Currency Markets
The US dollar bulls continued to lead the charge as traders remain centered favorably on the entrenched US data flow, despite a slightly softer ISM, relative to those from other major economies that are cooling quickly. This suggests that central bank policy divergence and the widening interest rate differentials have G-10 traders taking the dollar bull by the horns. It’s now over to the FOMC to hold up their side of the bargain as so far, the heavy lifting for the greenback has fallen on the global central bank community which has turned dovish on the first hint of economic slack.
Equity Markets
After initially grumbling on Pfizer (NYSE:PFE) results and dropping oil prices, US equity market rebounded convincingly in Tuesday’s NY session. However, investors remain cautious that tariffs and higher oil prices could increase cost pressures and weigh on corporate profits. In addition, the negative equity market connotations from the prospects of higher US interest rates as the Federal Reserve Board concludes its two-day policy meeting continues to weigh on markets.
Oil Markets
As the May 12 Iran nuclear deadline nears, headline risk continues to speak volumes. The market turned lower after peaking post-Israeli Prime Minister Benjamin Netanyahu’s televised exposé which accused Iran of lying about its past nuclear intentions when in fact the existence of a covert Iranian program was divulged in a 2011 report from the International Atomic Energy Agency.
Geopolitical developments will continue to drive sentiment. However, a stronger US dollar, soft ISM and a refocusing on rising US production have caused traders to turn to profit taking mode and capped upticks so far.
The API reported a larger than expected crude inventory build while the U.S. Energy Information Administration said Monday that oil production rose to a record 10.264 million barrels a day in February.
Gold Markets
Gold market is melting as the surging US dollar takes hold. The revitalized greenback has all but crushed demand for bullion, and as we near the critical $1300 level, the specter of stop losses getting triggered on an upbeat FOMC statement has traders now positioning for the path of least resistance, which appears lower.
We’re in a lull between geopolitical developments which is also offering little support for gold prices.
G-10
The USD is bid across the board after testing some significant levels as the market sits tight ahead of the FOMC, but more significantly, now pivots to this week’s NFP which could make or break the resurgent dollar.
EUR: Some traders had not entirely positioned for downside exposure so on a break of the psychological key 1.2050 there was a mad dash for downs exposure which toppled the EUR below the 200 day moving average which set up a test of this year’s low print, 1.1915.
JPY: Interest rate differential and positive developments in the Korea Peninsula suggest a test of 110 is on the cards.
AUD: The RBA was a non-event and was more or less a replay of past statements. With the RBA continuing to err dovish and barring a surprise uptick in global growth and commodities, the market continues to favor the Aussie short vs USD among G-10 peers.
Asia
MYR: Stronger dollar narrative coupled with political uncertainty should continue to pressure the ringgit.
Growing election uncertainty continues to keep investors at bay. While the chances of the opposition to pull off a surprise result remain low, a large scale knee-jerk negative repricing of Malaysian assets suggests foreign bond buyers will stay on the sidelines. As such, the MYR will continue to trade defensively due to its heightened domestic political risk.