A Tale Of Two Weeks

By Stephen Innes

A tale of two weeks and how quickly investor sentiment can turn. Last week, the Trumpenomics rally has given way to a vote of no confidence from investors who are growing leery of President Trump's agenda and are restless about the lack of focus on the fiscal front.

The weekend's immigration headlines have won the president few friends globally. There's an increasing level of unease amongst investors that the recent executive orders are eroding minted political relationships abroad and will have a negative impact on US trade negotiation.

While the Muslim travel ban may have been universally condemned, keep in mind, capital markets lack a moral compass, and while it makes a compelling storyline, the market meltdown overnight was investors voting with their feet in a direct challenge to the Trump-inflation trade. Sure, the immigration ban was risk-averse, but leeriness will quickly fade if the US administration comes through on the fiscal front.

While the markets have started the week on a sour note, it is not the time to bury your head in the sand, as we are in for one of the busiest data calendars in some time. The key risk events are the three central bank events: the BoJ, FOMC and the BoE, where we have the Quarterly Inflation Report. Last of all and at the top of my agenda, Friday's granddaddy of all data releases, the US Non-Farm Payroll.

The BoJ is expected to give its policy announcement between 10 am to 11:30 am (Singapore time), but as we have seen so often in the past, there is no specific timetable for the release. Nonetheless, the BoJ is not expected to yield any real surprises, as it will likely be more than happy to leave policy unchanged and continue to see inflation drift towards its target. However, the markets may be on forwarding guidance watch after reports that the BoJ is looking into how it could raise its 10-year bond yield target from zero in the future without roiling the financial markets, as market chaos usually ensues if the BoJ surprises.

Speaking of which, it was a year ago yesterday when the BoJ unexpectedly slashed rates into negative territory for the first time and kicked off the seven-month chase for yield which dominated trade flow through much of 2016. Let's see what rabbit the BoJ pulls out of its hat later today.

Australian Dollar

The Aussie has been stuck in the muck over the past 24 hours, while the Kiwi has basked in the sun. The market is voicing its opinion on the probable course of each country's monetary policy. While the AUD has sat glued to .7555-60 level overnight, the Kiwi appears ready to test the rarified air above .7300 once again.

To be honest, I had to take a second at my Aussie screen, as I thought it was a stale price given the unwind and about-face we have seen on the broader USD sentiment overnight.

It once again illustrates the importance of the Carry in the 3C equation (Carry, Commodity and China) for the Aussie dollar, and I believe last week's weaker-than-expected Australian CPI will continue to dampen enthusiasm for the Australian dollar.

Japanese Yen

For USDJPY, the focus is all on today's the BoJ monetary policy meeting, where it is widely believed the policy will be left unchanged. However, dealers will be homing in on forwarding guidance after reports surfaced that the BoJ was looking for ways to taper for 0% 10-year Rinban targets. But it is likely too early for the BoJ to rock the boat, despite the recent uptick in inflation.

I believe the shift away from 0% 10-years is inevitable given the likelihood of US 10-year yield moving above 3% and global yields turning higher. It sure feels like the market's love affair with Trumpenomics is fading, with USDJPY falling below 114, coat-tailing the 1% drop in the S&P (NYSEARCA:SPY). While the move was triggered by the US economic data release, it's difficult to determine just how much the move is related to pre-data position expectations, month-end rebalancing or risk-off. I suspect the truth lies within all.

Keep in mind, the recent run of US economic data, including Friday's miss on US GDP, has also weighed on sentiment. But really, after some 13% rally on the S&P, let's not get to wound up by a relatively minor retracement.

The technical edges remain entrenched 112.50-115.50

Asia FX

Not much happening due the holidays, but the market is very much tethered to movement in the broader USD. But I think we're entering some crucial times, as the market is digging for clues on the Trump policy front and is cautious to not get ahead of the plot this time around.

Positioning is relatively neutral, and I maintain risk is gibbous to US fiscal and trade headlines, but there remains a thick air of caution permeating the APAC FX landscape.

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