The US Dollars dual personalities
The US dollars dual personalities were in full view overnight as an endless stream of headline surprises weighed on investors sentiment while some localised circumstances played in its favour. Indeed the numerous idiosyncratic storylines had currency markets rocking in every pocket of the globe, however, in general, the USD dollar lost some momentum overnight as concerns resurfaced over the pace of Fed normalisation, and a case of the willies gripped investors ahead of The House Vote on the budget resolution.
Not surprisingly, Republican infighting once again threatens to derail the vote as clouds gather over state and local income tax provision.
Uncertainty over the next Fed Chair has traders double and even triple guessing their best-educated guess. Indeed, the agonising wait is taking its toll on positioning as the longer the process gets drawn out, the more nervous the market becomes and then starts to wonder if the what appeared to be the unlikely scenario of a status quo wins out.
Australian Dollar
There’s entirely no way to sugar coat yesterday’s domestic CPI miss, and the broadcast of a re-weighing of the CPI basket for the January print only adds to the misery.
If there was any doubt about RBA policy, the CPI print suggests they will be parked in neutral for some time as the lack of any wage inflation to mollify the household debt burden will continue to weigh dovish on RBA policy. Indeed all eyes will be focused on the RBA’s inflation spin in the Statement of Monetary Policy next month where any sliding revision to the CPI forecast could spell doom for the Aussie dollar.
Japanese Yen
Market chatter elevated after coming within a hair’s breadth of breaking the critical 114.25, and the burning question remains can we push through this level which has been the markets undoing for the better part of 2017.
Technical hoodoo aside, breaching the 10 Y UST 2.4% inflexion point and the surging Nikkei suggests yes.But with the US tax reform getting more priced into the risk equation, a significant near-term move towards 115 will need some help from a hawkish shift at the Fed helm for the dollar bulls to have their cake and eat it also.
The Euro
Expectations have been tempered by ECB speak and the dearth of leaks. But of course, when it comes down to crunch time the concern is that the market has written today’s meeting off as a non-event more or less expecting currency neutrality and continuation of well-travelled ranges between 1.1675 -1.1875
While the market is not expecting anything earth-shattering from Draghi dealers will none the less trade the ECB policy lean, but the risk of a hawkish surprise is real and we could see a further extension of recent EUR gains as investors hedge for that possibility
Canadian Dollar
What was thought to be the beginning of a Bank of Canada interest rate hike cycle is being discounted as nothing more than a removal of emergency accommodation. Governor Poloz is back roosting with doves. With interest rate differential likely to favor the long USD position going forward after the BoC expressed concerns about downside inflation risk, the Canadian dollar could remain on its back foot heading into 2018
FX Asia
Risk sentiment rand out of gas yesterday as local equity markets moved into consolidation mode with US tax reform narrative and the Fed Chair search still the key themes.
Indian Rupee
The Rupee is back on investor radar on the bank recapitalization headlines underpinning local equity markets. USDINR moved lower aggressively as investors refocus medium and longer-term outlooks based on these extremely positive developments in the banking sector that have been weighted down by substantial loan loss provisions. In early trade, the USDINR is trading just below 64.90 level, but further short-term gains could be challenged by the shifting USD sentiment around the Fed Chair announcement.
The Malaysian Ringgit
The Ringgit is trading gingerly ahead of the budget.
Indeed, all Forex roads lead to the Fed Chair nomination and US tax reform. But on the domestic from all eyes are on Budget day where its expected Prime Minister Najib Razak will walk the fine line between reducing the fiscal deficit while providing enough tax incentives in what is being perceived as an election budget.
However, what happens on the deficit front will likely shape the Ringgit’s medium-term outlook as the balanced budget would greatly appeal to foreign investors.
