Never a Free Lunch in FX market these days
Forex Overview
Trading currency markets can be cruel and unusual punishment and unforgiving at times. Which was typified by EURUSD moves overnight as two critical headlines sunk the EUR, causing some well thought out longs to get stopped out only to have the EUR consensus trade re-established later in the day?
The pair initially dipped on headlines that the Berlin regional branch of the SPD has supposedly rejected coalition talks with the Merkel bloc. However, given it represents 4% of the Bundestag the headline was quickly pushed aside, and the bulls were happy to buy dips. But in typical ECB fashion, the central bank rolled out the unmanned sources to the press dousing the party with ice water by suggesting the market is getting ahead of itself.
But later in the NY session reality set in that the coalescence of technicals and fundamentals continue to suggest a structural shift to sell USD is on the cards triggering market players to re-engage dollar shorts.
Expectations are increasing that other G-10, and Asian central banks are readying to enter a path of interest rate normalisation, with the ECB and BoJ joining the Fed spearheading the shifting Central Bank narrative for 2018. And the surging global growth narrative is providing the favourable scrim.
The Euro will remain the markets darling in this scenario as an undisguised explanation suggests that with the low level of EU bond yields relative to the US yields that when the ECB definitively embarks on policy normalisation the Euro could surge much higher. Considering a 50 basis point rise in EU yields could trigger a modest 2-3 % rally in EURUSD, but the thought of a 100 basis point jump and a 5-6 % bounce on the EURUSD, the top side risk appears oh so attractive.
Oil Market Overview
Occasionally the technical picture, suggesting we’re topping out on prices, can distort the fundamental premise that after years of oversupply the inventories are contracting much faster than the markets had anticipated as the surging global growth narrative ferments. And while US drillers may come back online more aggressively, but price response could dawdle, and WTI and Brent could move higher near-term regardless.
Of course, there’s some thought that Russia is willing to end the OPEC relationship, but until there is a simple quantifiable methodology to what constitutes global oil market balancing act, it far too early in the game to go down that road. The fact is OPEC nor its comrades in arms can incur another significant price slump suggesting a messy exit strategy is long ways off.
Overnight it was a mix of profit-taking, background discussions around Russia parting way with OPEC and Shale Producers ramping up production that has weighed on sentiment.
US Equities Market Overview
Equities were bid on the opening bell, but the 10 am NY option expiry coincided with the high water mark in US equities as the Dow Jones Industrial topped the 26,000 mark for the first time. But from there onwards, it was all downhill into the close. ( Just for the record, when it comes to option expiry referrals, I don’t believe in coincidences)
Energy sectors indeed weighed on stocks as the technical picture on oil prices suggests the long anticipated correction is in store. But with the Vix bid +12. % during the session, and while it still has a long way to go before it becomes significant, perhaps the uptick in vols convinced investors to book some profits and reduce some risk.
Not to mention the omnipresent political quagmire in Washington adding a level of angst after headlines suggesting Steve Bannon, Trump’s former right-hand man, will be subpoenaed to testify as part of the ongoing Russia gate investigation
Gold Market Overview
Gold Trader finally came up for air overnight after prices printed a four-month high this week. While the US dollar remains the most prominent driver of momentum, we can not overlook the meltdown in Bitcoin on the back of regulatory oversight adding to the Gold risk premium. Indeed, many retail traders suffered in the collapse, and at this stage, the actual economic impact is unquantifiable. And while it’s not as convincing an argument as a weaker dollar is for higher gold prices, at a minimum, it provides support from a cognitive perspective.
G10
The Euro
Indeed the market did not buy into the overnight headlines remained in buy the dip mode. Despite all the headline noise, the EURUSD held 1.22 as traders remained unwavering on their bullish Euro calls.
The Japanese Yen
The background conversation around the BoJ policy shift continues to resonate. With top side risk relatively limited in this cooler USD environment; traders become more attracted to risky trades than playing established ranges. Given that an appreciable break of 110 could drive a wave of impulse selling for well-established longs coupled with panic selling from exporters, the potential for 107 is not out of the question before the BoJ has time to react.
The Australian Dollar
Base metals have underperformed, and oil has pulled back from the highs, so not shocking that commodity currencies are settling while the USD sell-off abated. But Aussie traders remain focused on tomorrow’s Job report and China data dump.
Although Chinese Lunar New Year is over a month away, the market may start to reduce appetite for raw materials as virtually everything shuts down that week. So for the Aussie to take out the 80 level anytime soon, it will probably need a stellar jobs report coupled with an extension of the US dollar slump to get the market across the line.
The Chinese Yuan
The Yuan remains a major focal point, but the bottom line is the Pboc do not appear overly concerned with the strengthening Yuan as even in the face of substantial moves they’ve only marginally pegged the fix USD higher. Of course, the traditional thought that China needs a weaker Yuan to support exports does make sense, but as Mainland policy markets accelerate the internationalisation of the RMB complex, Beijing may merely be more focused on attracting inflow to support local capital markets while regulators continue the arduous process of deleveraging financial markets risk.
Asia FX
Lots of moving parts and idiosyncratic storylines in the region, but outside of the INR and PHP, short USD dollar positions remain favourable. INR trade poorly overnight after the RBI said that banks must manage their rate risks
The Malaysian Ringgit
With the markets focus shifting to Central Bank policy normalisation this should favour the MYR given the anticipated policy shift at the end of the month. But to get through the 6.95 level before the BNM rate hike, it will require either an extension of the Euro rally to break through 1.23 or USDJPY to fall convincingly below 111.00 as both currency pairs are steering FX markets right now.
