Investors were sponging up the plethora of suggestive Fed commentary overnight, President Trump’s State of the Union speech, and a profusion of economic data. They left the 20,000 Dow Jones level in their rear view mirror, breaching 21,100 as the market latches on to Trumpflation, despite the President’s address coming across about as clear as dishwater concerning actual policy. Regardless, there was enough meat on the bone to content the street with financials, powering their way higher supported by the prospect of stronger US economic growth. As for the dollar, Fed speaks guided the markets and lifted the pricing for a March rate hike to 75% probability and the US 10 Year bond yields have ratcheted higher, nearing in on the 2.5% level.
Australian Dollar
Strong Aussie data with GDP, 1.1% QoQ 0.3% higher than expectations, along with buoyant China PMI data has lent support to the AUD. Even more impressive was the Aussie dollar gains that came as US 10 year yields ratcheted higher to 2.47 % (+.7 %) overnight. The AUD appears poised for another attempt at 0.7700 cents, but the weight of USD demand could prove to be an act of overreaching near term. Indeed, the AUD should remain firm on the crosses, which are still a favoured way for dealers to express their bullish Australia bias. Corporate demand will intensify over the next couple of weeks with dividend buying, likely to keep the AUD supported on dip buying. However, with USD on firmer ground, there is a high chance for a near-term correction lower at some point, with markets flagging Aussie longs and growing weary of the constant rebuffs at .77 level.
The January building approvals missed this morning, coming in at -1.8 % vs. -.5 % expected, and the AUD has fluttered on the data, dropping below the .7650 level.
Base metals continued to flourish overnight in the wake of the stronger China PMI’s and President Trump alluding to the 1 trillion US infrastructure proposal, which provided an additional underpin to the AUD.
Japanese Yen
USDJPY is the stand-out legatee of the March rate hike repression as USDJPY remains the market’s favourite pair to express a strong USD bias, but demand does appear to be broad-based suggesting the market is still looking to buy more topside exposure. Fed hawkishness underpinned the price action with Kaplan incredibly upbeat and the Beige book evidencing a further compression in labour markets. While the market could pause ahead of
decisive speeches by Fed Vice Chairman Fischer and Chairman Yellen, there appears little reason to talk down March, so the tail risk remains a Hawkish one. No hint of FOMC obfuscation this time around as the FOMC stars are coming together and the 115 now appears to be a bridge not too far to cross.
WTI
Oil traders remained edgy when the EIA Crude Stocks change report was released. The headline number beat the forecasts, but traders were unnerved on the news that a stockpile of 520.2 million barrels was a record. WTI dropped from $54.40 to $53.65 at the close. One has to believe that eventually, the Energy sector will tick higher if the Trump administration’s focus is to make America grow again and inventories top out soon.
Offshore Yuan
The CNH continues to trade off its back foot, as expectations ratchet higher for a March rate hike. Despite the positive PMI, CNH continues to be very much driven by the broader dollar landscape.
EM APAC
While Donald Trump has the spotlight, it was the Fed speakers that stole the limelight. Repricing of March rate hike expectations will weigh on regional sentiment, yet the most important detail remains Tax reform. While President Trump sounded unusually placatory yesterday, there were no specifics revealed on the border tax adjustment, but we need to be cognisant that any acceleration of these expectations will give the dollar a boost and should weigh on regional markets in the near term.
