A spoonful of morning jitters sent New York investors scurrying to the local bond desks as the skittish demand for US Treasuries guided the USD lower initially, only to stage a tentative recovery in some FX pockets after US home sales surged to a ten year high.
Indeed, wobbly China equity markets are not helping global sentiment, but at the core of the matter, investors continue hanging by a thread over US tax reform as the market remains embroiled in the US Senate's competing priorities. This morning, media sources report that without changes to the Senate tax bill, Republican Senator Ron Johnson is a no in Tuesday’s Senate Budget Committee. And of course, the great unknown remains Senator Bob Corker who remains on the fence.
Also, it’s worth noting that we are encroaching year-end type liquidity. The markets have been driven to the back of position-momentum swings lately, and with USD the most prominent short, traders get nervous about the crowded trade mentality in less than ideal liquidity conditions, and will head for the exits quickly. Needless to say with the numerous risk-off triggers hitting the market regularly, it gets a bit spooky trading in sub-par conditions and certainly dampens speculator appetite.
Asian equity markets continue to trigger ” risk-off” moves; this will remain the immediate focus as the overall global risk environment remains queasy.
The Japanese Yen
One of those ” FX pockets ” where the dollar continues to struggle is USDJPY. The pair remains exceptionally susceptible to both Risk and Yield with both key drivers hammering the pair mercilessly yesterday. Beefy flow in US bonds started the slide as investors were growing ever so nervous about the recent China market machinations. But a vague rumor that North Korea may test another ICBM also weighed on sentiment.
The Euro
The EURUSD continues to hold around the 1.1900 levels. But the advancing strength in the European economic data stream will continue to reverse out any expectations for ECB dovishness. This positivity alone will keep the euro firmly bid on dips as traders await a clean, decisive break in Germany's political deadlock before taking the euro higher.
The Australian Dollar
The Aussie dollar trade is becoming more of a chess match than anything else as two competing ideas are driving current sentiment. The Aussie remains well entrenched above significant support levels ( .7500).
The recent run of reasonably constructive price action as the Aussie yield premium all but evaporated has some elements in the market dipping into the tactical pond, buying AUD and feeding of the regional EM soaring GDP prints. While others prefer flat-out selling, the Aussie's diminishing carry advantage continues and the result is a currency stuck in neutral awaiting fresh news to take another leg in either direction.
Overall we remain in no man’s land until either .75 gives way to .7675 or is taken out so choose your sides carefully. But given that risk-off sentiment, it looks likely to extend further. This week's tactical short would be AUDJPY, making it the go-to trade from that perspective
Energy Prices
WTI oil prices traded with a negative bias due to the firm US dollar, and the likely early onset of profit-taking ahead of Thursday’s OPEC meeting. There were rumors that Russia may not be eager to extend production cuts. This rumor plays into the view that anything short of a complete buy-in by Russia to roll over the production cut sends oil prices sliding given the market's bullish positioning.
Asia FX
USD Asia liquidity has not recovered yet from Thanksgiving which has traders not so keen to speculate. And of course, the wobbly China equity markets have created some regional risk wobbles.
Nonetheless, I am confident China regulators will not let this get too out of hand and provide liquidity to settle any of the nervous nellie jitters their Financial Reform movement is causing. Overall I view this short-term pain as the long-term extremely positive gain for the region. Unfortunately, we are trading in year-end markets when a long-term view is considered holding a position longer than 3 minutes, which is not helping risk sentiment.
The Chinese Yuan
The yuan has remained exceptionally stable given the wobbly mainland equity markets. The RMB complex continues to provide an excellent proxy of USD sentiment as it shadows broader US dollar trends.
Entering month end, we should expect the usual USD corporate demand to provide a near-term base for USDCNH.
Sentiment remains guardedly optimistic for the yuan, but traders need to see an extended rally on mainland equities before diving into the waters again.
The Malaysian Ringgit
The USDMYR market has become less one-sided with shorts pared ahead of significant 2-way USD risk this week. But with a rebound in EUR and dovish November FOMC minutes still fresh in the market mind, this should continue to favor regional EM demand. Also, the cleaner positioning suggests the MYR could extend its decisive run as the currency remains in favor on both macro and monetary policy fronts.
On a slight negative WTI oil prices opened with a negative bias, dropping from $58.52 to $57.57, due to the firm US dollar, and the likely early onset of profit-taking ahead of Thursday’s OPEC meeting. But given that the MYR has been less sensitive to falling oil prices of late, this should not be a substantial adverse bias as oil prices remain above the Malaysian Government's budgeted oil price targets.