Trying To Get One's Bearings

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Includes: CNY, CYB, DRR, EPOL, ERO, EUFX, EUO, EWT, FTW, FXA, FXB, FXC, FXCH, FXE, FXY, PLND, QTWN, TWN, UDN, ULE, URR, USDU, UUP
by: Marc Chandler

Summary

USD still at fulcrum, but see-saw tilts in opposite direction--euro and yen are softer, while dollar-bloc and sterling are firmer.

Polish zloty is steady after pre-weekend slide, but debt markets are under pressure following the surprise S&P downgrade late last week.

The Canadian dollar is poised to snap a record 11-day declining streak.

The market is trying to get its bearings today. The large decline in the US equities before the weekend has had modest spillover effects elsewhere. Equity markets, barring the Shanghai and Shenzhen Composites, are mostly modestly lower. The MSCI Asia-Pacific Index is off about 1% while the Dow Jones Stoxx 600 is less than 0.5% lower in late-London morning turnover.

Iranian oil sanctions were lifted. Oil prices are off a little more than 1% today as Brent and WTI briefly slipped through $28 a barrel level before recovering. Iranian banks are back on SWIFT. Several European companies have indicated readiness and desire for commercial links. Still the sanction-environment is far from clear. Reports indicated that while 86% of the Iranian entities on the UK's sanction list will be lifted only 68% on the US OFAC (Office of Foreign Assets Control) sanction list will be removed.

Iran is thought to be able to supply 500k barrels of oil a day, nearly immediately. In the next few months, it hopes to boost output another 500k barrels a day. This, coupled with resilient output in the US (inventories at Cushing are at record highs), post-Soviet Union record high Russian output, and the continued strong OPEC output, all weigh on sentiment. As prices drop toward $25 a barrel, there is increased talk of an emergency OPEC meeting (more likely it seems next month rather than in the next two weeks), with some non-OPEC producers suggesting the possibility of reducing output.

Before the weekend, S&P surprised investors by cutting Poland's rating. A Reuters poll the day before had about 30% of those surveyed expected S&P to downgrade the positive outlook. Instead, after keeping Poland's credit rating at A- since 2007, S&P cut it to BBB+ and gave it a negative outlook. The main reason it cited was that the new government's actions have threatened the institutional independence. The same issue lies at the heart of the EU opening an unprecedented inquiry into Poland's democratic commitment.

While the zloty is little changed on the day, after having sold off before the weekend, Poland's creditors are responding for the first time. The yield on the 10-year benchmark is up 20 bp to 3.16%, while the 2-year yield is six bp higher at 1.45%.

Over the weekend was the PBOC's decision that as of later this month it will raise the required reserve ratios to foreign banks with yuan deposits in the mainland. Last year, foreign banks were formally included in the RRR system but were assigned zero requirement. The move is meant to make it more difficult for clearing banks to facilitate the shorting of the yuan offshore.

China is using both carrot and stick means to take pressure off of its currency. Far from seeking to drive it lower, as many of the critics who cry "currency war" claim, China is trying to prevent or, at least, slow the depreciation of the yuan, which may also be key to keeping the onshore and offshore yuan aligned. Last month, the PBOC appears to have burned through more than $100 bln trying to stabilize the yuan. There are some signs that it is beginning to find traction. After having its best week in several months last week, the offshore yuan continued to be squeezed higher today. It rose by about 0.25% while the onshore yuan rose 0.09%.

There was no immediate market fallout from the results of the weekend election in Taiwan. For the first time since 1949, the Kuomintang lost its majority in parliament and, as widely anticipated, Tsai Ing-Wen, from the Democratic Progressive Party, become the first woman President. The campaign appeared to be largely waged over relations with China, and the DPP were critical over the closer ties that the KMT pursued. Taiwanese share closed about 0.6% higher (in comparison South Korean shares advanced by 0.25%).

Our interpretative point that at the moment the US dollar appears to be more a fulcrum than a driver seems broadly fair assessment of today's price action. The currencies that were out of favor last week, like sterling, and the Canadian and Australian dollars are posting modest gains, while those currencies, like the yen, euro, and Swiss franc, which firmed last week, are trading somewhat heavier today.

Of note, coming into today's session, the Canadian dollar was nursing an 11-session losing streak, its longest in the floating era. The central bank meets in the middle of the week, and many expect a 25 bp rate cut. The US dollar initially rallied to CAD1.4660 before reversing lower. A US dollar bearish shooting star candlestick pattern appears to have been traced out. The first target is near CAD1.4435.

Many emerging market currencies are also getting a reprieve from the selling pressure. However, with nerves shot, the US on holiday, and the serious technical damage, it will take some time to rebuild risk appetites.

Tomorrow the UK reports December CPI figures and BOE Governor Carney speaks about the UK economy for the first time this year. The ECB meets Thursday. The price of Brent has fallen by more than a third since the ECB met in early December. This will impact the projections of the Survey of Professional Forecasters, which in turn will be part of the case that Draghi will build that the ECB remains bound by law to take more action, if necessary. A Bloomberg survey found 60% expect the ECB to do more this year. This is up from 40% last month. We have penciled in additional measures around midyear.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.