By Stephen Innes
Most of this morning's action is centered on the pound after a weekend report where media suggested that UK PM Theresa May will signal the intention of a "Hard Brexit" on Tuesday. If the press insights are correct, she is willing to quit the EU's single market and be prepared to "withdraw from tariff-free trade in exchange for curbing immigration."
The process is likely to be a messy affair as the High Court ruling on Article 50 has yet to be announced, and with Northern Ireland's political upheaval, the process could be dragged out for months.
Negotiations of this size and importance are bound to involve an element of bluff to ensure that the UK would get the best possible deals. Moreover, without actual confirmation of these "hard" measures, we could be viewing little more that sell the rumor, and we may end up buying the fact.
We saw the pound breach the 1.2000 mark in extremely low liquidity at the Auckland open, exacerbated by the MLK US holiday as regional desks are thinly manned on this US holiday. Regardless, we should expect GBP pullback capped until further clarity emerges. Certainly, this timely report will send shockwaves through Davos where political disorder will be the topic of the day.
Commodity currencies have held up extremely well. The AUD is the current darling in the G-10 space and attracting much attention. The Aussie continues to look attractive from a yield perspective, and with iron ore prices surging, it is easy to see why the Aussie is offering so much investor appeal in this environment. We should expect a tug of war between narrowing of AUDUSD yield differential versus surging commodity prices. Australian dollar longs versus the USD raises the potential for a lot of back and forth and a higher degree of uncertainty. However, the best way to express a strong Aussie Commodity bias is through crosses on the leading currencies such as EUR, GBP, and JPY, which will continue to assert itself in early 2017.
The Australian Dollar remains well supported in early trade on the back of GBPAUD inflows.
USDJPY continues to be the favored G-10 pair to express dollar bias. While I expect external drivers will remain dominant, price action leading into week's end indicates that we are in consolidation mode with traders doing little more than trading the edges of daily technical support and resistance. Traders remain nervous about USDJPY sensitivity to risk and bad US economic data, not to mention the lack of the upside momentum on strong US economic data.
USDJPY has been trading a bit "heavy" this morning on the back of "Hard Brexit" chatter. It is possible risk sentiment will sour leading up to PM May's speech. Given that topside momentum on the greenback has been lacking, traders may test the market resolve of nimbly buying USD on dips ahead of the Trump Inauguration. If this occurs, look for the battle zone to center around the key 113.75-114 region.
Lots of moving parts, investors were thrown a curve ball by the funding squeeze, escalation of capital controls and mixed economic data.
Last week trade data tempered market outlook on China. I think global uncertainty will continue to weigh on China trade and the potential for a trade war between USD and China is a possibility, which points to further risk for China on the trade front. Despite all the added capital control measures, Mainlanders will continue to look for creative ways to move money abroad, especially now that the domestic markets are more influenced by global financial markets, making it increasingly difficult to maintain the iron fist of control.
China still wants an orderly depreciation of the yuan to offset mounting trade uncertainty, and while I think the yuan depreciation will likely continue post-Lunar New Year, fears of more funding squeeze continue to plague the market, and there's simply less appetite for the short yuan trade at this juncture. If investors are looking for long USD exposure against China's backdrop, given these funding uncertainties, they may be better served to express this view via USDSGD and USDTWD.