A bit of the Merry -go- Round syndrome in currency markets

A bit of the Merry -go- Round syndrome in currency markets

More of the same overnight as Forex Asset classes ebb and flow on yield curve speculation as 2’s vs 10s continue to flatten with  2-year yields gravitating towards 1.77 %. There’s no real news to report other than the fact the momentum play suggests the curve continues to flatten in the absence of any discernible US inflation to influence the long end.

The market is starting to look towards FOMC minutes as the next possible dollar driver given most do want to hear the Fed’s  view on the state of the flattening yield curve if nothing else Is the flattening momentum driven by EU bond markets,  or does it signal the market’s  pricing in a slower trajectory for US growth. And of course, traders want to capture the Feds frame of mind towards inflation and extraordinary accommodation which will be key drivers for a number of currency pairs that are in  G-10 dealers portfolios.

Overnight, US stock markets hit record highs on Tech Gains as investors do not want to fall behind this raging bull.But only time will tell if they’re following false prophets or about to bank real profits.

Looking at a few of those key currencies this morning :

The Australian Dollar

There was a significant build-up of short Aussie positions hoping for a move lower post-RBA monetary policy minutes. But even with the relatively dovish RBA  tack highlighted by considerable uncertainty over depressed wages, the market could only muster 20 pips downside test as the 2-way risk was always part of the equation ahead of Governor Lowe speech and the Governor didn’t support the markets overly-dovish expectations. In fact, when he suggested the next move in rates would likely be up, it triggered a wave of short covering given that negative positioning was relatively heavy. And of course, the boisterous China equity markets sentiment helped lift the Aussie off the mat. Again as is so often the case, it’s tough being the Aussie bear when testing the bottom of near-term ranges.

But with the Federal Reserve Board the only major central bank who are persistently sending a hawkish message (despite the flattening of the US yield curve), the outlook for the Aussie remains negative. The Feds are on the move to end the decade of extraordinary accommodation for no other reason than to provide themselves with buffer to adjust policy when the next economic downturn occurs. But on any hint of US inflation, especially the wage growth variety, look for an aggressive repricing of the US rates curve which will all but vaporise any forward Aussie premium.   I suspect traders will be reloading shorts if the Fed minutes wax hawkish.
The Japanese Yen

Given the waves of political risk aversion the past fortnight, short-term traders have probably built up a considerable short position and correctly so as the markets remain in a constantly edgy state

.But the more extended the 112 support level holds he more susceptible these trading positions become to a significant near-term squeeze, even more so on positive US tax reform news. But given the US political newsflow has slowed to a drip with legislators in Washington on Thanksgiving holiday’s, the USDJPY will continue to trade at the mercy of US Treasury yields. But even then, given that traders are gearing down for the year-end holiday season unless there’s  an unexpected or definitive shift in Fed policy, I think the 113-114.25 area is about as good as its going to get for the dollar bulls heading into year-end.

Since we’re nearing Tax Reform crunch time, how the US dollar benefits from US tax reform remains a bit of a puzzle. Of course, tax reform will be a boon to equity markets but will equity inflows alone be enough to hold the USD bears at bay. While tax reform should be a meaningful positive, the US dollars medium-term fortunes are down to a quicker pace of tightening from the Fed and little more.

The Euro

The market continues to downplay the political risks out of the eurozone but none the less German politics remained in focus following the breakdown of Merkel’s coalition talks.And given her options,  Merkel stated that she preferred new elections to a minority government. Angela Merkel is a cunning political warhorse, and while her tenure at the helm appears a bit wobbly at this stage, the market should not discount her political savvy for one minute.

The last two days have been a microcosm for trading the Euro throughout 2017. A surprising shift in news flow creates new positions which are faded over the course of the next 12 hours only to have the original trading positions then gradually reentered over the subsequent 24hrs. It’s been a merry-go-round to say the least and its unlikely to stop anytime soon

The Pound

Let’s be clear no one likes trading the pound and given just how badly the Brexit negotiations are going there is few compelling reason to own any UK assets. And with the BOE roosting with the doves, there are even fewer plausible reason to buy Cable. So why isn’t sterling trading lower. Two possible reasons  1) longer-term positioning is entrenched 2) The outside chance the Brexit goes through, and Sterling rallies 5-7 big figures.

Given this less than comforting risk rewards scenario, short-term speculators have pretty much given up the Sterling storyline.

Energy Markets 

Oil prices rise after the API reports a significant draw in crude inventories.But all eyes remain focused on the OPEC’s  flux and reflux heading to Vienna as the meeting’s outcome will ultimately determine oil prices near-term fate, but the API  data does not go unnoticed as US production and inventories data have a tendency to act as a foil to OPEC production cuts.Both WTI and Brent were trending higher during Tuesdays NY  session prior to the API release reflecting OPEC anticipation for the November 30 meeting. But at the NYMEX close, WTI failed to make any meaningful breakout perhaps influenced still by last weeks bearish demand revision from the IEA

Asia FX

Asian Stock exchanges soared as the Dragon breathed fire into Asian equity markets hitting ten-year highs with Chinese and HK stocks outperforming. In what could be a sign of things to come capital inflow is surging into the crucial mainland, and HK tech and financial sectors as investors look for undervalued opportunities. Whatever reservations investors may have had about booking profits into year end have been temporarily put on the back burner for fear of falling behind the raging global equity bull market run.

Regional currencies have made substantial gains and there remains a  bias to sell USD regionally despite the broader G-10 space handcuffed by political woes and consolidating into a holiday-shortened week.

Oil prices are being watched closely by the local (ASEAN)currency basket traders as its thought that a top side price break could complicate the landscape for some while simplifying the outlook for other. On our regional highlight currency below MYR should benefit in a higher oil-price scenario, while INR and PHP are likely to suffer froma terms-of -trade basis.

The Malaysian Ringgit
But the $MYR has been unfettered by the EU political noise or the recent bid in USD across the broader markets. In fact, the Ringgit continues to march to the beat of its own drummer as the market remains exceptionally bullish after the massive bounce in GDP data released last week.Also, the BNM remains unwavering in their hawkish language. In fact, this week Governor Ibrahim all but suggested the central bank has a preference for a stronger currency. The BNM would prefer the stronger Ringgit to take the edge off rising prices given their latest forecast suggest inflation be at the upper end of the forecast range. If Oil prices do break out it will certainly complicate the matter for the BNM from an inflation standpoint. As it stands a January rate hike looks all but certain and the robust 3Q GDP does suggest one an additional rate hike for 2018 suggesting the MYR has ways to go before the currency runs out of gas.

The Philippine Peso
Similarly, the Philippine Peso which was written off as the local whipping boy only last month continues to firm in a similar fashion to regional peers. The Peso is being supported by bullish sentiment related to the country’s Macro prospects as momentum builds to close out the year on a blistering GDP print. Also, the Peso is trading in a much higher correlation with other regional currencies lately and reaping the benefits of local currency momentum.

The bottom line is it’s hard to escape the local reflationary storyline.

The Indian Rupee
The Indian Rupee continues to gain traction, and if oil prices remain subdued given the bravado in local markets, we should expect we could see USDINR retest the post-Moody’s-upgrade lows of 17 Nov (64.62-64.65 zone) sooner rather than later.

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