A shadow from the past
It’s always difficult to make heads or tales of traders behaviourism around the new year, but for now, USD is brawling back against the sell-off that started in Mid December as two clear-cut developments from Friday could influence short-term sentiment.
First, USD rallied after a soft employment report, indicating the recent dollar sell-off could be taking a brief respite.This disconnect between the USD and economic data has some traders betting a near-term USD correction is imminent. Even the dismal non-manufacturing ISM didn’t get a significant rise out of the bears
Second, a shadow from the past spooked the dollar bear after the Fed published 2012 transcripts of its FOMC meetings on Friday.And since Powell was on the Fed board at the time, G-10 traders took a genuine interest in the report. And while Powell did support QE3, he was not of high conviction. This view was a bit more hawkish than the dollar bears liked heading into the weekend causing dollar shorts to pare Friday afternoon. This storyline will put further emphasis on the plethora of Fed speak this week so observe the Fed Bankers this week.
Oil Markets
While OIl prices remain firm from supply disruptions, these signals have all but run there course. And while the OPEC vs Shale debate will rage the real focus remains on politics and specifically the Middle East turmoil. Indeed the markets are taking note of the Iranian Demonstrations, but I suspect oil traders remember the death Nedā Āghā-Soltān and if a similar story develops from overly forceful suppression President Trump will be quick to strap on Oil sanctions which will send oil prices rocketing higher.
Equity Markets
Global equity markets remain frothy to start the year supported by robust economic data and more buy into the stronger global growth narrative.Even in the face of weaker US jobs report it failed to dent universal optimism as the benchmark US S&P 500 entered new record territory.
Gold Markets
January is usually a good month for Gold prices and should remain so on the anticipation of physical demand ahead of the Chinese New Year. While there could be some downside pressure from a possible US dollar correction, Gold will likely remain firm until a March Fed hike possibility comes on the radar. But non the less its essential to keep an eye on Fed speak this week as the markets remain overly dovish which brings in the tail risk for hawkish surprises
G-10
Identifying the broader dollar trend will be a bit trickier this year, and we’re already witnessing idiosyncratic storylines emerge, not only in $Asia but also in G-10 as traditional correlations start to diverge. Some G-10 and EM central bankers will begin the arduous process of policy normalisation, but given that each country could have a different response to changes in their domestic inflation narrative, unquestionably trading will be a bit more complicated than just playing a broadly based USD basket if this holds true.
The US Dollar
The market consensus is for USD weakness to continue as investors selectively build positions
The Euro
Last week the EUR hurtled the disappointing EU CPI which supports the view that markets remain under-positioned long-term relative to the markets overwhelming bullish sentiment. However, near-term EURUSD levels suggest there’s a lot of focus 1.2000 indicating a break could trigger a correction towards 1.1900, as overweight short-term speculators and fast money positioning suggests the market could be susceptible to an early 2018 squeeze lower.
The Canadain Dollar
The incredibly strong job report on Friday increased the odds of a Bank of Canada hike. Combined with the supportive backdrop from the oil markets, the CAD should remain on sound footing.
The Japanese Yen
Few if any dealers expect the BoJ to move from the YCC anytime soon with inflation struggling below 1 %. So the USDJPY could move higher despite dollar weakness emerging in outher G-10 pairs. Over the short term, JPY could weaken given the favourable global risk conditions and rising global yields. However, One possible risk-averse situation to start the week is North Korea’s leader Kim Jong Un purportedly turns 34 today and there are some concerns they may light off a missile to celebrate however there is also a scheduled discussion between NK and SK regarding the Olympics on Tuesday which should temper any aggression.
The Australian and New Zealand Dollar
Australia and New Zealand dollar see few events to move the dial for this week, and the currencies will likely trend with the broader move in the USD, commodities and risk appetite. Indeed the path of least resistance for both AUD and NZD appears higher, so long as USD weakness remains intact, the global growth narrative remains robust, and base metals and oil remain firm.Not too much of a stretch at this point.
The only issue is that a consensus is building that copper, gold and oil might struggle to push higher early in the week which could cause the cause the AUD and NZD to wobble a bit out of the gates this week
Asia FX
Asia currencies continue to outperform in early 2018. However, on Wednesday China Inflation data for December will influence broader sentiment in the Asia currency basket, but more so related commodity exporter countries.
In the meantime, the risk-on sentiment and cash equities buying is supporting the regional basket
The Malaysian Ringgit
USDMYR which spent 2017 grinding lower and finally cleared the 4.0 barrier with little fanfare almost as if it was a foregone conclusion. But a combination of USD weakness and firming oil prices appears to have been enough to break psychological support in USDMYR.The recent supply disruption and escalating middle east tensions are having a more significant impact on oil prices in the wake of OPEC recent supply cuts.
Rising oil prices bode well for the KLCI given that oil and gas constituents play a vital role in the bourses make up which is providing some decent inflow. But this is not merely an OIL related rally as the stronger global growth narrative is benefiting exporters also.
While the MYR should continue to strengthen on a benevolent Fed outlook and rallying energy prices, the market has most likely sufficiently priced in a BNM January rate hike so we may see the pace of appreciation slow down. As well, we should expect profit taking to set in ahead this months rate decision.
The Chinese Yaun
The Pboc appears unconcerned with rising rates and seems more concerned with attracting capital inflows. But with China rate hikes relatively well baked into the short end with CGB index inclusion rhetoric building which likely to draw massive waves of foreign investment flow, and coupled with prolonged weaker USD narrative, its convives the USDCNY tests 6.30 in 2018.
The Philippines Peso
Everybody loves the underdog and we should see an underweighted position wise PHP play a bit of catch up to the regional peers. The export picture has improved dramatically as the PHP lagged its regional peers in 2017 providing the Philippines with a regional competitive advantage. .President Duterte Tax Reforms are being embraced by investors while market reform has local sentiment pointed in a positive direction. Structurally in the past, the PHP has suffered from the lack of inflow other than overseas remittances, but there are subtle signs that foreign investment and equity inflows are picking up. While much of this could be attributed to a catch-up trade to regional peers there is not denying traders love a turnaround story and in early 2018 the PHP is being embraced.
