It’s blustery out here as the markets get caught up in a vortex of political discourse, and like a deer in the headlight, traders have no idea which way to turn. Expect price action to remain fickle at best as Treasury prices have barely moved, with the curve consolidating at the flattest levels in a decade
Republican leaders looking to revamp the tax code are now faced with a gap of at least a $74 billion shortfall in the House’s plan. And with the GOP lambasting in Tuesday’s state and local elections, House lawmakers may be viewing this as the sign of things to come, and likely making it more troublesome to advance the Trump administrations agenda. Entirely nothing will go quickly to this current administration.
Frankly, the markets are struggling to find a reliable argument to stick to, and muddling through political bluster is more of a distraction than a guide
Geopolitical developments in the Middle East should continue to push oil prices higher. This, despite a profit-taking induced drop after the EIA reported that U.S. crude oil inventories went up, by 2.2 million barrels, contradicting the API estimates of a 1.562-million-barrel draw. The rise in oil prices increases the risk of unfastening expectations for assiduously -low inflation.
And while its still early day’s in the oil patch rally but with the Middle Eastern version of the Game of Thrones unfolding, all its squabbles in infighting should underpin oil prices which could send tremors across fixed income markets
New Zealand Dollar
The RBNZ delivered a remarkably upbeat economic assessment but more significantly for currency traders is that RBNZ Spencer said the currency was in the vicinity of fair value by far the most hawkish language the bank has used in recent times.
The NZDUSD is trading +45 pips, but the markets favoured way to express the NZD hawkishness is through AUDNZD which is trading off about -75 pips.
The Australian Dollar
The AUDUSD short trade continues to struggle below .7640 as harmful political noise around US tax reform and rebounding iron ore prices, despite the sharp decline in China imports, underpin AUDUSD. And while RBA offered the market little reason to buy Aussie dollar, but given its stickiness versus the USD, I suspect a clean break below .7620 is needed to get the more aggressive bears excited.
The Japanese Yen
The JPY continues to oscillate between tax reform headlines. Tax headlines and equity market pessimism/optimism will be the main the drivers in the absence of any of any significant data releases. Dips to 113, given the interest rate divergence narrative, will be supported until the absolute bottom falls out of the tax reform proceedings.
Bank Negara Malaysia will probably keep the overnight policy rate unchanged at 3 percent. And while the pace of economic activity in Malaysia could support an interest rate hike to ward of inflationary pressure which climbed above the BNM target band in Septemeber, given the proximity of elections, its unlikely to occur.
The Ringitt continues to trade quietly this week as risk appeal is waning given the uncertainty over US Tax Reform.