Now for some real action

Now for some real action


The end of the US government shutdown was to some degree ‘risk positive’ but hardly a pivotal moment. And more to the point the bipartisan deal is first and foremost a matter of kicking the can down the road to February 8. Which sets up another funding clash and given the level of partisan politics, which will likely remain as stubbornly intense and polarising as ever, we should expect another contentious affair if both parties don’t resolve the critical stumbling blocks between now and then.

With a very light economic calendar to start the week, overnight markets were more than happy to respect new ranges heading into some critical central bank meetings. This series of Central Bank meetings will be a crucial catalyst for bond and currency markets as traders will focus on inflation rhetoric and critical signals that either the Bank of Japan or European Central Bank could signal that extraordinary monetary accommodation will soon be wound back.

But for the most part, the dollar weakened overnight, but a small knee-jerk briefly tempered its decline after the Senate voted to turn the US government’s lights on again

US Equity Market

While investors didn’t extrapolate a great deal of uncertainty from this government shutdown as GDP impacts from prior closures were negligible, but they still celebrated the stopgap deal pushing the Dow back into record territory and wiping earlier losses. Which speaks volumes for both the underlying momentum and equity investor voracious appetite as on even the most minuscule risk catalyst they are willing  to pay top side asking price for a meal of equities.  However, let’s not pop the champagne corks just yet as there’s a substantial likelihood we’ll go down this road again Feb 8.

Asian Equity Market

Yesterday markets were a mixed bag as the US government shutdown tempered investor appetite. But with the US shut down temporarily behind us and the political stalemate in Germany nearing a resolution, Risk sentiment will move to the front foot taking its lead for surging US markets While catch up is in play no reason why local markets will not extend gains in a very flexible Asia EM space.

Oil Markets

Not unexpectedly the past 24 hours have been choppy, but at the start of the Asian session oil markets remain buttressed by Saudi and Russian flowery language indicating their willingness to cooperate beyond 2018. Of course, the jump in the first mentality suggests this to be an extension of production cuts, but even if it proves to be a loss leader type headline, any hint of compliance between these two oil supper power beyond 2018, is a positive sign

As far as the NY session Oils were trading with a higher correlation to the US dollar after traders digested the news that  Libyan Wintershall oil fields will restart production and caused Brent prices to wobble.

With currency markets on central bank watch, in the absence of any oil related specific headlines, Oil’s could be more or less pinballed around by broader USD dollar sentiment today.

Gold Market

A muted overnight session with most traders watching US Senate vote, although there was little for Gold traders to glean from the proceedings. Traditionally US yields fall in shutdowns, but with UST 10y rising to 2.65+ it was undoubtedly throwing a spanner into traditional markets correlations.

With the spate of central banks on tap and by extension, even the slightest shift in language could send bond yields soaring; traders will remain cautious until a clear-cut dollar trend emerges. But not to further confuse the issue, there could be two idiosyncratic dollar storylines with the BoJ erring dovish sending the USDJPY to 112 while having the ECB shifts from an of a neutral bias triggering a move to 1.25 EUR USD as EU bond yields move higher.


The Euro

The Euro should remain quiet within the 1.22-1.23 range ahead of the ECB

The Japanese Yen

While not expecting any change, it would be silly not to expect the unexpected. But even if the BoJ wanted to announce a taper there is little chance Kuroda will take that leap of faith today as the market would hammer USDJPY mercilessly lower. But with the Japanese economy firing on all cylinders and signs of deflationary pressures abating, traders my continues to buy JPY post-decision regardless fo whatever dovish lean Kuroda puts on the proceedings.

The Australian Dollar/Commodity Bloc

The Aussie dollar underperformed the rest of the commodity block as the market focus is on next week CPI

In Canada higher oil prices and the resumption of NAFTA talks had traders paring back short. But in general, everyone is waiting for the NAFTA headlines and this week’s CPI before re-engaging positions in size

The New Zealand dollar continued to benefit from the political risk premium unwind as longer-term structural shorts pair back.

The Chinese Yuan

AS the weaker dollar narrative unfolds a test of 6.40 again is in the offing. Indeed over the past 24-48 hours, traders have been banging around a lot of theory and what if’s. With some out of left field ideas. Indeed the general weaker US trend was helping Yuan sentiment, and we should be able to test the Pboc resolve if the dollar drops further as expected. It will go a long way to clearing the air as only through price discovery can we determine if the Pboc are no longer single-mindedly focused on the USDCNY exchange rates, but have the confidence to use the more comprehensive basket of currencies as the central signpost.

Asia FX


On the contrary front, the first salvo was launched today in would may develop into a long drawn out tit for that trade battle between US and China. Trump administration slapped a tariff on cheap solar panels which has driven the rapid expansion of solar energy in the US. Any escalation of trade battle could dampen enthusiasm for regional currencies as exports make up a significant portion of local GDP/s

The Korean Won

Appears to be more stealthy currency intervention as regulators are reports are circulating that the government has asked banks to refrain from overseas bond sales. But my view is that equity is driving the bus, so more inclined to ignore this ominous headlines

The Malaysian Ringgit

The pick up on global risk sentiment after the US Senate ended the government shutdown along with higher Oil prices bodes well for the MYR today.

Talk of OPEC and Russian policy compliance beyond 2018, suggest higher for longer oil prices. Not only a boon to the government budget coffers but bodes well for   oil and gas constituents on the KLCI

The US equity market celebrated government workers reporting back to work by lifting the Dow to new record territory, and this positive momentum should carry into Asia

The US dollar weakness is starting to re-emerge which  should play out well for local currencies

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