King for a day
The dollar turned king overnight in a market lacking conviction across most asset classes got swept up by a wave of position adjustments as investors turn incredibly indecisive heading into next weeks FOMC. Indeed it’s shaping up to be arguably one of the most critical Centeral Bank policy events in some time as Jay Powell gets set to dictate the course of Fed policy for the remainder of 2018 and beyond. Given the enormity of the risk event, traders are getting remarkably anxious awaiting hints on forwarding guidance, so we should expect interest rate uncertainty to intensify as we near the event horizon.
But the pace of the dollar short covering was heightened by US economic data which showed the number of Americans applying for unemployment benefits fell while import prices rose more than expected, the later buttressing inflation expectations.
And sure the Kudlow interview on CNBC has some market observers anointing him the new Market Oracle of Pennsylvania Avenue after his King Dollar sell Gold remarks; the fact is traders didn’t react to the news at all, and why would they? Indeed, on that narrative alone I wouldn’t rush out to buy tickets for the next USD dollar coronation, which is probably years away given that US investors are quickly running out of reason to be optimistic as the increase in vacuous rhetoric emanating from the Whitehouse continues to dent market sentiment.
US yields have backed up overnight supporting the USD, but without “risk on” supporting global equity market it has left both commodity bloc and EM Asia currencies prone
The recent flow of headlines, especially those centring on trade are creating an air of uncertainty, and when it comes to investor sentiment, uncertainty fuels anxiety which causes investors ” Fear Guage “to ratchet higher. Whether its an escalation of a trade war or leeriness after news that US Special Counsel Mueller subpoenaed more documents from the Trump organisation, there’s always some prattle coming out of Washington these days that continues to cast a dark cloud over the markets.
Even in the face robust US economic data, US equity market could not hold onto gains as investors fears about the US administration trade policy trumps all else. This despite thinly veiled efforts to temper markets when Peter Navarro, Director of the White House National Trade Council, suggested the US could put tariffs on foreign goods without sparking a global trade war. Of course, he didn’t quite explain how that was achievable.
There is no escaping the Oil market yo-yo as sings of growing oil demand are offsetting the bearish overtones from Shale oil output, at least for today. The International Energy Agency( IEA) in the heavily subscribed monthly report suggested global oil demand should grow by 1.5 million barrels a day, to average 99.3 million barrels a day in 2018. The estimate was an upward revision of 90,000 barrels a day compared with last month’s report.
The market positioning remains incredibly frangible to the continually shifting supply and demand narrative as the latest IEA headline implies market rebalancing is working. However topside price action remained well in check given the burgeoning Shale oil output projections for 2018 and beyond.
Gold prices plunged as the USD gained some swagger overnight as traders get incredibly anxious about the possibility of a 4th interest rate hike this year. When interest rate rhetoric rises, gold plummets although the rise of geopolitical tensions between the UK and Russia likely tempered the sell-off.
Traders remain incredibly indecisive about the course of Fed policy, and all assets markets are enduring position adjustments where the lack of investor participation could exaggerate price action. Trader’s are precisely in position reduction mode as opposed to risk-taking style.
Currency markets remain in well-defined ranges as traders prepare for the pre FOMC position chop fest.
The Euro continues to consolidate with the near term top side firmly in check ahead of the FOMC meeting on the back of overtly dovish Draghi and growing uncertainty over Fed forward guidance
The ever so slight moderation in negative risk sentiment has seen USDJPY try to follow the broader dollar sentiment higher. However, the Abe political scandal continues to haunt investors and the potential threat to Abenomics should curb top side momentum
The Australian Dollar
While the Aussie initially became a bit of a passenger with the stronger USD in the driver’s seat, however, the Aussie is getting hammered mercilessly as trade war rhetoric with China is likely to escalate. Given Australia precarious position in the China supply chain, the potential escalation of regional trade war is not sitting well with the G-10 trading community this morning who have set their sight’s on the toppling Aussie
Falling Iron ore and copper prices aren’t helping sentiment either.
The Malaysian Ringgit
The Ringgit was underperforming this week due to quarter end repatriation flows, but now the USDMYR is caught up in the broader USD dollar strength and rising US bond yields. But with risk sentiment waning regional equity market will struggle, and the threat of additional regional outflows as trade war rhetoric increases could dent all regional currency sentiment dragging the MYR lower by proximity.