Equity investors for the most part remained chiefly on the sidelines with no major data releases and few disruptive headlines. The S&P nudged higher at the close and all but filled last Wednesday's market gap.
But there was animated action on the currency markets when dealers focalized on the euro. And losing no time, traders rushed to top side exposure after Angela Merkel told a Berlin audience that the strong euro makes German products cheaper, implying the euro was too weak due to ECB monetary policy. With investors brooding about the political developments while shying away from buying USD, the EURUSD accelerated higher.
Despite the political overhang, the general market temperament suggests that investors are focused on the outcomes of the ECB meeting and what the FOMC has in store for the markets. Currently, markets are pricing in a ~70% probability of a rate hike in June but only 60% for one more rate hike in 2017. If it becomes clear that the FOMC are keen to move on interest rates beyond June, there remains some decent scope for year-end Fed repricing which should prop up the dollar. In the meantime, I suspect the markets will continue to be hostage to shifting headlines
Thankfully there’s been a pleasant reprieve for the Comey/Trump headlines, but the melodrama is expected to pick up after Memorial Day (US) and Spring Bank Holiday (UK) when Trump returns to Washington after his first official trip abroad.
Euro
The overhang from weak US economic data and the Comey/Trump saga has dealers shunning the greenback which continues to promote demand for the euro. Merkel’s comments added fuel to this fire in a market that is fully entrenched in buy-the-dip mode. After touching an intraday high above 1.1260, short term traders took profit as the FOMC side of the calculus has yet to play out. With minutes on Wednesday and a plethora of Fed speakers still to come. Regardless, with the market playing the euro from the long side, last week’s aggressive breakout suggests a test of 1.1300 is in the offing. As markets are looking for any excuse to load up on euro’s
Japanese Yen
While yesterday’s USDJPY sell-off after another NK missile test is short lived, yen traders continue to eye the Korean geopolitical landscape and correctly so. North Korea appears dead set on launching its first intercontinental ballistic as they continue to make technological advancements within their missile regime. Despite little reason to sell yen, the market still views selling USDJPY at current levels as a low-risk reward trade ahead of the FOMC. Rather they the prefer to move into EURJPY which offers the path of least resistance on short JPY.
Australian Dollar
It’s a huge week for commodity currencies heading into the May OPEC meeting. Metal and Energy markets continued to trade positively with WTI trading north of 50.00 per barrel as the markets are convinced the nine-month extension will fly through, while reports are suggesting even deeper cuts. With the Aussie basing last week after easing in June, US rate hike expectations and a bounce in iron ore, momentum suggests we push toward the .7500 level.