Central Banks Competing For Stage Time With Crypto Craze

A quorum Central Bank policy decision will take place this week; only the Fed is expected to change its policy. None the less policy guidance from the Fed, ECB and BOE will be monitored and will play a significant factor on year-end positioning. We’re off to an inconspicuous start this morning but I’m confident things will pick up quickly given several evolving narratives.

Nonfarm Payrolls

Traders initially took hawkish inference of Friday’s employment headline but markets where tempered again by the soft AHE print. While the wage data did little to forward the view for an early Fed hike in 2018, the unexpected bounce in inflation forecasts after the University of Michigan (UofM) Sentiment’s 1 year inflation expectation gauge jumped from 0.3% to 2.8% supported the dollar into the NY close.

While we could see a more poignant shift to the four rate hike camp for 2018, the actual raw inflation data indicates slow forming wage growth suggesting little haste to price in more than three hikes next year at this point.

G-10 FX

The Japanese Yen

The Trump trade is back on the radar with US infrastructure spending on the table and could underpin USDJPY sentiment.The market was reluctant to chase the USD aggressively higher on that basis alone initially, but fiscal spend could play out as a significant dollar driver in 2018

Friday’s US economic data was a tower of strength for the greenback suggesting the best trend trades heading for year-end are stocks, rates and USDJPY higher.

USDJPY may be under-owned after November's tendency to print lower highs, and more depressed lows kept a lot of USD bulls at bay, suggesting the pair could be in catch up mode heading into year-end.

The Euro

If there was s currency weighted down by year-end positioning, it has to be the euro. Last week’s European November PMI came in at their highest level since 2011 yet failed to inspire as short EURGBP trades remain the flavor de jour with the positive shift on Brixit. Enigmatic or not duly appreciated, EURUSD dealers may be underpricing a more hawkish outcome from this weeks ECB which could provide a significant push higher for the euro.

The Australian Dollar

The Aussie continues to limp along following last week’s weak GDP data and weaker than expected trade data due to the sharp decline in iron ore prices. There are far too many domestic economic disappointments for traders to overlook and with the Australian employment data looming large, the Aussie is prone to a one-two knock-out punch from the cocktail of more hawkish Fed forward guidance and weaker employment data this week. While the RBA will put up little fuss, anyone still holding out for a year-end Aussie dollar recovery would have a painful week if this toxic cocktail did unfold.

Asia FX

Chinese Yuan

The yuan remains handcuffed by domestic economic uncertainty but as we enter the year-end stretch run a resurgent USD is likely to present some headwinds to the RMB complex as well.

On the data front, China PPI cooled, and CPI remained low key. The producer price index rose 5.8 percent in November from a year earlier, matching the projection in a Bloomberg survey and slowing from 6.9 percent in October while the consumer price index climbed 1.7 percent, the National Bureau of Statistics said on Saturday, less than the median forecast of 1.8 percent. The moderate inflation eases pressure on the PBOC to hike rates which is a positive as mainland markets remain a bit wobbly as market regulators look for a delicate balance between financial reform and market stability.

Food prices were the most significant drag on the consumer side while at the factory gate, lower commodity prices were the primary cause of the drop.

Singapore Dollar

Asian currencies have done well this year, and the SGD is no exception. But like its regional peers, a stronger USD and a faster pace of US interest rate normalisation will be the most significant negative driver to local sentiment.

However, with the positive global growth narrative and to this point, a rather benign Fed, the SGD could be well be positioned to appreciate further in 2018.

But with China’s policy prerogatives shifting from expansionary to controlling risk, there remain substantial downside risks to China’s growth even as its deleveraging efforts are expected to moderate. Lower production in China could present some gusty headwinds to the stronger SGD narrative in 2018.

In the meantime, local traders will focus on this week’s US rate decision but more so to the forwarding guidance as a more hawkish leaning Federal Reserve Board into 2018 would weigh negatively on SGD sentiment heading into years end.

The Malaysian Ringgit

The US NFP headline was robust, but it was the U of M inflation expectation gauge the firmed the USD into weeks end and provides it with a good base entering the trading week

Its a case of a stronger USD narrative, as opposed to any tarnishing of local sentiment weighing on the ringgit.

While Malaysia is expected to raise interest rates next year, speculation on the faster pace of interest rate normalization and a stronger dollar may present some headwinds for the MYR near-term as the shifting USD interest rate outlook will drive investors to the US dollar.

Despite the USD dollars resurgent speculative appeal, real Malaysia domestic and external positives should outweigh risky wagers on the USD which should continue to support the ringgit’s decisive run.

However, the market should remain reticent as we enter holiday thin liquidity conditions with the ringgit expected to remain stable to slightly defensive as year-end USD corporate demand picks up.

Energy Markets

Oil Prices

On Friday, China’s November crude imports surged to a staggering 9 million barrels a day, up from 7.3 million barrels a day the month prior. The eye-watering 2nd most substantial import number on record should continue to drive sentiment early in this week as buzz remains loud. Also, the weekend escalation of Middle East tension should lend support to the market.

But the resurgent USD could dampen the positive sentiments after Friday bullish US economic data has dollar bulls pumped. As well US shale drillers added two oil rigs in the week to December 8, bringing the total count up to 751

As a whole, however, oil prices remain a bit of a paradox. If prices continue higher, US shale oil will increase production, and of course, there remains a chance that OPEC tweaks the deal to raise output at the June OPEC meeting. And on the downside, any convincing break of 50 per barrels would likely trigger verbal intervention from OPEC that would push for a production cut extension through 2018.

Monday Morning Market Musings

Crypto Craze – Bitcoin arrives in the mainstream

Bitcoin is on the verge of a watershed moment, and over the next few months, we should finally solve the vexing question if cryptos are accepted as a legitimate asset class by professional traders.The CBOE’s professionally geared seamless futures trading solution is set to kick off Bitcoin future trade today while CME Group (NASDAQ:CME) will follow up with its Bitcoin contract, on December 18, 2017. Expected participation is purportedly not that strong out of the gate, but with year-end code freeze policies kicking in, we should see a better buy in early 2018. Hopefully, there is no rush to judgment as there remains a positive vibe on the street with most shops looking to add Bitcoin futures to there stable of assets early next year.

Regardless of what side of the debate you’re on, what’s undeniable is that the current euphoria and the extreme levels of price volatility offer the brave of heart some excellent speculative opportunities.

However and from that perspective, it’s little more than an attention-grabber to suggest future trading levels given the lack of quantified modelling. Over the years I’ve made some horrible trades using capricious and non-objective strategies, but applying guesswork to Bitcoin is little more than throwing spaghetti at the wall and fraught with peril. Bitcoin trading is a tricky proposition and risk management should be front and foremost in all strategies. After all, there’s nothing worse than chasing the markets only to find yourself the ” bag holder” at the wrong side of the range.

Self-serving Bitcoin soothsayers can influence the price but so too does headline FUD (‘fear, uncertainty and doubt’), naysayers. And with Bitcoin markets still evolving, no one can predict prices any more than they can accurately predict the weather.

Bitcoins are concentrated among a few players, a random move by a significant market actor could cause a paradigm shift in sentiment, but ultimately it could be ” FUD” that propels Bitcoins hurtling back to reality with the ensuing air burst leaving investor carnage in its wake.

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