The Song Remains the Same
That forex dealers are staying in no man’s land is very perplexing, as the Greenback is underperforming, despite a run of strong US economic data. The markets are in flux, yet globally, FX investors are doing little more than moving from one position event to the next, while keeping positions light in between to avoid getting sideswiped by all the political noise.
Meanwhile, the current political landscape is unlikely to change soon, nor will the debates surrounding Tax, Fiscal and Fed policies. As such we should expect the markets to come under renewed pressure and to be severely tested in the weeks to come.
Australian Dollar
AUD remains very well supported as the reflation dynamics continue to run high, with both China and US inflation indexes printing higher than expected. Australia’s Jobs reports had a mixed reaction, as expectations were slightly elevated following the firm NAB business survey earlier in the week. However, the NAB has confirmed Governor Lowe’s optimism, expressed last week. Nonetheless, heading into the week’s end, the AUD is struggling to hold.77 despite broader US dollar weakness; hardly a strong bullish signal.But the Aussie has been in real demand this week on the back of the reflation trade and perhaps is a little overextended, so we may see further profit-taking and positions squaring as dealers opt to keep weekend risk nimble.
Japanese Yen
The song remains the same for the dollar bulls who are being thwarted by short rallies with limited follow through. As is so often the case this year, when top side dollar position appears stretched, it reverses hard, and we now find ourselves trading -160 pips off the weekly highs, precariously perched above the 113 level. It confirms the view that the market is in the midst of one continuous positioning event. However, the constant rebuff on dollar rallies is a worrying sign that the market may be favouring positioning for a sudden wave of risk aversion. Apparently, political jitters continue to override strong underlying economic sentiment in this current climate.
Chinese Yuan
The market is reticent, without much going through, and longs are getting nervous by the lack of broader USD follow through post-Dr Yellen’s hawkish speech, which ultimately failed to convince investors that a March rate hike was on the table.
USD Asia
These are the three top factors are driving Asian currency demand for USD/Asia:
President Trump has been softening his rhetoric and toning down in hard-line approach on trade
European political risk may keep the US Fed on hold, post-May
Reflationary trade, as confirmed by high CPI prints in both US and China, are supportive for emerging market currencies
