You’re Fired or maybe not

You’re Fired or maybe not 

Its been a year to remember in  Global politics and by all accounts, December looks like it will be chalk full of political goodies. The stakes are enormously high for both Brexit and tax reform resolutions, but questions continue to swirl around the Trump administrations as ‘Rexit” (Rex Tillerson Firing ) reports,  rumours and innuendos emanating from the Foggy Bottom brings the administrations credibility into question once again. Well you know what they say where there’s smoke, there’s fire and nothing could be more accurate about the Trump administration record. Even if nothing definitive emerges from ‘Rexit, not that it should be a long-lasting dollar negative,  the real question is who’s next on the firing line??

Prospects for tax reform are convincing with the market pricing in a  75 % chance it will go through. Senate Majority Leader McConnell says passage is likely Thursday night or Friday. If indeed the case, that would lay the first stone for a Republican joint Conference to arbitrate the variances between the House and Senate versions

On the Brexit front,  reports citing an EU official who claims that the EU and UK have agreed to a financial settlement keeps the momentum rolling for a market-friendly parting of the ways.

Economic Data 

Core PCE data has come out at 0.2%MoM and 1.4%YoY – precisely in line with expectation and generated dollar selling as hope for future uptick does little to support the cause of the dollar.

Eurozone inflation data missed the market slightly but was inconsequential as far as the market was concerned.

G-10 FX

Overnight price action was practically incomprehensible given month end rebalance mayhem where the greenback gained in some wallets and weighed in others despite 10Year US bond yields nudging higher overnight.

The Japanese Yen

The path of least resistance appears higher as US yields rise and tax reform risk unwinds. Provided there are no significant unexpected risk catharsis or the BoJ backs off the YCC program, USDJPY should remain well supported on dips. Overnight  saw risk aversion creep into the equation when the market sold off on the “Rexit ” headline but dollars were hoovered up as risk appeal for the US tax reform is too loud to ignore

The Euro 

As EU political risk fades, the Euro will continue to take cues from economic data. The EU CPI data registered a small insignificant miss as Eurozone’s booming economy foreshadows an ECB policy showdown. The Euro should remain firm on strong data flow. The Euro made an astonishing move overnight based traders pervasive apprehension about missing out on a possible shift in ECB rate policy. But with the Brexit bluster lessening the EU is riding the wave of progress.

The British Pound

  Brexit positivity has underpinned  GBP  even with the dollar catching a broader bid. But we should expect the pound to remain embroiled in the Brexit bluster suggesting a limited top side until the dust settles later in December when divorce talks should reach a crescendo. 

The New Zealand Dollar
The Kiwi continues to sag on weak business confidence while the political overhang continues to weigh on broader sentiment.But with the market looking for political risks to abate we could see a reversal of fortunes sooner than later.

Australian Dollar 

Some recently engaged tactical year-end longs are packing it in as the Aussie continues to gain little traction in the face of diminishing yield advantage. With little support offered on the domestic front, the AUD should remain pressured by the stronger US dollar and firmer US dollar yields with the US 10 year treasuries breaching the 2.40 level.

Energy Markets 

OPEC had extended production deal by 9m and agreed to review those cuts in June (6m) rather than the 3m ( April ) hawked about on Wednesday. Indeed, a better result than what could have been and should underpin oil prices through year-end.But oil traders were slow off the mark suggesting that either position is too heavy long in their view or that that the agreement is not constructive enough to inspire a significant push higher.

Local EM Fx traders are in price discovery mode given the pro and con susceptibility various regional currencies will have to higher oil prices. INR vulnerable while MYR resilient  pointing  to some  interesting regional cross trade nuances

  

Asia FX

The Malaysian Ringgit 

It’s a Malaysia public holiday in observance of the  Prophet Muhammad’ s birthday so trading should be rather muted.

The Bank of Korea offered up a dovish rate hike which caused a wave USD short covering. The Won has been a proxy for the regional currencies of late, so it dulled the Ringgits sharp-edged momentum.

US yields are rising but rates remain rangebound and only sustained a break of 2.4 % in the 10 Year US Treasuries would push USD dollar significantly higher. However, this is unlikely to happen unless there are some definite signs of inflation

Month-end activity tends to be very messy on the USD as there is more rebalancing activity than actual market momentum flow, tends to cloud the big picture.

Expect 4.07 4.11 range early next week as we may enter a consolidation phase with investors optimism waning as holiday season thin liquidity is creeping into the picture

Rising US yields present the most significant obstacle to a stronger Ringgit next week so investors will continue to monitor the US yield curve in earnest

The Korean Won

The widely expected BOK dovish rate hike:

  • The Won was appreciating too rapidly which unwinded any momentum for a hawkish expectation
  • IRS market is still implying a little under two more rate hikes over the next 12 months, so not much change there
  • The BoK remains the  most assertive regional central bank regarding future normalisation
  • The USDKRW  bounced aggressively higher but likely compounded by equity outflows as the global tech sector rout weighed on Samsung shares.
  • The US ten-year yields were moving higher adding to the positive USD momentum

There’s a balancing act when it comes to monetary policy as the CB can choose to tighten financial conditions through a stronger currency or higher interest rates. To prevent ” financial imbalances” from the stronger Won, the BoK tacked dovish but left the door wide open for further rate hikes down the road.

The market continues to price in a shallow rate hike cycle, but the Won should continue to benefit from a strong economy supported by the global growth storyline and long-standing sizeable current account surplus. But more significantly, the BoK may be more supportive to a pace of gradual appreciation of the Won as opposed to monetary policy to ward off inflation.

Given the market will continue to express a bullish Asia view through the KRW, the market will likely try to add dollar shorts. Korean Asset should remain in high demand, after all, when is a dovish rate negative for equity or bond markets?  Also, any significant move lower on USDKRW  should attract exporter and corporate need to convert dollars. Also

The primary risk to the bullish Korean Won storyline comes not from the BoK dovish rate hike but rather a sudden meltdown in global equities or an unexpected hawkish shift from the Federal Reserve Board.And of course, traders will continue to monitor the North Korea escalation as the market continues to sidestep Korean Peninsula risk after the latest missile test.

Market Musing 

The US Dollar 

While tax headlines are dominating, the market remains tacitly focused on US  inflation which suggests a tax reform victory in the Senate may have a muted dollar reaction as subdued inflation could ultimately weigh on US yields.

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 currently 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. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and 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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