The overnight focus was on the upswing in global yields which offered the greenback no clear channel as traders found themselves confined to the stationary bike, peddling fast but going nowhere quickly while regurgitating the same narratives in very prosaic detail.
On the Fed front, Yellen’s testimony, unlike the markets' takeaway from the recent FOMC minutes, continued to emphasize transitory factors in subdued inflation while suggesting the US economic recovery was “increasingly broad-based”. By default, the market views this as hawkish, but from my seat, the comments are little more than December rate hike window dressing.
The tax reform bill passed the procedural hurdle in the US Senate as expected, but risk positivity should continue to underpin the USD into the final tally.
The Japanese Yen
Don’t get overly complacent with USDJPY nearing the 112 level. Trading JPY remains as intense a dogfight as ever with competing narratives contributing to the choppy price action.
Downside momentum stalled after investors sidestepped the North Korea escalation. However, it may have provided a false sense of bravado suggesting that all that ills the world are cured. But nothing could be further from the truth as risk aversion is waiting in the wings ready to pounce on the first sign of weakness.
For today at least, though, improving prospects for tax reform should carry the day.
Long USDJPY remains one of the more crowded trades as short-term speculators have piled in suggesting this will be the best vehicle to sell on any signs of dollar weakness.
The Euro
The single currency continues to underperform versus the market's lofty expectations entering the week. At the core, the USD has gone tacitly bid across the G-10 as US yields pop and the equity market continues to froth on improving tax reform sentiment. But as mentioned yesterday it’s more to do with EURGBP crater dampening sentiment as GBP continues to march to the beat of its own drummer after the Bullish Brexit headlines.
Australian Dollar
AUDUSD rate differential touched below the 0 mark for the first time in ages triggering machine driven sell orders based on the Aussie's diminishing carry advantage.
However, most of the Aussie pressure is coming from the GBPAUD cross as the market continues to add to longs.
The Chinese Yuan Pre Fix
The markets are awaiting Chinese PMI. Once that's released we'll watch what happens to the yuan fix.
Energy Prices
The oil market continues to trade the OPEC headlines, but the only one that counts is that Russia signaled it was leaning towards a nine-month extension. As usual, this whole OPEC fiasco is a complex event. Even if a nine-month extension is agreed to in principle, the entire debate is open for review in April anyway. Moving on ………
Asia FX
Korean Won
There will be of massive interest in the Bank of Korea (BoK) rate decision and its effect on the Korean won as the BoK is now viewed as the proxy for regional monetary policy.
The Malaysian Ringgit
The Market continues to express its bullish Asia FX views through the ringgit which rallied again yesterday, pushing through a 52-week high.
The unexpected arrival of interest normalization is taking hold of sentiment. And with Malaysia investors already riding the wave of a robust global demand, the higher interest rate scenario as adding to the ringgit’s appeal. Since the market has still not fully priced in a January rate hike, nor the real prospects of a follow-up interest rate hike in Q2 or Q3, the rally could extend well into year-end as traders set sights on the critical 4.00 level.
MYR may be less susceptible to adverse shifts in the global growth narrative as the ringgit remains under-owned by investors. But the near-term risks are a collapse in oil prices post-OPEC meeting or a deterioration in risk sentiment from China bond and equity markets souring into year-end potentially destabilizing regional markets.
From the macro perspective, the export sector continues to flourish, and by that alone, and despite the ringgit trading at a 52 week high, the MYR remains undervalued relative to some of its high flying regional peers
Speaking of which; the market continues to view the KRW as a broader proxy for local FX risk as well as rates normalization. With the BoK set to raise interest rates as the domestic economy continues to soar, expect the MYR to ride any buoyant won sentiment. And with the ringgit poised to do some serious catch-up to regional peer currency valuations, the MYR should remain one of the go-to trades for Asia FX investors heading into year-end.
Thursday Morning Market Musings
A Brave New Bubble
But with all the commotion on Bitcoin, it offered some distraction to a listless trading day on forex desks. However, with the new wave of so-called “Crypto Strategist” hitting the airwaves overly long on theory and conjecture but lacking any structural blueprint or trading narrative, it might be time for some reflection, in case the masses forget to come up for air before it’s too late.
These are extraordinary times in the market. The primary drivers of Bitcoin momentum in my view:
- The CME’s acceptance that seems to have lit a fire under Wall Street. Cryptocurrencies will gain more credibility as CME Group Inc. (NASDAQ:CME) starts selling Bitcoin futures and other mainstream institutions get involved
- Intense media coverage supporting the current rally which leads to
- Investors' pervasive apprehension that they’re missing the party or the underlying fear of losing out on a quick profit.
It’s not just your average retail Joe champing at the bit; high net worth investors are starting to view Bitcoin as an asset class in the same light as investing in other higher-risk debt and are gradually accepting it as a legitimate asset class.
Bitcoin will continue to broaden its legitimacy and credibility as more of the more significant well known Primary Market Makers enter the field. Provided Bitcoin has a favorable lift off on the CME later this year Bitcoin could surge higher from a credibility perspective alone.
Of course, government agencies will likely clamp down on excessive margin given the hyper-volatility as the potential loss to non-sophisticated investors is enormous. After all, risk management continues to run weak in the retail space.