By Stephen Innes
I suspect we're entering extremely volatile times for the USD. While the reflationary aspect of US fiscal spends in itself is a compelling argument for a stronger dollar, when combined with Corporate and Border Tax reform it should be a no-brainer. But there remains a high level of uncertainty about the new administration's dollar policies especially following President Trump's recent remarks on the strong dollar directed at China. If you think about it, the strong USD runs counter-intuitive to President Trump's trade policy, adding another level of uncertainty.
So instead of investors piling back into the dollar, the market is more likely to pile into the volatility trade, given the muddled economic and political landscape. While the reflationary trade makes for a credible, strong dollar storyline, I suggest bracing for an extended period of dollar volatility to the extent that we have not experienced in years.
The markets have priced in huge expectations, so Trump's fiscal policy will remain in the limelight. However, there could be more disappointment for dollar bulls this week, especially from those who were banking on the president charging out for the gates on Fiscal and Tax Reform. Indeed, there is growing discomfort from Investors who continue to seek confirmation to buttress their long USD and higher global rates bias.
Currency markets opened tentatively today, but dealers are finding few compelling reasons to re-engage dollar longs as the path of least resistance appears lower for the Greenback. Mind you, there is not a great argument to suggest the USD is overvalued either, but with traders in sell mode, after the inauguration falls out, I suspect the US dollar will feel the dealer's near-term angst.
On the trade front, there were no surprises that the new US administration strategy to protect American jobs would start with withdrawal from the 12-nation Trans-Pacific Partnership (TPP) trade pact.
The AUD is holding up remarkably well and has benefited greatly from the unwind of the Trump trade and hot commodity markets. So much so that the currency is being affectionately labelled on 'the street' as the 'EURUSD' of the South Pacific, in comparative reference to the Euro's longstanding resilience. While I expect the AUD to hold short-term, the top side may be limited in the face of a possible increase in risk aversion, as political uncertainty looms. US trade policy appears to be at the head of the queue for the incoming administration. If you needed any confirmation of this fact, the Trump mantra that came across loud and definite at the inauguration, was "BUY AMERICAN & HIRE AMERICAN".
The AUD is opening unchanged from Friday's NY close. And while there is growing pressure from the possibility of a resurgent USD, the near-term outlook for the AUD should remain on stable footing, benefiting from Friday's China GDP growth, which remained strong and will provide support the Aussie's current 'run in the sun'.
Traders will turn to this week's national CPI, which should also limit downside, as the market is expecting a rise to .5 % from .3 % on the surge in food prices.
USDJPY is still the favoured trade to express dollar bias. In the lead-up, USDJPY tested the 115.40-50 zone before Trump took the stage and proceeded to slide to 114.20, as traders quickly turned to 2017's preferred strategy of selling the inauguration risk.
Core positions remain much lighter than in early 2017, and with little expectation for an event-driven risk, fast money traders were quick to cover their shorts at the intraday technical edges, happy to take few risks into the weekend.
The focus will now turn to just how the new administration will deliver Fiscal and Tax policies, which is at the core of Trumpenomics which markets cheered favourably for post-election.
Most likely, the early trade will be to sell the USDJPY, given the absence of clarity on Trumpenomics, and risk aversion is liable to re-emerge. Yen traders are taking their cue from the Nikkei, which is trading with a softer bias as the local bourse is likely feeling the pressure from Trump's aggressive trade rhetoric.
The yuan continues to trade without direction stuck in the quagmire of US policy uncertainty But with funding cost normalising we should at least see a convergence of USDCNH and USDCNY rates.
The Pboc is singing a happy song now that their iron-fisted policies in both currency markets and capital controls have reduced capital outflows to a dribble.
Fielding lots of questions about China's temporary RRR cut for the big five banks and last week large open market operations last week. The key is that is little more than a cash management injection to prevent any cash squeeze before Lunar New Year.
Despite Draghi sounding less hawkish than what he might have been the EUR continues to remain supported due to US economic and political uncertainty. Friday's break of 1.07 could be an ominous sign that a further squeeze on EURUSD shorts is in the cards. The 1.0720 pivot was taken out early but follow through was limited to 1.0750 as EUR cross-selling pressure remains intact.
It was a very hectic week for the pound, and we now find ourselves back to square one for the month virtually stuck in no man's land. And while I expect some interplay off the broader USD momentum, I think Cable is a play in its right. With the latest best case Brexit scenarios fully price, despite glimmers of hope for the pound at weeks end, I expect "sell the GBP rally" to return in vogue as the messy Brexit affair unfolds. Essential for sterling watchers will be the Supreme Court gives its ruling in Brexit on January 24th.
UK PM Theresa May and US President Donald Trump will meet on Friday, January 27 in Washington. High on the agenda will be US-UK trade relations as PM May begins her road show aimed at instilling investor confidence by increasing trade ties between both countries while working towards a new " passporting " deal between American and British banks.
A meeting of the OPEC Ministerial Monitoring Committee went well as by all indications the production cuts have been deeper and faster than expected. Media reports that the cartel's output cuts are ahead of schedule. Fairly muted market reaction to the weekend news.
Markets remain very whippy which has been characterised by extreme moves, but I continue to view the local EM FX more exposed to and less insulated from US policy and the market's sensitivity to US policy will continue to reflect in near-term underperformance. However there are still pockets of appetite to sell USD extremes along the forward curve in local currencies like IDR and KRW, but I suspect this is more in line with the bond and equities market valuation play as opposed to outright currency speculation, but overall inflow remains tepid across the region. The Korea bond market remains supported despite the sell-off and UST on Friday which should lend near-term support to the won.
However, given the mounting political and economic uncertainties, there remains little urgency for investors increase any directional bias. So outside of short term trading extreme USD moves, I do not anticipate a significant directional move until US policy clarity is forthcoming.
The outlook for INR continues to deteriorate in line with most EM markets in the face of outflows from both bond and equity markets.
Traders have been primarily focusing on US President Donald Trump's plans for fiscal stimulus and trade, and less focused on domestic affairs. Certainly, India's technology and outsourcing space will feel the wrath of Trump's trade kerbs.
The ringgit continues to trade with a negative bias, while BNM held overnight policy rate at 3.00 per cent the market continues to believe they will cut rates later in the year when hopefully there is less focus on the currency. Offshore traders continue to shy away from the MYR due to liquidity constraints and prefer to express their regional bias through other ASEAN currencies.