Another Day another Dollar

The December Rate hike probability is set near 100%, and the UST 10’s are nearing 2 .38 %. The USD bulls have shown little fear by taking the greenback into the weekend trading at, or near, recent highs.

Given the sheer USD buying volumes of late and with the DXY surging, traders are positioning for another USD leg higher, despite concerns that we are nearing a near-term pinnacle from the USD positivity of Trump mania.

However, shortened holiday week, liquidity should drop off significantly by Thursday, and I suspect we may see a lull in activity with some consolidation and profit taking likely  after a tumultuous ten days of monumental USD strength.

Australian Dollar

The Australian Dollar continues to struggle, as do all high yield currencies. With US yields surging, the AUD’s return has been significantly tarnished. US inflation expectations are mounting on speculative bombastic fiscal spend, so dealers are quickly repricing a steeper Fed rate hike tangent.

Since the turn in the metals complex last week, there has been no looking back after the break of the 200 days MA at .7410. The AUD is trading frailly within the Commonwealth basket, yet by no means is it isolated, as regional USD dollar outflows are mainly concentrated in the Emerging Market Asia space.  Given that the AUD is a liquidity proxy to express economic APAC sentiment, the currency is feeling the negative regional effects.

While the interest rate narrative is dominating currency movements ,  the threat of US trade barriers continues to bode poorly for global industrial supply chain champions like Australia.Of course , there is no guarantee that Trump’s campaign rhetoric will turn into foreign policy, but the threat of trade sanctions will keep the RBA on a dovish lean, which could magnify if the Fed Fund Rate curve steepens.

Japanese Yen

Playing to a similar song, US fixed incomes are ratcheting higher while the BOJ maintains its de facto 0% peg in JGB 10’s. This underlying divergence will continue to support USDJPY higher and given current momentum, any pull back to 110 levels will present excellent opportunities to add to long positions. Despite the strong directional energy, retracements have  been shallow and profit taking has been sparse. The key for this trade is yield divergence and provided the UST10’s move higher, and the BOJ holds the de facto peg, USDJPY remains the most obvious trade to express USD bullish sentiment.

While very much a yield trade it is not without risk. Currently, the BOJ is forced into QQE (Rinban buy Bonds) as UST10’s exerted pressure on global bond yield. If global bond yields ebb lower, the opposite will hold and the BOJ will need to reduce bond purchases, which may be viewed by the market as tapering.


Chinese Yuan

We are approaching the psychological 7 USDCNY level, and predictable rumblings from Chinese policy makers are making the rounds, suggesting that the 7.00 level will be the “next “line in the sand”. No doubt capital outflows are of concern, but to what measure they will defend the currency is open to much interpretation.

Up until now, the PBOC has been unperturbed about the sliding Yuan, but may be concerned about the rapid pace of the depreciation enough to “pump the brakes”. That said, a break of 7.0 may be tolerable but may force the PBOC into smoothing action to better control a Yuan slide. Investors are carefully watching the PBOC’s reaction to the test of the psychological 7.00 level.

EM Asia

Massive USD outflows, chaos in the NDF markets due to BNM policy and another leg higher in US yields has traders exiting and by all accounts, they can’t leave quick enough. Look for continued pressure on MYR and locally correlated currencies, as investors find hedges against what is essentially an offshore non-tradable MYR.

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