A Case of the Doldrums

A Case of the Doldrums

Other than a few idiosyncratic storylines, for the most part, G-10 trade remains listless and unable to shake a severe case of the doldrums. And while there have been a couple of fidgets but with few dollar-related news headlines to start the week G-10 trade has driven by a hodgepodge of events. The Pound is floundering as UK Leadership continues to be challenged, EUR and JPY are flat while the Antipodeans trade lower.

The lethargic start to the week has offered few clues, and with all the second-guessing going on surrounding the events in Washington, investors continue to reduce rather than add to exposures.

Bond market quandary remains in full swing as bear flattening 2’s vs 10’s ( UST’s) remains the flavour de jour. While a potpourri of explanations for this phenomena is on offer, but the timing of the move suggests the market is just not buying into the GOP hoopla that the US tax cuts will boost medium to long-term economic growth.

Then again in a forex market long on theory but lacking a comprehensive blueprint for trading the US dollar in a bear flattening cycle. However, if the shift higher in short-term bond yields can be explained away by Fed tightening, then it gives reasons why carry trades will be an open target while haven currencies and gold should underperform.

The Fed goal posts for inflation are still miles away, but even the slightest glean from this week’s CPI has the potential to supercharge the dollar as investors are likely to start pricing a faster pace of monetary tightening by the Federal Reserve into 2018.

There is no fewer than 13 central bank speaker today, and while it’s easy to draw parallels to Sintra, where last year the gathering of central bankers surprised the markets by adopting a more aggressive stance.The fact is most of the global CB’s are coming off dovish policy meetings and unlikely to break rank. However, given the flip-flopping nature of Carney and Draghi who make habits of throwing monkey wrenches into the works, an element of headline risk must be respected.

In the Asia-Pacific region, the diary is dominated by China, which will release key activity data for October.

The Australian Dollar

The Australian dollar is testing the bottom end of recent ranges as commodity prices wobble, and two-year US Treasury yields are moving higher suggesting to some the market is underpricing the FED pace of tightening in 2018.

Unless there some major calamity in the US, a December rate hike is a foregone conclusion. But with the towering US economic data returns adding conviction to the Feds 3 rate hike scenario for 2018 mantra, investors may not be that far behind playing yield curve catch up.

But the logic does not only fall on the US side of reason. The RBA is on hold indefinitely which suggests whatever support from yield premiums the Aussie has been living on will evaporate. Look for the Aussie dollar to remain under pressure as AUD bears pencil in .7500 as the next target

With bullish NZD expectation post, RBNZ getting quashed by overtly pessimistic views from the local Finance Minister, the NZD could also plumb new depths.

Japanese Yen

It has been an arduous task of screen gazing the last 24 hours waiting for something to give. The markets apparently do not want to engage the tug of war between equities and yields suggesting that traders are waiting for some tier one US data that could be decisive in breaking the tedium. CPI remains the central point of convergence, and we should expect the markets to continue tight ranged until then.But it certainly feels like the proverbial calm before the storm scenario.
The Euro

There appeared to be a good argument for the EUR to move higher this week based on robust EU economic data and a tax reform depressed dollar. And while the Eur has climbed higher post ECB meeting fall out, the Dovish ECB guidance continues to hold back any forward topside momentum.

The big question is will the ECB hold firm to their clear dovish guidance or will the data convince them otherwise.

Market positioning is purportedly skewed short, so a push above 1.1725 could cause a bit of a rukus on a squeeze.

EM Asia

Outside of the individual EM storylines in ZAR( downgrade) and TRY ( Geopolitical) in general, EM currencies are going through a mini revaluation despite favourable longer-term macro setups as the markets start to reprice the US rate curve. ON the more extended end of the yield curve, supply uncertainty in the face of a massive budget shortfall has created some waves. While on the short end of the curve, the markets remain massively underpriced vs the FOMC dot plots. As such, EM investors remain caution knowing that at some point something has to give an indeed  the market pricing in a faster than expected pace of monetary tightening by the Federal Reserve is one of the significant headwinds for local Asia EM

In the meantime, we are sitting tight awaiting the regional knock-on effects from the China data dump

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