-week lows despite resounding commodity prices.
However, do not ignore today’s CPI print as higher than expected impression could lead to a notable shift in short-term interest rates sentiment and underpin the Aussie. But this too may only provide some temporary relief as the market looks to fade Aussie dollar strength.
The New Zealand Dollar
The Kiwi continues to wobble on political uncertainty. But when you throw in a dose of monetary policy uncertainty with the incoming Government poised to “review and reform ” the RBNZ, things get messy.
Asia EM FX
There is no escaping or avoiding the headline risk jitters. US bond yields are dictating the pace of play as local traders nervously bide their time. USDAsia will continue to track USDJPY as fast money rules with longer-term traders showing little appetite for risk.
It will be interesting to gauge just how much of a “decisive role” the market will play in the economy into year end. So far these comments are following on deaf ear as its likely state-owned entities were keeping the market in check over the China summit to avoid any extreme awkwardness.
Its a big week for the Ringgit but with the Budget likely to target lower income groups the net effect should be stimulatory for the economy and support the local unit to a degree.
However, the market focus remains on the next Fed Chair and US tax reform. Recent tax reform headlines have proven positive for both US equity and the US dollar markets. Also, the prospect of a hawkish surprise on the Fed Chair has also underpinned USD sentiment. Asian FX is showing a robust correlation to the USD trend so we could be on the verge of a near-term crossroad that could see the broader USD push higher short-term and weaken the MYR towards 4.25 USDMYR support levels, more so on a hawkish Fed chair surprise.
While the MYR long-term outlook remains favourable, the possible short-term USD scramble on a more hawkish Fed Chair nod could present some headwinds to regional currency markets. I expect Traders will tread lightly this week given the level of market uncertainty.
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