U.S Dollar Dominates Safe Haven Play

News of a possible North Korean nuclear test and lingering concerns over China is keeping trading desks busy this Wednesday. Global equities again see red, sovereign yields continue to fall while the dollar strength holds it’s strong pace approaching the FOMC meeting minutes later this afternoon.

Geopolitical concerns have investors shredding riskier assets: North Korea has announced it has conducted a “successful nuclear hydrogen bomb test, vowing to use its new capability for defensive purposes and to act responsibly as a new member of the nuclear club”. Their actions have prompted South Korea to demand an emergency meeting of the UN Security Council, while Japan has indicated they would consider further sanctions against North Korea. This fear aided also by the continued soft Chinese data has global equities seeing red. Risk aversion strategies have U.S treasuries remaining better bid.

Yuan’s fears persist as regional PMI’s disappoint: The People’s Bank of China (PBoC) has again set the Yuan reference rate to a new five-year low overnight (¥6.5575). This suggests that Chinese authorities are becoming “more tolerant” of depreciation as intervention costs rise and economic growth slows. A weaker China’s Caixin services PMI data (new 17-year low 50.2 vs. 51.2 e) has also been adding to the Yuan’s losses. Hong Kong PMI was also a disappointment, remaining in contraction for the 10th straight month with a deeper dive (46.4 vs. 46.6 prior). The country’s output and new orders fell at faster rate due to weaker client demand from China.

Mixed European Services PMI readings flatfoots some investors: UK, Eurozone, Germany and Italy beat estimates while France, Ireland and Spain all miss. However, in contrast to China, collectively the euro data would suggest that the regions economic growth picked up in Q4, 2015. Nevertheless, todays reports indicate that euro businesses continue to cut their prices which is an indication that the ECB will find it difficult to raise the inflation rate towards its desired +2% target. Deflationary fears have the single currency remaining on the back foot (€1.0738).

Central Bank Action: Regarding Denmark, the chatter is getting louder that the Danish Central Bank will soon hike their key policy rate, maybe as early at this week. The surge in reserves, witnessed in early 2015, has now fully reversed. On the flip side, if capital inflows were to pick up then the market would then be talking about a central bank wanting to cap the exchange rate and contemplating cutting rates.

Crude prices fall to an 11-year low: Despite the Middle East geopolitical issues, the crude market cannot find a bid. The strong dollar and disappointing Chinese data has commodity sensitivity currencies like the ‘loonie’ printing multi-decade lows outright (C$1.4100 11-year low). WTI is down another -2.75% to $35 a barrel.

Hawk’s vs. Doves: The market will be scouring this afternoon’s FOMC minutes to try and decipher exactly what does “gradual” mean to the Fed. During her December’s press conference, Ms. Yellen only clarified that gradual does not mean mechanical. By default, this has left the market believing that U.S policy decisions are again wholly data dependent. A more hawkish tone to what was a unanimous decision would certainly give the mighty dollar a helping hand. However, if the minutes indicate a divided committee with last months “token” hike, a close call could have the dollar seeing red. Thus far, the fixed income market has been tentatively pricing in the possibility of four-rate hikes for 2016. A divided decision should reverse some of that trade rather quickly.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell