Short On Themes, Long On Dollars
MarketPulse | Oct 27, 2016 12:43AM ET
Australian dollar
It was hard to ignore the AUD surge post-CPI data with the headline beating (0.7% vs. 0.5% QoQ, 1.3% vs. 1.1% YoY). With the core print failing to provide a clear signal, the +70 pips move higher caught a few by surprise. I suspect the dramatic uptick had more to do with positioning, as the market may have been long dollars, given the broader US dollar moves of late.
My view:
exorcising the deflationary demons will be a lot harder than what the market has currently priced in.
Heading into the data, the market was pricing in a minuscule risk for a rate cut through 2017, and since the RBA is certainly not about to hike rates, the veracity of the move was a bit surprising. However, the pair may have been caught up in the broader USD move as the greenback was trading slightly lower in Asia.
The AUD/USD once again gained little traction above AUD/USD 77 with a risk reward of pressing higher in the face of an impending US rate hike, making little sense. However, the headline data should confirm a positive tilt for Australia. Better traction on the long Aussie trade played out versus the euro and the Canadian dollar, where the interest policy appears divergent.
The AUD is getting little support from oil, which has continued to fall; the WTI is trading just above $49 in early APAC as OPEC deal worries and US inventory data narratives keep resonating within the oil patch. This, despite a relief rally on the better than expected DoE inventory report. $50.00 per barrel is proving a tough nut to crack, and the move quickly faded.
US dollar
US economic data was generally USD supportive overnight as the US Services PMI, and new home sales topped market expectations, pointing to stronger Q3 growth. Moreover, the overall US trade deficit came in narrower than expected, but with exports higher than anticipated and imports lower than expected, it suggests a buoyant Q3 GDP. Of concern, the US consumer continues to tighten their purse strings as reflected via lower import demand.
Japanese yen
JPY continues to range trade, but holding the 104.00 levels. With the markets ascribing a 75% probability of a rate hike by December, with only six weeks before the December FOMC, further dollar momentum from additional Fed repricing is likely limited.
Get The News You Want
Overnight currency movement was on the back of a new Florida poll showing Trump with a 2.0% lead over Clinton; USD/JPY sold off to 104.05, then a ground higher on the positive US economic data.
Overall trade remains directionless and choppy on headline risk, likely a sign of things to come, as trading themes other than the Fed and election narrative are tough to source.
Normally, the week before the BOJ meetings the markets are on edge, but with the BOJ bazooka days apparently behind us, traders are quickly acclimatising to the BOJ’s newly adopted patient approach to policy, as the probability of any near term BOJ policy action is minimal.
Chinese yuan
The most interesting takeaway is that during the recent Yyan depreciation, risk sentiment has held up remarkably well in a market where that I believe is itching to sell risk, given the proximity of the high-risk US election event and the multitude of Central Bank meetings next week.
The Feds continue to ease potential election risk by suggesting the path of interest rate normalisation will be gradual, thus supporting risk sentiment in the face of an imminent hike. I fully expect the Feds to reinforce this notion at next week FOMC, while I expect the BOJ to remain on hold, and maintain the current seemingly happy equilibrium.
However, with CFETS basket not depreciating, the move appears strictly dollar related therefore the global risk apple cart remains upright.
EM Asia
Emerging Markets (NYSE:EEM) were the clear loser overnight versus the USD, as renewed fears of higher global interest rates and a stronger USD continue weighing on investor sentiment. While the on the surface all is calm, the market is starting to get a bit nervous about further weakness in the yuan, which could lead to greater capital outflows and could negatively influence the regional basket, especially the low yielders.
Given the wave of speculative long USD Asia position-betting for further yuan weakness, risk reward is feeling a bit stretched at these levels, especially considering + 75% probability of a rate hike.
We saw a bit of this play out on the MYR yesterday as the USD/MYR traded to a low of 4.1440, but import hedgers were reported on the bid and pushed the market back above 4.16.
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.