Overview
The end of the US government shutdown was to some degree ‘risk positive’ but hardly a pivotal moment. And more to the point the bipartisan deal is first and foremost a matter of kicking the can down the road to February 8. Which sets up another funding clash and given the level of partisan politics, which will likely remain as stubbornly intense and polarizing as ever, we should expect another contentious affair if both parties don’t resolve the critical stumbling blocks between now and then.
With a very light economic calendar to start the week, overnight markets were more than happy to respect new ranges heading into some critical central bank meetings. This series of Central Bank meetings will be a crucial catalyst for bond and currency markets as traders will focus on inflation rhetoric and critical signals that either the Bank of Japan or European Central Bank could signal that extraordinary monetary accommodation will soon be wound back.
But for the most part, the dollar weakened overnight, but a small knee-jerk briefly tempered its decline after the Senate voted to turn the US government’s lights on again
US Equity Market
While investors didn’t extrapolate a great deal of uncertainty from this government shutdown as GDP impacts from prior closures were negligible, they still celebrated the stopgap deal, pushing the Dow back into record territory and wiping earlier losses. Which speaks volumes for both the underlying momentum and equity investor voracious appetite as on even the most minuscule risk catalyst they are willing to pay top side asking price for a meal of equities. However, let’s not pop the champagne corks just yet as there’s a substantial likelihood we’ll go down this road again on February 8.
Asian Equity Market
Yesterday, markets were a mixed bag as the US government shutdown tempered investor appetite. But with the US shut down temporarily behind us and the political stalemate in Germany nearing a resolution, risk sentiment will move to the front foot taking its lead for surging US markets While catch up is in play, there's no reason why local markets will not extend gains in a very flexible Asia EM space.
Oil Markets
Not unexpectedly, the past 24 hours have been choppy, but at the start of the Asian session oil markets remain buttressed by Saudi and Russian flowery language indicating their willingness to cooperate beyond 2018. Of course, the jump in the first mentality suggests this to be an extension of production cuts, but even if it proves to be a loss leader type headline, any hint of compliance between these two oil super powers beyond 2018 is a positive sign
As far as the NY session, Oil was trading with a higher correlation to the US dollar after traders digested the news that Libyan Wintershall oil fields will restart production. This caused Brent prices to wobble.
With currency markets on central bank watch, in the absence of any oil related specific headlines, oil could be more or less pinballed around by broader USD dollar sentiment today.
Gold Market
A muted overnight session with most traders watching the US Senate vote, although there was little for Gold traders to glean from the proceedings. Traditionally US yields fall during shutdowns, but with UST 10-year rising to 2.65+ it was undoubtedly throwing a spanner into traditional market correlations.
With the spate of central banks on tap and by extension, even the slightest shift in language could send bond yields soaring; traders will remain cautious until a clear-cut dollar trend emerges. But not to further confuse the issue, there could be two idiosyncratic dollar story lines with the BoJ erring dovish sending the USDJPY to 112 while having the ECB shift from an of a neutral bias triggering a move to 1.25 EURUSD as EU bond yields move higher.
G-10 FX
The Euro
The euro should remain quiet within the 1.22-1.23 range ahead of the ECB
The Japanese Yen
While not expecting any change, it would be silly not to expect the unexpected. But even if the BoJ wanted to announce a taper there is little chance Kuroda will take that leap of faith today as the market would hammer USDJPY mercilessly lower. But with the Japanese economy firing on all cylinders and signs of deflationary pressures abating, traders may continue to buy JPY post-decision regardless fo whatever dovish lean Kuroda puts on the proceedings.
The Australian Dollar/Commodity Bloc
The Aussie dollar underperformed the rest of the commodity block as the market focus is on next week's CPI.
In Canada higher oil prices and the resumption of NAFTA talks had traders paring back short. But in general, everyone is waiting for the NAFTA headlines and this week’s CPI before re-engaging positions in size.
The New Zealand dollar continued to benefit from the political risk premium unwind as longer-term structural shorts pair back.
The Chinese Yuan
As the weaker dollar narrative unfolds, a test of yuan 6.40 again is in the offing. Indeed over the past 24-48 hours, traders have been banging around a lot of theory and what if’s, with some out of left field ideas. Indeed the general weaker US trend was helping yuan sentiment, and we should be able to test the PBOC resolve if the dollar drops further as expected. It will go a long way to clearing the air as only through price discovery can we determine if the PBOC are no longer single-mindedly focused on the USDCNY exchange rates, but have the confidence to use the more comprehensive basket of currencies as the central signpost.
Asia FX
Regional
On the contrary front, the first salvo was launched today in what may develop into a long drawn out tit for tat trade battle between US and China. The Trump administration slapped a tariff on cheap solar panels which has driven the rapid expansion of solar energy in the US. Any escalation of the trade battle could dampen enthusiasm for regional currencies as exports make up a significant portion of local GDP/s
Korean Won
The Korean won appears to be undergoing a stealthy currency intervention from regulators as reports are circulating that the government has asked banks to refrain from overseas bond sales. But my view is that equity is driving the bus, so more inclined to ignore these ominous headlines.
Malaysian Ringgit
The pick up of global risk sentiment after the US Senate ended the government shutdown along with higher oil prices bodes well for the MYR today.
Talk of OPEC and Russian policy compliance beyond 2018 suggest higher-for-longer oil prices. Not only would that be a boon to government budget coffers but it bodes well for oil and gas constituents on the KLCI.
The US equity market celebrated government workers reporting back to work by lifting the Dow to new record territory, and this positive momentum should carry into Asia.
The US dollar weakness is starting to re-emerge which should play out well for local currencies.