Lowdown, Showdown and Shutdown

Lowdown, Showdown and Shutdown
Market overview

The DXY traded with a slight negative bias overnight but never really threatened an aggressive interday move lower with both EURUSD and USDJPY confined to their recent ranges. Most of the subtle shifts are on the back of misgivings over a possible U.S. government shutdown as lawmakers struggled to forge a federal budget deal.

Yesterday’s Apple headlines suggest Repatriation is taking a leading position in the current market narrative. While a win-win for equity markets and the US economy. However, it is highly unlikely US equity gains will translate into discernible support for the struggling US dollar.

AS we saw yesterday when the news hit there’s no question FX traders tend to jump first and ask questions later. But the bulk of the repatriation “yardage” is sitting in USD dollar accounts overseas, suggesting the weight of transaction will be little more than a back office ledger transaction and corresponding Bank account adjustment. And while there will be heaps of standing order on a daily basis to covert the initial waves of non-US dollar denominated residual repatriation flows, the volumes will be quickly consumed by the markets. All and all the repatriation flows are unlikely to make this year’s FX highlight reel.

Stocks and commodity prices were not immune from choppy and toppy price actions overnight  while US fixed income markets continued to unwind flatteners with US 10y yields testing 2.62%

Lowdown, Showdown and Shutdown

As usual, the focus is back on Washington with the markets digesting the lowdown in the budget showdown that could lead to a potential shutdown. Of course, a Government closure will have minimal impact on the US economy and the sun is sure to rise on Monday, but the markets will temporarily wobble in predictable unthinking fashion if lawmakers fail to table a last-minute agreement. The air is ripe with the stench of partisan politics, which has remained as stubbornly intense and polarising as ever. But it all comes down to the Senate vote where the GOP fiscal hawks could stay as staunch as ever leaving the Republicans scrambling for funding votes.

Pardon the interruption

If a shutdown occurs, history tells us the dollar will sell off marginally in the ensuing weeks but t the scope for weakness will be somewhat limited. Also, as for markets in general, we should expect investors to look past Washington contempt regardless of the length of the interruption but apparently from a more risk adverse perspective. Ignore the noise and stay the course.
Oil markets overview

The Energy Information Administration reported a more substantial than expected drop in inventories than the market has predicted which continues to “draw “attention to the bullish oil market narrative causing oil prices to rebound overnight.

However, with speculation mounting that OPEC and Russia are planning an exit strategy from production cut agreement. The top side could be limited as traders will be keen sell contrarian risk as even the slightest glimpse of a policy shift from OPEC, traders will be tripping over themselves to get downside exposure.

For proper measures, S&P updated its 2018 Brent assumption from $50 to $60

Equity markets overview 

A predictable air of caution has engulfed global equity markets as we approach the final bell for US budget showdown. But in the bigger scheme of things this case of hic-ups is likely to pass as quickly as it arrived

But more to the point,  after the Dow nudged in to record territory on Wednesday,  there’s a natural propensity for investors to take some profit and when combined with updraft on UST 10y trading at 2.62 comes a greater appeal for Cross asset rotation out of stocks into bonds.
Gold markets overview.

The shine has come off gold this week as the confluence of early week key drivers of risk has failed to unfold. There has been little to no escalation on the geopolitical landscape, in fact, its much calmer. While Washington remains a political quagmire, a nonchalant attitude appears to have permeated investors psyche ahead of the Budget showdown. Equity market remains frothy with the Dow crossing into record territory and triggering equity hedges to reduce.  Apple repatriation investment flow is a win-win for equity market and the  US economy. Traders positioned for more downside dollar risk which has failed to materialise this week.

The market has been offloading risk after touching a four-month high but will likely look to re-engage longs next week if the weaker USD narrative unfolds more aggressively

G-10 and the RMB

The Yuan

GDP growth for the full year accelerated ‎for the first time in seven years, which should lift stocks and global commodity prices, and add more credibility to the bullish sentiment on the yuan

And while the larger than expected GDP suggests officials will have more room to address the growing debt problem, as China continues to place controlling risk and to deleveraging at the forefront of financial policy in 2018 but of course but of course with reforms and deleveraging comes economic headwinds. However, with mainland regulators hell-bent on market stability and attracting capital inflows, the potential economic headwinds are a short-term pain for long-term gain.

