The USD quickly got into the Black Friday act, getting sold as rapidly as Playstation Fours were flying off the shelf at the local Walmart (NYSE:WMT).
But Friday’s momentum was as much about the strengthening euro with a convergence of politics and data leading the charge. Momentum continues to build towards another grand coalition while EU economic data continues to crush forecasts.
Its a busy week on tap but at this stage, it’s unclear if liquidity, which was sparse last week, will fully recover as the markets veer towards year end which tends to see traders chasing their tail as opposed to taking on risk.
As for the greenback, the FOMC minutes are too fresh in traders minds to ignore which suggests the weaker dollar narrative should remain intact. And adding fuel to the USD fire sale, the political landscape got even muddier when news leaked that Michael Flynn’s legal team is no longer communicating with Trump’s. This story may induce severe storm clouds for the dollar as we could see more indictments this week.
It could be a crucial week for the US dollar with October PCE print and more tax reform evolvement unfolding.
Any major inflation print will be a significant point of convergence to determine the Fed path to normalisation even more so in light of the recent Fed minutes which highlighted moderate inflation as a significant concern.
While tax reform remains bogged down in competing priorities, any sign of progress should be a USD-positive surprise. But the Republicans are in a frangible spot as no more than two Senators can dissent. So we should expect significant focus directed to the US Senate this week.
While tax from passage will be equity market positive, the big question is how much of the tax reform benefit is already baked into the dollar sentiment and will the currency market care as the ultimate focus remains on the Fed curve?
The much anticipated OPEC meeting is finally upon us but with the deck stacked for a production cut extension, anything short of a complete buy-in by Russia to roll over the production cut for all of 2018 could spook the markets and may cause oil prices to plummet.The bar has been set very high for any welcome surprises, so downside risks are sizable.
Finally, the Fed Chair Senate hearing is slated this week along with a plethora of Fed speak which will both be carefully observed for any glean on next years policy guidance.
The Australian Dollar
The Australian dollar is opening relatively unchanged versus the USD. On the domestic data front, we have another quiet week ahead, but there may be some interest in Q3 Capex Thursday. But with the Aussie dollar diminishing carry advantage continuing to weigh on the currency, there will be an acute focus on the US PCE print. But barring any major surprises along the Fed curve, the Aussie should sail into year-end relatively unscathed as post the FOMC minutes; the Aussie has remained well entrenched above support levels as significant selling interest is only likely to emerge near the .7675 level.
The Euro
Too many positive developments to ignore suggests the market will set sights on the 1.2000 level where things could get a bit messy. The market continues to underprice the ECB risk, but with the recent string of uproarious EU economic data, surely this will be too difficult for the ECB to ignore and at minimum moderate their lower for longer stance in spite of inflation undershooting expectations.
The Japanese Yen
With the dollar struggling and market chatter accelerating that the BoJ are preparing to shift their bond yield target rate higher, the market could be primed for a test of the critical 111 level this week. At a minimum, I think it’s safe to say that given the recent FOMC dovish tack, despite the FOMC confirming the December rate hike, topside USD/JPY momentum should be a grind at least until the dust settles on US tax reform.
China
China markets induced a bout of indigestion last Thursday when mainland equity market cratered but the market noise subsided on Friday providing relatively smooth sailing into the weekend. China’s clampdown on debt triggered the most significant one day fall in the CSI 300. But with regulators intent on deleveraging, this recent market collapse may be a sign of things to come.
As Beijing moves to standardise financial markets, it will likely lead to more short-term capitulations as investors are now required to face the inherent risk from high yielding volatile assets as opposed to relatively risk-free returns as more financial reforms take hold. Given that regulatory changes will have a negative impact on liquidity, equity bulls should keep an eye on Bond Yields after Chinese sovereign yields surpassed 4% mark last week.
On the economic data front, jam-packed end of the week highlights the diary. China’s official manufacturing and non-manufacturing PMI for November are due Thursday. The Caixin manufacturing PMI will follow on Friday. Expect the PMI’s to ebb as both deleveraging, and environmental regulations take their toll on activity metrics.
The Chinese Yuan
Cheaper US dollar mainland corporate demand could give way to a surging yuan as USD appetite continues to dwindle as reflected by the US dollar index (DXY) which fell below 92.70 on Friday. Not to mention that market flow remain biased to sell USD despite the market covering shorts ahead of this week’s US tax vote.
FX Asia
After some eye-watering currency moves last week, USD Asia traded higher into the weekend as dealers booked profits on shorts ahead of a busy week for the USD and KRW.
Korean Won
Regional focus will fall on the BoK where the market has baked in a 25pbs rike to 1.5 %. But currency traders should be positioned on guard for any possible knee-jerk reaction if the BoK governor offers up a dovish hike to counter the surging KRW and rising bond yields.
Malaysian Ringgit
After the recent rally, consolidation should take hold of the ringgit markets ahead of the key US PCE data, OPEC and US tax reform vote. Given the abundance of two-way dollar risk this week, I expect dealers to be more reactive to news headlines and economic data releases as opposed to position for a long-term view. So we should expect extended periods of boredom accentuated by abrupt explosions of volatility around headline risk.
Monday Morning Market Musings
Malaysian Ringgit and the domestic CPI
As you would expect, the MYR remains a very hot topic with my Singapore clients, who have significant market exposure and financial obligations in Malaysia. I was inundated with calls after the consumer-price index rose 3.7% from a year earlier compared with a 4.3% year-over-year increase in September. And well below the WSJ poll of 4 %.
Much of the recent strength in the ringgit, besides the robust domestic demand and positive external sector, is driven by traders progressively pricing in a January rate hike. So does this lower than expected CPI cause me to have second thoughts about my January rate hike call or rethink my year-long bullish view on the ringgit, absolutely not.
Much of the inflation gyrations occur at the gas pump, and OCT CPI too was tempered by pump -related price restraint which in my view, is far too volatile to include in any inflation metric. But despite the tempering of Octobers inflation data, one of the leading tenets of any Centeral Banker is to get ahead of inflation, and the BNM has already acknowledged this preference. All but suggesting a choice for an interest rate hike sooner rather than later. These type of comments are about as hawkish as a Central Banker can get.
Also, the real OPR has been running negative in 2017 which Gov Ibrahim recently recognised as “too long ” implying BNM is focusing on a neutral real policy rate. Based on this view, it suggests one hike in January with a possible follow up rate hike in 2018 a plausible projection. Finally, the MPC has signalled a preference for a stronger currency to mitigate inflationary pressure and to lower the cost of servicing foreign debt obligations. Keep in mind that monetary policies on distant shores cannot be ignored as weaker currency knock-on effect can raise the cost of servicing foreign currency debt.
All of which keeps this trader running with the Ringgit Bulls.