Powell, Puppets and Politics
A couple of takeaways from my trip.
1) Canadian Spot Traders are bullish in the Loonie and rightly so given Governor Poloz is the second most hawkish Central Banker next to Fed Chair Powell
2) Sterling traders are sick of talking about Brexit, even more so that we’re sick of hearing about it
US equity markets closed at a new record high on Friday after Fed Chair Powell’s comments during his Jackson Hole speech were taken to be slightly dovish. Most Asian market futures are indicating a positive open on Monday.
Falling US Rig counts and last weeks decline in US inventories are supporting oil prices amid a protracted US-China trade war that could dampen global growth and weight on oil demand. Despite growing concerns about potential oversupply, the markets will continue to get a fillip from US sanctions against Iran.
The weaker USD is giving Gold and nice lift after Fed Chair Jerome Powell signalled that the FOMC remains on a gradual rate hike path. While the speech was a tad dovish, golds resurgence may be as much position related as it is a real demand given the extended short Gold positions that have been build up over the past few weeks which resulted in several stop losses runs getting triggered.
But finally, we’re coming to the end of ” silly season” (an affection moniker used to describe August in currency markets) and by all accounts, the month lived up to its nickname after another episode of currency traders gone wild aired thanks to the political meltdown in Turkey.
Speaking of Turkey, the market reopens after a week-long holiday on Monday with more question than answers but sometimes ” time outs”, even coincidental holiday periods allow cooler heads to prevail. And with liquidity likely to come back to normal as locals return after the holiday, markets could be relatively contained until September 13 MPC date where a rate hike is expected but by no means is a lock.
The other non-ASEAN EM currency to keep an eye on is the Mexican Peso for all the right reasons as headlines reports suggesting US /Mexico are close to resolving key NAFTA issues.
Of course, there will be no escaping political noise with Mueller investigation, Italy and Australian politics filling the docket; I think these short-term themes will continue driving the dollar.
But even with all the political commotion I still like to hold a very practical longer-term approach to the USD based on Central bank policy. With the Fed, the only man standing, the USD should continue to make inroads.
So far Its been a relatively quiet start to the session with most of the discussion centring on Jay Powell’s Jackson Hole speech and Australian Politics.
As far as Jackson Hole, it looks like the dollar bulls were a bit disappointed even more so given that positioning was slightly long USD heading into Powell speech. It’s not like he was dovish, he just wasn’t hawkish enough to move the fed rate hike dial. Therefore, the dollar has remained offered at this morning open as US Treasuries remain bid.
This sitting Fed is not about to overreact to cyclical strength in the economy, and I even suspect the same would hold true for short-term fluctuations in inflation. An off-course Fed Chair Powell was just hawkish enough not to give off any hint of being a Trump puppet.
AS for the Aussie dollar, it was in very much oversold position so the move above .7425 could be viewed as relief rally of sorts. And while the domestic political landscape could get worse before it gets better, for me, the short Aussie trade is all about economic fundamentals as at the heart of the market the Australian economy remains an asset bubble on top of an iron ore mine which will keep the RBA on hold for some time to come.
The other currency that will be a primary focus is the EURUSD, and while I expect the market to start fading this recent EURO move because of Italy’s Risk which matters because it’s enormous and the ECB is more than content sitting on their hands. While there could be another squeeze higher, but seller will likely emerge en masse near 1.1700.
The Chinese Yuan
But ultimately its hard to ignore USDCNY (CNH) influence on G10 decisions as this pair remains at the epicentre of trade war bluster. And despite no compelling headlines, USDCNH continues to come off heavy as an investor is starting to buy into the fact that most of the trade war negative news is priced into the market. Also, talk that the Pboc, not surprisingly, has resumed to counter-cyclical factor in the CNY midpoint fixing mechanism to curb Yuan weakness to thwart possible upticks in capital outflows should calm both local and international investors that this move does signal the Pboc has no intention of moving into a full-scale currency war in the trade war escalations
The Malaysian Ringgit
The Malaysian Ringgit should get support for lower US yields a weaker USD and rising oil price. That positive cocktail of good news usually leads to a good day for the Ringgit. While the Ringgit does look incredibly cheap on the surface, the external trade war factors along with domestic political issues continue to hamper the local unit. While the subtle liberalising of BNM currency policies are viewed positively, there is an overriding concern in the market that the BNM next policy move could be lower especially if the escalation US-Sino trade tensions have a negative impact on Q2 GDP