USD Limps Out Of The Thanksgiving Holiday

As to be expected, the overnight session was very quiet as is typical with most US traders off to celebrate Thanksgiving. However, if you were long EURUSD, there was much to be thankful for as the single currency continued to gather steam and eked out its highest level since the November 15 ramp amid positive German political developments after Martin Schulz’ suggested the SPD would “be open to talks” with Merkel. And the day was capped off with eurozone data blasting through expectations with EU manufacturing recording the second-highest ever print.

The Euro

The positive German political developments initiated an unwind of any lingering short EUR positions undertaken on Monday following the breakdown of Merkel’s coalition talks when the early APAC Monday morning EU political headline mousetrap sprung again. Merkel is such a shrewd political warhorse and markets should never underestimate her clout. Any lingering euro shorts are looking a bit questionable at this stage.

The robust EU economic data does suggest a more aggressive tack from the ECB, but the latest iteration of the ECB minutes suggests the Board remains divided over keeping QE open-ended while committed to keeping interest rates low for a lengthy period.

The ECB is facing the same problem as the US; the eurozone economy continues to roar, but inflation remains to undershoot expectations. But none the less, the stellar economic data is just too juicy for dealers to ignore. We’re not far off the 1.1875 major band of resistance which if breached should open up the door to a more generous move higher towards the 1.2000 regions.

Besides the euro move, the markets remain glued to USDJPY momentum after the US fixed income market rallied post- FOMC minutes, which continues weighing on the USD and predominantly led by USDJPY

The Japanese Yen

USDJPY is always tricky around a significant big figure (111) especially as the market now finds itself quite short in a falling knife scenario. Frequently at these key support lines, there are a few quick covering pullbacks before any serious attempt to re-engage the downside if it warrants. Notwithstanding that holiday thin trading conditions are making dealers reluctant to press their fortunes by taking a run at the 111. But market chatter suggests the BoJ are preparing to move their yield target rate higher. The BoJ policy shift is based on reading between the lines from Kuroda’s speech delivered last week in Zurich when he surprisingly acknowledged some negative impact from the BoJ’s extreme monetary accommodation. It was quite the departure from his typical pro easy money policy stance. Rumor mills aside, I think it safe to say that given the recent FOMC dovish tack, despite the FOMC confirming the Dec rate hike, topside USDJPY momentum should be a grind at least until the dust settles on US tax reform

The Australian Dollar

The Aussie is trading firmer this morning as the Greenback continues to falter. Also, the bullish momentum on Iron ore has caught more than a few by surprise given China’s moves to deleveraging and efforts to curb pollution by targeting the steel industry.

Trading the China storyline is little more than a fool’s errand at best as on the one hand, we have a 16% surge in iron ore prices this month only to get sideswiped by a complete meltdown on the Shanghai Composite which suffered its worst one-day fall in 17 months on Thursday. One step forward and two steps back. But needless to say, all eyes will be on China equity markets today.

Energy Prices

Oil prices nudged noiselessly higher overnight, touching two-year highs as reports from Canada Oil sands warn of production slowdowns while the prevailing sense that OPEC production cuts are winning the war as sentiment continues to resonate.

SHCOMP

China equities sold off by 2.30% late in the afternoon session with insurers and banks leading the declines. The key driver for the weakness was news overnight that the regulators have ordered the sizeable Anbang insurance group to reduce its holdings of shares in China Minsheng Banking (SS:600016) and China Merchants Bank (SS:600036) to no more than 5%.Given the recent ramp in Bank stocks powered on by financial deregulation, the news is especially cutting as, within only one week, mainland investors have gone from cheer to jeer.

The Chinese Yuan

The yuan is becoming a fantastic benchmark for gauging US dollar sensitivity as PBOC guidance is capturing the broader G-10 move well as the pair took another leg lower on the back of the dovish FOMC. But the market is a bit muddled after CNH short-term cash remained tight with the weekend rolls at 15 (5 pips per day). When money is tight, the CNH tends to become predictably unpredictable.

Asia FX

It’s been a dizzying week of action as the regional currencies continue to eke out fresh yearly highs. Typically, local currency activity falls to a drip over US Thanksgiving, but volumes have been staggering this year as a sense of pervasive apprehension anxiety sets in with investors not wanting to miss this party

Predictably, profit taking ensued after yesterday’s SHCOMP meltdown, but this was viewed in an isolated context, and the market is still eager for local currency exposure.

But we have come a long way fast and while the supporting scrim remains especially supportive for KRW, MYR, in the absence of a broader flood lower in the dollar, we will most likely consolidate into the weekend. But on any broader USD wobble, the local basket looks charged and ready to rumble.