Down this beaten path, again

Down this beaten path. again

A sense of deja-vu is setting in as the market danced around yet another European worst-case risk scenario while inflation or the lack thereof becomes an overriding preoccupation for global markets., once again

Inglorious uncertainty has set in over the course of the Federal Reserve Board path to interest rate normalisation as the FOMC minutes indicated that the board was still profoundly divided about the slow pick up in prices and by all accounts, and as always, the Fed will continue to watch the data as we move into December. Indeed the Fed is back on inflation watch but just how much inference can be gleaned from the next sets of inflation data is questionable given the hurricane impact on perishables and energy prices.

The USD traded weaker on the initial post minutes knee-jerk, but with last Friday’s stronger AHE reading fresh in their minds, traders were reluctant to press their dollar bearish view given that many Fed officials are making a case for another hike in 2017.
It’s not like we haven’t been down this road before as the Feds continue to err on the dovish side. And while the dollar struggles there’s no indication that equity markets are backing down as Wall Street continues to surge to record levels on the back of insatiable investor appetite. In my view, the Fed debate is not so about a December hike, which is more or less priced in, but instead whether the dovish fringe exerts enough power to influence the 2018 dot plots.

The focus will now shift to tomorrow critical CPI print, but as with last weeks data prints,  the market may discount the anticipated inflation surge due to the influence of increased gasoline prices. Instead, trading desks will remain focused on the next Fed chair.

Musical chairs continue to be the flavour of the day as we near Fed Chair nominee decision time. But realistically, there is absolutely no room for error or bipartisan wrangling in this decision more so as the FOMC is now starting the daunting task of balance reduction. Indeed, Jerome Powell, the only Republican currently serving at the FOMC, would most certainly fit the bill for an extension of the Fed gradual process of monetary normalisation and would represent continuity.

The Euro

US Treasuries are still the primary focus and driver of FX. Not sure whether its FX desks are watching the Bond desk or vice versa but we’ve retraced from some extended positions pre-NFP build up. The Euro feels comfortable after regaining the 1.1800 handle, but I still view this as more of a relief rally as EU risk has tentatively settled. At current levels, there are just too many risk surrounding the Fed chair and tax reform, not to mention the Fed curve to make a solid case for a Euro rally extension.Rather caution, prudence and discretion should be the preferred course in what is  likely to be a very choppy market for the next few weeks.

Japanese Yen

Lower US treasury yields saw USDJPY test 112.35 support overnight and indeed threatened to break lower. What appeared a no-brainer long USD trade last week is proving to be a game frustration as the risk-reward for an extension of the previous week USD rally looks fleeting.Also, some scuttlebutt about North Korea repositioning 30 SCUD missiles weighed on sentiment

Australian Dollar

OK, so the Aussie dollar is not down for the count just yet and despite the rebound in consumer sentiment, local price action is currently driven by USDCNH. But given the uncertainties of Fed Pricing and an arguably dovish FOMC minutes, it should underpin sentiment. But whether the AUDUSD has enough moxie to bridge the fundamental .7830 level, I think this more or less comes down to an extension of the Yuan rally.


The USD is looking tired again, with geopolitical risk abating, global stock market surging and getting little support from tax reform.
Asian currencies should continue to strengthen on the broad-based USD weakness and resilient equity markets

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