For the most part, other than a few idiosyncratic story lines, G-10 trade remains listless and unable to shake a severe case of the doldrums. And while there have been a couple of fidgets, but with few dollar-related news headlines to start the week, G-10 trade was driven by a hodgepodge of events. The pound is floundering as UK leadership continues to be challenged; EUR and JPY are flat while the Antipodeans are trading lower.
The lethargic start to the week has offered few clues, and with all the second-guessing going on surrounding the events in Washington, investors continue to reduce rather than add to exposures.
The bond market quandary remains in full swing as bear flattening 2-s vs 10-s ( USTs) remain the flavour de jour. While a potpourri of explanations for this phenomenon is on offer, the timing of the move suggests the market is just not buying into the GOP hoopla that the US tax cuts will boost medium to long-term economic growth.
Then again, it’s a forex market long on theory but lacking a comprehensive blueprint for trading the US dollar in a bear flattening cycle. However, if the shift higher in short-term bond yields can be explained away by Fed tightening, then it gives reasons why carry trades will be an open target while haven currencies and gold should underperform.
The Fed goal posts for inflation are still miles away, but even the slightest glean from this week’s CPI has the potential to supercharge the dollar as investors are likely to start pricing a faster pace of monetary tightening by the Federal Reserve into 2018.
There are no fewer than 13 central bank speakers today, and while it’s easy to draw parallels to Sintra, where last year the gathering of central bankers surprised the markets by adopting a more aggressive stance.The fact is most of the global CB’s are coming off dovish policy meetings and unlikely to break rank. However, given the flip-flopping nature of Carney and Draghi, who make habits of throwing monkey wrenches into the works, an element of headline risk must be respected.
In the Asia-Pacific region, the diary is dominated by China, which will release key activity data for October.
The Australian Dollar
The Australian dollar is testing the bottom end of recent ranges as commodity prices wobble, and two-year US Treasury yields are moving higher suggesting to some the market is underpricing the Fed pace of tightening in 2018.
Unless there is some major calamity in the US, a December rate hike is a foregone conclusion. But with the towering US economic data returns adding conviction to the Feds three-rate-hike scenario for 2018 mantra, investors may not be that far behind playing yield curve catch up.
But the logic does not only fall on the US side of reason. The RBA is on hold indefinitely which suggests whatever support from yield premiums the Aussie has been living on will evaporate. Look for the Aussie dollar to remain under pressure as AUD bears pencil in .7500 as the next target
With bullish NZD expectations post-RBNZ getting quashed by overtly pessimistic views from the local Finance Minister, the NZD could also plumb new depths.
It has been an arduous task of screen gazing the last 24 hours waiting for something to give. The markets apparently do not want to engage the tug of war between equities and yields, suggesting that traders are waiting for some tier-one US data that could be decisive in breaking the tedium. CPI remains the central point of convergence, and we should expect the markets to continue tight ranged until then. But it certainly feels like the proverbial calm before the storm scenario.
There appeared to be a good argument for the EUR to move higher this week, based on robust EU economic data and a tax reform depressed dollar. And while the euro has climbed higher post- ECB meeting fall out, the Dovish ECB guidance continues to hold back any forward topside momentum.
The big question is, will the ECB hold firm to their clear dovish guidance or will the data convince them otherwise.
Market positioning is purportedly skewed short, so a push above 1.1725 could cause a bit of a rukus on a squeeze.
Outside of the inpidual EM storylines in ZAR (downgrade) and TRY (geopolitical) in general, EM currencies are going through a mini revaluation despite favourable longer-term macro setups, as the markets start to reprice the US rate curve. On the more extended end of the yield curve, supply uncertainty in the face of a massive budget shortfall has created some waves. While on the short end of the curve, the markets remain massively under-priced vs the FOMC dot plots. As such, EM investors remain cautious knowing that at some point something has to give. And indeed the market pricing in a faster than expected pace of monetary tightening by the Federal Reserve is one of the significant headwinds for local Asia EM
In the meantime, we are sitting tight awaiting the regional knock-on effects from the China data dump.