In a delayed response to the Chinese data, USDCNH traded extremely heavy into the close driven on the back of onshore corporates selling as did interbank speculators. The stronger Yuan consensus trade is back in vogue.

But the removal of the counter-cyclical mechanism and the subsequent policy misinterpretations derailed bulk of short positions. So Traders have likely not established long Yuan positions in size they want suggesting a move lower. And while dealers may be reluctant to chase the market lower without a stronger USD downtrend signal to re-emerging in G-10, they will undoubtedly be looking to sell tactically into and USDCNH pullbacks.
The Australian Dollar

The Aussie employment rounded off a stupendous year for the domestic labour markets leaving the RBA  both happy and sad, glad the economy is growing but sorry the currency is rising. However given the volatility in the in the Employment series, the real focus should be on CPI later in the month and with only twenty-five, bp’s priced into the 2018 curve and a measly five bps priced into May the risk is for much higher Aussie on a stronger CPI print. It’s hard not to remain positive on the Aussie more so as the dwindling differential storyline has turned as insignificant a sentiment driver as its ever been.

Sure, it’s a bit tricky trading around psychologically significant points like the 80 level, but given the Aussie is trading strong beta to the USD, it becomes as much of a US dollar storyline than a domestic one this stage.  If US dollar weakness returns in earnest, as it is expected to do, commodity markets remain firm, traders will be scrambling for topside risk much to the chagrin of RBA policymakers, and the Aussie could head for .8250.
The Euro

ECB Members and mysterious “unnamed sources”  were conspicuous by their absence after making best effort to squelch the EURO rally by efficiently raising the spectre of volatility in FX markets. Just look at Wednesday  140 pip top to bottom range within a 3-hour period with minimal to no news. Traders soon cooled their jets realising that this exercise in futility becomes little more than passing the buck while throwing spaghetti at the wall hoping something sticks.

It is becoming a predictable trend for the EBC to intervene after the market breaks topside and takes out another significant big figure. Moreover, it is almost as if the ECB wants to punish the markets for buying the EURO by giving traders just enough rope to hang themselves and then springing the trapdoor. It is probably a good idea if they want to tame the voracious markets appetite for Euros, best not table a hawkish leaning ECB minutes….”just saying.”

But given all the noise this week, and even with IMM non-commercial positioning for EUR is at a 10-year high. But in reality the market is still undeposited for an eventual shift in ECB language.

The Japanese Yen 

The JPY continues to be a mystery in the making. But the strategy unfolding into next week is sure to remain tactically long on the risk of an overtly dovish BoJ. According to some recent articles, some players in the market have overblown the probability for a shift in BoJ policy, and some of that unwind alone could push USDJPY closer to 113.Smart money bets are for the BoJ to stay the YCC course.

Asia FX

The Malaysian Ringgit

Not expected any surprises or significant moves ahead of the weekend as the Ringgit has been a pillar of stability this week. The markets are pricing at roughly 70 % rate hike probability which suggests we could see an uptick in volatility early next week ahead of the MPC meeting which will be a significant influence over the near-term direction. In fact its the day we’ve been building for the past three months

Oil prices remain firm although the market did not make any significant headway overnight. The US dollar is trading with a negative bias ahead of the budget showdown, but US yields continued to ratchet higher. All in all, we should expect the MYR to remain relatively range bound today unless there is an unexpected shift in the broader USD dollar narrative as the Ringgit is trading powerful Beta to the USD this week.

The Korean Won

BoK held interest rates yesterday, but the market is trading of little more than technical levels.There appears to a tactical line of discussion either side of the 1070 levels where the markets spent the majority of the yesterday, and it seems we have headed for a similarly quite day with a slight skew to seel dollar ahead of the opening salvo.

The Indian Rupee
$INR edged lower on FPI inflows with SENSEX surging +1.00% following news that the government is considering higher FDI limits on banking stocks.

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