Sombre Start
Finding the desire to discuss forex markets this morning in the wake of the worst mass shooting in US history is a challenge.
But with heavy hearts, the global markets trudge on searching for opportunities realising these tragedies are becoming all too commonplace. And as cynical as that may seem, that is the reality we’ve come to accept.
Markets
Peering at the screens this morning, it’s apparent that US yields are providing the primary catalyst for the USD revival.
But the deep-seated tension in Spain is certainly weighing on the view that European political risk has faded, by all accounts anti-establishment populism is alive and well.
While the market is likely to sidestep the restlessness in Catalan, the short-term picture for EU risk remains clouded.Expect short-term EUR bulls to take the sidelines limiting top side appeal ahead of this weeks ECB meeting.Speaking of which, the ECB could present some challenges for them as the central bank is apt to show some concern about the EURO’s recent strength.
And while the footings are solid to anchor the USD ( US tax reforms, a new Fed governor, Hawkish Fed) if price action is telling us anything, the dollar bulls remain tentative and appear almost uncomfortable to hold long positioning. Even a juicy good ISM manufacturing print overnight failed to get a rise form dollar bulls.
Indeed, the markets ingrained scepticism regarding Fed policy along with political challenges in Washington continues to temper expectations. But the reality is the Fed rate hikes( 2017-2018) remain underpriced as speculation continues to swirl around the shift to a Hawkish Fed Chair.
The Reserve Bank of Australia is on tap later today but it would be out of the ordinary if they lit off any hawkish fireworks. Recent RBA rhetoric runs counter to interest rate normalisation.Governor Lowe has continued to dampen any market expectation that more hawkish stance by global central banks does not necessarily have pass through implication in Australia. With CPI still below RBA target, there’s not much risk for the RBA to nudge rates higher anytime soon.
IN the Asia FX space we should expect currency markets to remain in flux until global yields stabilise and regional equities see increased inflows. Mainland holiday thinned-trading conditions are also weighing on sentiment. Overall the market remains nervous on the INR and KRW but are showing some small pockets of interest int CNH and MYR at current levels
Views
USD: Longs remain uncomfortable awaiting the next bullish signal.It’s difficult to read too much in this weeks NFP given the expected hurricane effect, but an aggressive top side surprise could send the dollar bulls into a frenzy
EUR: Expect limited fallout from the chaos in Catalan, but this weeks ECB risk will contain any rally
JPY: Tough trade gave the Japanese election risk and as you can tell traders are respecting current ranges
AUD: Remains extremely susceptible the to a dovish RBA
