Tax Reform; Trump Asia
There is a very light US economic diary this week, but there will be no lack of political bluster as the US tax reform debate rages while Trump deals with North Korean nuclear ambitions and regional trade relations during his whirlwind tour of Asia. But make no mistake the focus is squarely on North Korea headlines.
In a show of military might, an entourage of F-35s will accompany Trump (actually deployed to Okinawa), and the mainstay of the US Navy’s power projection, two more Aircraft Carriers will be positioned in the Western Pacific, bringing the total to three.
The Forex market’s reaction to last week's tax announcement was underwhelming, but there remains USD positivity as investors continue to reweight into US equities, but indeed, that tank is starting to dry up. There remains a lot of puzzlement concerning some of the House's latest amendments, but hopefully, some clarity will be offered later today.
Political Noise
NY Federal Reserve Governor Dudley is rumoured to be retiring in either spring or summer of 2018. His term was set to end in January 2019.
US political pundits will be paying close attention to the Virginia Governor race on Tuesday which appears to be a very tight contest between Democrat Ralph Northam and Republican Ed Gillespie, with many of the same issues as the presidential election likely to be top of the voters' agenda. With President Trump's approval ratings plummeting, markets will look for confirmation on the election front to validate the polling data.
Key for the USD
For the dollar to make significant headwinds, it’s in need of a heavy dose of interest rate support from economic data. But given the scarcity of such this week the dollar may struggle to gain momentum without a helping hand from non-domestic influence. Critical levels of the UST 10 remains 2.30-2.40 where last week’s topside breach of the key 2.40 % level was fleeting and did not signal the critical breakout some had expected (myself included). On the downside a test of 2.30 could prove to be the dollar bull undoing.
The Fear of the Fed is the key to US dollar strength, and without a perceived acceleration of the Fed’s rate-tightening schedule, we may top out on the dollar momentum until the next set of meaningful US economic data convinces.
Danger from Down Under
This week both the RBA and RBNZ policy meetings take center stage and should offer up some significant volatility.
The Australian Dollar
The Australian Dollar remains vulnerable to RBA dovish guidance even more so post a dismal nationwide plummet in retail sales and weaker CPI. While the data suggests traders will continue to sour on the Aussie, but with the evidentiary erosion of the carry vs USD, it should lead to a clean extension for Australian dollar weakness from this point.
The New Zealand Dollar
The NZD is a bit more complicated given extended short positions established on local political noise.These shorts are incredibly vulnerable to a more hawkish RBNZ bias than the market is forecasting.
Keep in mind traders have been selling the Kiwi for the better part of two weeks and may start to unwind positions ahead of the RBNZ. And while the RBNZ could offer up some divergent (USD) opportunity but given the possible short covering from overextended positions, best be nimble in this trade.
However given this setup, an excellent way to express AUD weakness is through NZD especially ahead of the RBNZ as there is a chance for a more hawkish bias than priced in at current spot levels.
The Euro
The market remains very constructive on US assets, but euro 1.1575-1.1600 remains solid support. I suspect the market continues to play the ranges until something breaks.
The Chinese Yuan
The RMB has remained within a range of 6.45-6.65 of late. However, following the 19th National Congress positivity and given the robust China fundamentals, we expect inflows to continue. Also, policymakers will open up domestic capital markets while adding more market reforms to attract foreign investment for some critical fiscal initiatives.
The Malaysian Ringgit
The ringgit weathered the latest US interest sell-off much better than the markets expected. A few things stand out in the ringgit's favor. The MYR remains undervalued on many models given the surprising levels of economic expansion which creating a considerable punch. But positioning in the MYR remains light, and the absence of an active NDF market, when regional currencies weaken the ringgit is less likely to do so aggressively given the lack of NDF speculation pressure. And while there is a need to add some much-needed reserves, perhaps with oil prices looking to move higher, the BNM may be able to add to the reserve coffers at much lower levels than currently offered.
Oil Markets could play more influence
WTI enjoyed a ceaseless move higher on Friday on the back of few if any headlines and while the Baker Hughes Rig Count did fall by 1.1%, that came well after the meat of the rally kicked in. All in all, it appears support for OPEC to extend production cuts looks to be growing, and when factoring in the decline in US inventories and rig count, the bulls are smiling.
But with the shale output effect not living up to the skyscraping market’s expectations, OPEC may sense some weakness and may now be thinking neither $70 nor $60 dollars per barrel; before abandoning the agreement. But given a long way between now and November 30, we anticipate either consolidation or a correction before a push higher to $ 60.00 on WTI.
Turkish Lira and South African Rand Carry Trades
Both the lira and rand came under dealers crosshairs on Friday
TRY
The lira was trading off the back foot after domestic core inflation hit the highest level in 13 years but cratered when headlines surfaced that President Erdogan has been accused of helping Iran avoid US/international sanctions. Given the tenuous USA-Turkey relationship this latest headline has carry trade investors running for cover once again.
On the inflation front, with inflation touching a 13-year high, there is little to no expectation the Central Bank will loosen monetary policy to spur the economy which saw the lira fall nearly 1%.
ZAR
The rand weakness is likely a combination of some moving parts, but the sell-off appears to be more a function of credit rating jitters as the market is awaiting word from both S&P and Moody’s.
Post NFP Market Action
While the NFP came below the market's towering expectations, but with a +90k revision to August-September jobs, the data implies the hurricane influence was terrible, but not as bad as had been reported, so this month's rebound was less influential.
However, wage growth came in dismally low, but with the hurricane’s distorting effects thought to be skewing the data there should be no muss or any fuss from the Fed. And while the inflation watchdogs on the FOMC will fret, but given the booming US economy, the Fed is pushing forward with December rate hike despite the skinny paychecks, fully expecting that wages should respond to the strength in the other payroll headlines. Overall the markets didn’t read too much into weak October AHE growth, which should bounce back in November.
After the USD knee-jerk, astute traders bought dollar on the dip, and ISM non-manufacturing confirmed that fading the primary post-NFP USD weakness was the correct call. The robust print greenlighted a wave USD buying into the weekend, although in G10 ranges were respected.
To be honest, if you didn’t know there was an NFP release on Friday, you might have missed it as price action was neither USD hostile or supportive.
Jay Powell
Munchin finally got his man, convincing Trump that continuity and stability at the Fed helm were essential and Jay Powell's appointment suggests just that. Powell will not deviate too far from current Fed policy stance while supporting Trump's self-proclaimed stance of being a ” low-interest rate person.” And while his appointment proved to be anticlimactic, market chatter was picking up on Friday debating not only the makeup of the new FOMC board but who will be the essential Vice Fed Chair as that post is now the high unknown.