A Brave New Bubble

A Brave New Bubble 

The overnight focus was on the upswing in global yields which offered the greenback no clear channel as traders found themselves confined to the stationary bike, peddling fast but going nowhere quickly while regurgitating the same narratives in very prosaic detail.

On the Fed front,  Yellen’s  testimony, unlike the markets take away from the recent FOMC minutes, continued to emphasise transitory factors in subdued inflation while suggesting the US  economic recovery was “increasingly broad-based”. By default, the market views this hawkish, but from my seat, the comments are little more than December rate hike window dressing.

Tax reform bill passed the procedural hurdle in US Senate as expected.But rik positivity should continue to underpin the USD into the final tally.

The Japanese Yen

Don’t get overly complacent with USDJPY nearing the 112 level as trading JPY remains as intense a dogfight as ever with competing narratives contributing to the choppy price action.

Downside momentum stalled after investors sidestepped the North Korea escalation.However, it may have provided a false sense of bravado suggesting that all that ills the world are cured. But nothing could be further from the truth as risk aversion is waiting in the wings ready to pounce on the first sign of weakness.

But for today at least, improving prospects for tax reform should carry the day.

Long USDJPY  remains one of the more crowded trades as short-term speculators have piled in suggesting this will be the best vehicle to sell on any signs of dollar weakness.

The Euro

The single currency continues to underperform versus the markets lofty expectations entering the week. At the core, the USD has gone tacitly bid across G-10 on as the US yields pop and equity market continue to froth on improving tax reform sentiment. But as mentioned yesterday it’s more to do with EURGBP crater dampening sentiment as GPB continues to march to the beat of its own drummer after the Bullish Brexit headlines.

Australian Dollar

AUDUSD rate differential touched below the 0 mark for the first time in ages triggering machine driven sell orders based on Aussies diminishing carry advantage.

However, most of the Aussie pressure is coming from GBPAUD cross as the market continues to add to longs.

The Chinese Yuan Pre Fix
The markets are awaiting Chinese PMI

Energy Prices

The market continues to trade the OPEC headlines, but the only one that counts Russia signalled it was leaning towards a nine-month extension. As usual, this whole OPEC fiasco is a complex event. Even if a nine-month extension is agreed to in principle, the entire debate is open for review in April anyway. Moving on ………

Asia FX

Korean Won

There will be of massive interest in the Bank of Korea( BoK) rate decision as the BoK is now viewed as the proxy for regional monetary policy.

The Malaysian Ringgit

The Market continues to express its bullish Asia FX views through the Ringgit which rallied again yesterday pushing through a 52-week high

The unexpected arrival of interest normalisation is taking hold of sentiment. And with Malaysia investors already riding the wave of a robust global demand, the higher interest rate scenario as adding to the Ringgit’s appeal. Since the market has still not fully priced in a January rate hike nor the real prospects of a follow-up interest rate hike in Q2 or Q3, the rally could extend well into year-end as traders set sights on the critical 4.00 level.

MYR may be less susceptible to adverse shifts in the global growth narrative as the Ringgit remains under-owned by investors  But the near-term risks are a collapse in Oil prices post OPEC meeting or a deterioration in risk sentiment from China Bond and Equity markets souring into year-end potentially destabilising regional markets.

From the macro perspective, the export sector continues to flourish, and by that alone, and despite the Ringgit trading at a 52 week high, the MYR  remains undervalued relative to some of its high flying regional peers

Speaking of which; the market continues to view the KRW as a broader proxy for local FX  risk as well as rates normalisation. With the BoK set to raise interest rates as the domestic economy continues to soar, expect the MYR to ride any buoyant Won sentiment. And with the Ringgit posied to do some serious catch up to regional peer currency valuations, the MYR should remain one of the go-to trades for Asia FX investors heading into year-end.
Thursday Morning Market Musings


A Brave New Bubble 

But with all the commotion on Bitcoin, it offered some distraction to a listless trading day on forex desks. However, with the new wave of so-called “Crypto Strategist” hitting the airwaves overly long on theory and conjecture but lacking any structural blueprint or trading narrative, it might be time for some reflection, in case the masses forget to come up for air before it’s too late.

These are extraordinary times in the market. The primary drivers of bitcoin momentum in my view 1) The CME’s acceptance that seems to have lit a fire under wall street. Cryptocurrencies will gain more credibility as CME Group Inc. starts selling bitcoin futures and other mainstream institutions get involved 2) Intense media coverage supporting the current rally which leads to 3) Investors pervasive apprehension that they’re missing the party or the underlying fear of losing out of a quick profit.

It’s not just your average retail Joe champing at the bit, high net worth investors are starting to view Bitcoin as an asset class in the same light as investing in other higher-risk debt and are gradually accepting it as a legitimate asset class.

Bitcoin will continue to broaden its legitimacy and credibility as more of the more significant well known Primary Market Makers enter the field.Provided Bitcoin has a favourable lift off on the CME later this year Bitcoin could surge higher from credibility perspective alone.

Of course, Government agencies will likely clamp down on excessive margin given the hyper-volatility as the potential loss to non-sophisticated investors is enormous. After all, risk management continues to run weak in the retail space.

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
Stephen Innes

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