Currency markets yield to dollar demand

G-10 and EM currencies yield to dollar demand

The recent rise in US yields is responsible for crystallising USD strength, and this appears to have been accentuated by comparatively strong data flow in the US. But next week’s  US Trade Roadshow to China, which includes the President’s ” champions of trade” Steven Mnuchin, Robert Lighthizer and Larry Kudlow, has undoubtedly calmed investors nerves and triggered an unwind of USD risk premiums around tariff and trade.

The dollar has traded higher against most currencies since the recent uptick in Yields early in the month. Also, some thematic changes underway suggest we could be in the midst of a structural shift in the global currency market pecking order. With EURUSD below 1.22 in convincing fashion and USDJPY setting sights on 110, the USD appears poised to breakout across the board.

Equities were trading gingerly most of the NY session, and after a midday risk wobble which saw the USD and UST yields fall, the markets bounced right back. All this suggests in the view of the market unless there is a very unlikely massive meltdown in US equity markets, it is doubtful the Fed will waver on a June rate hike. So with equity market sentiment holding firm in the face of rising bond yields, the almighty dollar could move through G-10 currency market like a wrecking ball pulverising lingering shorts in its path.

Asia Open

While investors remain focused on Yields, it looks like the 3 % ten year UST doom, and gloom hand was overplayed. US equity investors are picking themselves up off the mat after taking a beating on Tuesday when U.S. 10-year Treasury yields breached the “psychological level” of three percent,  on the back of corporate  earnings. All of this should instil a definite sense of calm at the Asia open despite massive regional outflows this week

Oil Prices

A jumpy NY session on Oil markets a the DOE inventories data was was a tad bearish relative to market expectations and as traders continue to assess all the noise and implication around Iran’s nuclear program. But the closer we get to May 12, Iranian sanctions waiver deadline, the more deafening the rhetoric, so rest assures we will be in for a very choppy dynamic ride during the next few weeks.

However, besides the geopolitical risk, which has been dominating trader sentiment, global demand for oil has remained high and provided OPEC compliance remains solid; oil should remain firm throughout 2018.

Gold

The prospering US dollar has toppled Gold prices to a five-week low. And with the dollar possibly on the verge of a breakout, speculative demand will remain low, and we could see prices fall ahead of for Friday US GDP data. Bullish dollar sentiment will likely build ahead of the data given the US’ robust performance on the economic front. All this suggests gold investors will be sidelined looking for better levels to buy as  a stronger dollar narrative unfolds.

Currency Markets

The Japanese Yen

Yesterday technical issues we resolved and outside of a midday risk wobble, the dollar continues to move higher in convincing fashion as investor confidence is returning in a big way.

The Euro

Despite the markets pressing against some massive technical levels around 1.2150, there appears little appetite to tweak the current positioning gauges ahead of the ECB.

The Malaysian Ringgit

The USD is stretching its wings getting set to soar suggesting there could be more pain ahead for regional currencies as ten year UST’s remain above 3 %. However, equity sentiment has fallen off as bad expected suggesting risk appetite remains guardedly optimistic, but regional outflows are expected to stay high on the back of higher US yields.

The MYR should continue to trade defensively on the combination of firmer US scrim and fixed income outflows.

President Najib took to the airwaves overnight sounding confident about an election win but was more guarded about a two-thirds majority.

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