Political Malaise
While the US dollar remains tentatively poised for a breakout, lingering political uncertainty still hangs heavy in the air which has left G10 FX rangebound for the most part on Monday.
Despite taking a knock in late US trade after an afternoon US equity market swoon, JPY is expected to weaken over time as an extension of Abenomics should mean further stimulus for Japan. But in the early stages of any currency move, there’s seldom a "take-it-to-the-bank-trade ” more so in this current scenario given the extending long USD positions, very frothy equity markets and the omnipresent level of uncertainty when it comes to the House passing any substantive US administration policy. Even if Abe served up weaker JPY on a silver platter, there are many hurdles on the way to an eventual payday.
US equities finally came up for air after the Dow snapped a six days winning streak as investors get set to dissect the deluge of corporate earnings this week. In general, earnings should remain a significant boost to equity prices, but markets were spooked when General Electric (NYSE:GE) shares cratered 6.3 percent causing analysts to hit the panic button, warning of possible dividend cuts.
On the Fed chair watch, the highlight of the day was stale reports that President Trump is “very, very close” to deciding on the next US Federal Reserve chief. Jerome Powell and John Taylor are getting the nod from markets while Janet Yellen is relegated to the sidelines.
The Euro
While political concerns are likely weighing on the common currency, the central focus is the ECB meeting on Thursday where the master of central bank voodoo, Mario Draghi, will take center stage. Caught between a hawk's and a dove's nest, Draghi will have to be at his more eloquent self to not only satisfy both sides of the council but to ensure markets are not spooked. But given the euro markets have been trending sideways in a happy place for the past month it would be improbable the ECB announces anything other than what was leaked to the markets, an apparent ECB consensus of buying €20-€40 billion in monthly asset purchasing with the program running for another 9-12 months.
Even approaching some significant technical levels, trade remains exceptionally lackluster, perhaps due to reduced EUR positioning as any constructive bias has likely evaporated in a sea of frustration over the past month.
Japanese Yen
With the election in the rearview mirror and no challenges to Abenomics, the markets are free to focus on other wave makers. The disconnect with the Nikkei remains a key focus and should this correlation move back towards historical levels it will underpin USDJPY. But in the meantime, the markets have their hands full with reactant price movements from developments around tax reform while gauging USD concerted momentum over the Fed chair appointment.
Mind you, New York traders were not dazzled with the USDJPY’s 113.95 NY open and went into hit the bid mode from the get-go. But at the start of APAC trade, there is sizable support at 113.30-113levels, but on a break of the psychological 113, things will get messy quickly given the market is generally long USD in this space.
Australian Dollar
The main event this week is AU CPI on Wednesday, and RBA Debelle will speak on Uncertainty on Thursday.
AUD does feel like the intransigent of G-10 trade unable to break out on the bottom or the top of current ranges. AUD lower story will be a US rates higher storyline, full stop.
Other than that, for traders looking to get short, Wednesdays CPI could present such an opportunity. In this positive USD environment fading the Aussie remains the name of the game.
The New Zealand Dollar
Is patience a virtue? Not sure about that one with regards to the Kiwi trade.But so far this week the political landscape has shown signs of stabilizing, and the onslaught has abated. Political risk usually has a way of evaporating quickly, and with little pressure from the greenback this week we could see a relief rally which would provide an opportunity to unwind some nervous nellie long Kiwi positions.
The long NZD trade remains fraught with peril given the absolute political uncertainties. Be nimble.