US equities put in another stellar session hitting the trifecta as all three major indexes ( DJIA, SPX and NASDAQ) synchronously closed at record highs. Likewise, the USD closed the week on a very optimistic note as positive investor sentiment was grounded in the Senate’s passage of the budget resolution, clearing a significant hurdle and moving the GOP closer to tax reform. Now it’s off to the Congress, but this time around, Trump is very confident The House will pass the resolution, eager to put tax reform behind them
The Fed Chair race remained in focus, but traders are finding it challenging getting off the merry go round after Trump made clear his three top choices are Powel, Taylor and Yellen on Friday. But never the one to miss an opportunity to stir the pot, when asked if Trump could have Powell-Taylor as co-chairs, he said it could be an option. While Powell and Taylor remain the odds-on market favourites, we do know that the President prefers lower rates and a softer US dollar, perhaps forgetting Yellen could prove to be a huge mistake.
FX markets remain choppy with traders reacting to headlines, rumours and at times engaged in a flight of fancy, not allowing the facts to get in the way. But this is more or less typical of trading in politically charged markets where risk quantification is a guessing game at best. But no rest for the weary as politically, it will be a huge week not only for the dollar but the weekend noise from Catalonia, and the Japanese election could make for a rousing start on Monday if the unexpected comes to fruition.
Even if you view the Catalan conflict as inconsequential to the long-term EUR view, headline noise can produce an outsized currency move at the Monday open due to thin liquidity conditions so best be nimble best be quick. But in reality, the primary focus for EURO traders is the ECB meeting on the 26th
PM Shinzo Abe is mostly expected to return to power with a comfortable majority. Given this likely scenario and effervescent risk environment, we should see a move higher on USDJPY as the market prices in short to medium term weaker JPY. His victory all but assures more fiscal stimulus in Japan including a JPY2trn budgetary spending package to ensure the next tax increase slated for 2019 does not result in an economic slowdown like the 2014 tax hike. Also, the Nikkie will continue to play catch up as elections risk premiums unwind and that should provide further upside impetus to USDJPY. Granted there are no election surprises; we should expect any USDJPY dips to be hoovered up at the Monday open
The Canadian Dollar
The Candian dollar tumbled and fumbled its way to the finish line proving to be G-10’s worst performer on Friday as CPI, and retail sales both missed the mark. Also, The Bank of Canada Monetary Policy Report and policy statement are due October 25. Today’s USDCAD rally indicates traders are looking for a dovish statement and no rate increase. So this wave of negativity should continue next week
The Euro
The long-awaited ECB meeting is upon us. But with the council all but telegraphing their intentions from the mysterious " unknown sources ‘, a lot of vol has been sucked out of this weeks meeting risk.
With that in mind, I suspect the Euro, as it did on Friday, will take its cue early next week from USD momentum.
The Japanese Yen
The market is bulled up on USDJPY for a favourable Abe election outcome as its expected his policies will continue to weaken JPY.
The New Zealand Dollar
The market has issued a vote of non-confidence for the very muddied NZ political landscape and by extension the Kiwi dollar. While political risk usually has a way of evaporating quickly, but with the NZD getting drawn into the USD vortex, we should expect a more profound current trend extension on a stronger dollar narrative.
The Australian Dollar
The Australian Dollar is one of the G-10 currencies with most to lose from a stronger dollar and a more hawkish Fed. The US dollar appears to be on solid footings into the weekend., but next weeks focus will be the US bond curve. Any aggressive move higher in US yields, especially if President Trump gives Taylor the nod, will put the Aussie at exceptional risk
