Unfortunately in what is becoming all too familiar, Europe’s citizens were subject to another terrorist attack. The Brussels bombing occurred only four days after one of the ringleaders of last year’s Paris attacks was arrested. While the news will likely have limited short-term impact on the FX markets, traders were busy overnight digesting this tragic event. Given how constructive markets have been trading of late, I was hoping to run with a very upbeat commentary this morning.
Flight to safety
As the news hit the wires, the usual safe-haven assets became in vogue with a wave of USD Treasury, gold and Yen buying dominating market flows. However, given the proximity of the Brexit, GBP was the first currency to capitulate on the event as traders increased downside bets on the probability of a British exit from the EU. Sterling’s move lower accelerated as a wave of risk-off sentiment gripped the market with USDJPY aggressively sold to the 111.40 level. Likewise, the Aussie gave up earlier gains trading down to .7551 as equities moved sharply lower.
Both USDJPY and AUDUSD have since rebounded strongly with gold and US Treasuries reversing earlier gains. The Pound continues to trade weak with the Brussels attacks viewed as increasing the odds that the UK referendum will favour the Brexit.
Cautious trading of Aussie
The Aussie continues to hover around the .7600 level as the broader USD dollar market consolidates post FOMC dollar sell off. Given the short trading week, traders are stepping gingerly and do not appear to be risk aggressive. Many traders are opting for the sidelines. Not surprisingly, electronic trading volumes are running well below normal, and liquidity is operating at a premium.
The main focus this week for the Aussie was Glen Steven’s comments in a speech delivered yesterday. While there was some pre-speech chatter that Stevens would jawbone the currency given the recent Aussie strength, there was little in the way of verbal intervention offered. While initial market reaction to the speech was muted, the Brussels attacks shook things up a little. However, after the risk-off trading, the Aussie has traded fairly constructively overnight consolidating just above the .7600 level as the Aussie bulls eventually found some comfort in Steven’s words. The fact that we’ve pretty much held the .7565-.7635 range this week indicates traders are very judicious with trading decisions amidst dwindling liquidity.
Despite the drop in participation, we see a move higher on the Aussie as one of the local lenders dropping RBA rate cut call
Interesting timing as local media ( AFR) released an attention-grabbing article before Governor Stevens Speech that claimed: “The Reserve Bank of Australia was censured by the United States government for talking down the AUD suggesting those efforts have breached international commitments to allow the market to operate freely.” This article may explain the lack of verbal intervention from the RBA during the Aussie’s appreciation in 2016. And certainly if his intention were to take another kick at can yesterday, the article would likely have derailed those thoughts.
Oil remained firm overnight even during the wave of risk-off sentiment that gripped the market after the Brussels event. However, traders have the key inventories data on their radar screens, released later in New York, so we may see some profit taking leading up to the release.
The Ringgit put in another strong performance breaking through 4.0 USDMYR ceiling in New York trading as investors remain bullish on EM currencies, and WTI traded at the $41 level. Likely adding to the MYR momentum was the completion of the EDRA Global Energy Bhd sale (part of 1MDB’s holdings). USDMYR opened a touch higher than the NY close, but I expect good selling interest on upticks as Malaysian bonds is in good demand this morning
In a relatively quiet week, China’s SAFE official Wang Yungui says they will not rule out the use of Tobin Tax on short-term capital flows. However, we should keep in mind that there is no announced timeline while PBOC’s Yi said over the weekend that a Tobin Tax on FX is ‘still an academic subject’ for now. In my opinion, despite some idle chatter here and there, the Tobin Tax is quickly fading into the background.
Not a great deal of actions on the RMB, which is a bit surprising given the higher fixes we’ve seen over the past two days. Overnight the USDCNH traded listlessly, falling off to 6.4880 where there was some investor appetite for USD.
Today’s fixing 6.4936 vs. 6.4971 prior, in line with market expectations
After a fresh wave of USDJPY selling post-Brussel bombing, the USDJPY regained the 112 handle on the back of broader USD dollar gains. The currency pair moved above the 112.00 level after Chicago Fed President Charles Evans (Dove) said he expects two rate hikes this year.
I think we’re now seeing the USDJPY buoyed not only by a refocus on interest rate differentials but we also see the logic reaction to positive global risk sentiment. With year-end hedgers not prevalent today, this suggests we could see this uptick extended today. On the technical front, USDJPY is back in no man’s land with little clear direction.
MPC decision at 3:15 PM SG. The market is not expecting any changes.
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