It was hard to ignore the AUD surge post-CPI data with the headline beating (0.7% vs. 0.5% QoQ, 1.3% vs. 1.1% YoY). With the core print failing to provide a clear signal, the +70 pips move higher caught a few by surprise. I suspect the dramatic uptick had more to do with positioning, as the market may have been long dollars, given the broader US dollar moves of late.
My view: “exorcising the deflationary demons will be a lot harder than what the market has currently priced in.”
Heading into the data, the market was pricing in a minuscule risk for a rate cut through 2017, and since the RBA is certainly not about to hike rates, the veracity of the move was a bit surprising. However, the pair may have been caught up in the broader USD move as the greenback was trading slightly lower in Asia.
The AUDUSD once again gained little traction above AUDUSD 77 with a risk reward of pressing higher in the face of an impending US rate hike, making little sense. However, the headline data should confirm a positive tilt for Australia. Better traction on the long Aussie trade played out versus the EURO and the Canadian Dollar, where the interest policy appears divergent.
The AUD is getting little support from oil, which has continued to fall; the WTI is trading just above $49 in early APAC as OPEC deal worries and US inventory data narratives keep resonating within the oil patch. This, despite a relief rally on the better than expected DoE inventory report. $50.00 per barrel is proving a tough nut to crack, and the move quickly faded.
US economic data was generally USD supportive overnight as the US Services PMI, and new home sales topped market expectations, pointing to stronger Q3 growth. Moreover, the overall US trade deficit came in narrower than expected, but with exports higher than anticipated and imports lower than expected, it suggests a buoyant Q3 GDP. Of concern, the US consumer continues to tighten their purse strings as reflected via lower import demand.
JPY continues to range trade, but holding the 104.00 levels. With the markets ascribing a 75% probability of a rate hike by December, with only six weeks before the December FOMC, further dollar momentum from additional Fed repricing is likely limited.
Normally the week before the BOJ meetings the markets are on edge, but with the BOJ bazooka days apparently behind us, traders are quickly acclimatising to the BOJ’s newly adopted patient approach to policy, as the probability of any near term BOJ policy action is minimal.
The most interesting takeaway is that during the recent Yuan depreciation, risk sentiment has held up remarkably well in a market where that I believe is itching to sell risk, given the proximity of the high-risk US election event and the multitude of Central Bank meetings next week.
Emerging Markets were the clear loser overnight versus the USD, as renewed fears of higher global interest rates and a stronger USD continue weighing on investor sentiment. While on the surface all is calm, the market is starting to get a bit nervous about further weakness in the Yuan, which could lead to greater capital outflows and could negatively influence the regional basket, especially the low yielders.
Given the wave of long speculative USD Asia position-betting for further Yuan weakness, risk reward is feeling a bit stretched at these levels, especially considering the market is pricing in a whooping + 75% probability of a Fed rate hike.
We saw a bit of this play out on the MYR yesterday as the USDMYR traded to a low of 4.1440, but import hedgers were reported on the bid and pushed the market back above 4.16.
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