U.S. Employment Data Disappoints After Particularly Weak AHE Numbers

Malaysian Ringgit

After being battered and bruised the past two weeks the Ringgit finally showed some moxie into weeks end after the Bank Negara Malaysia (BNM) laid their cards on the table. In an attempt to provide traders with some exchange rate policy clarity, a hedging alternative while offering a boost to onshore liquidity. At 4 PM local time Friday, (BNM) stated in a declaration that “exporters could only retain up to 25% of export proceeds in a foreign currency, while the remainder must be converted into Ringgit. Higher balances would need BNM approval, it said. The central bank also upped the ante to kerb capital outflows by providing a provision that all ringgit proceeds from exporters will earn a higher deposit rate of 3.25% per year, until 31 Dec 2017, subject to further review.”

After two weeks for virtually pegged onshore currency markets, the onshore unit finally moved to the left but more interestingly was the desperate convergence of the NDF market to spot which paired nearly 3 % of the basis on the spot to NDF convergence after all was said and done. Pretty ghastly move for new offshore hedgers to absorb, but at least some policy clarity is forthcoming from the Central Bank after weeks of market turmoil offshore.

However, no one seems to be rushing back to the Ringgit Trading Post, so I suspect liquidity will remain spotty with very few speculators willing to partake.

The Week Ahead.

Europe

The ECB and the Renzi referendum double feature have put the Euro back in the cross hairs. With only a minor retracement higher in the EURO despite the disappointing US employment numbers, the market is likely holding on to EUR shorts despite the referendum ‘ NO ” result probably priced correctly. While the tail risk of an ECB tapering has tempered the current EUR/USD assault, the baseline market view is for an extension of QE and as the market continues to support the view of higher US yields; EUR/USD rallies will likely be short lived and aggressively sold.

Australia

While the RBA will come into focus Monday, as the tail risk for the Aussie to move lower if the RBA downgrades either of its domestic or global views remains possible . This shift could increase the risk for easing bias. Wednesday’s 3 Q GDP will come under similar security, but the Aussie markets continue to engulf external drivers especially with the political risk in Europe accelerating and the USD dollar bull trend likely to re-emerge.

New Zealand

Focus shifts to the political landscape when the Government releases its bi-annual budget update on Thursday. Focus is centred on how the government will view the financial impact of the Kaikoura earthquake. My opinion is that the negative implications are all but priced in while positive surprises from additional tax cut incentives may provide a near-term boost to local investor sentiment

Reflationary Trade

I view this week as an important directional inflexion point for the dollar as to where it will close out 2017 but does not alter the medium -term bias that Investors will continue buying USD dollars, nor will they shy away from selling Bonds in early 2017. The key for near-term direction will be the US fixed income markets, which rallied into weeks end as traders covered shorts heading into what may be a politically charged start to the week with the Renzi Referendum on tap. How quickly the “Short” Fixed Income Trade re-emerges will likely dictate the USD’s early APAC momentum and in my view will; l provide some guidance for the Greenback direction into years end. Typically, an aggressive rally on fixed income into the weekend signals a greater propensity for additional profit taking early the falling week. So the dollar may remain on the defensive at the beginning of Monday trade, and with the political storm clouds and uncertainty brewing in Europe, dealers will likely err on the side of caution and wait for a clearer signal on the referendum before aggressively re-engaging.

Adding to this week’s reflationary trade was the impressive rally in oil prices, But with upticks likely to be sold on the threat of increased US Shale supply, last week’s moves could run into a supply of offers. With a sizable element of the street viewing OPEC’s recent production cuts as a possible last stand, the overall effectiveness of the production cut near term is dubious at best, so whatever expectation for a quick bump to the perceived reflationary Goldilocks zone of $55-60 per barrel might need to remain on hold.

Have the bond market overshoot? Not a chance and in my view, they are just getting warmed up. With a massive wave of fiscal spend all but rubber stamped in the US, the Federal Reserves forever inaccurate dot plots are likely in need of some serious overall as turning on the US.“Fiscal Policy Taps” will be highly inflationary. Are the Feds behind the curve ? of course, but the question is will they officially plan to remain so? Either way, the Bond Bears will continue to rule the day as Fixed Income Desks will continue to price in the reflationary trade through 2017 while Forex Desks continue to accrue USD topside exposure.