By Stephen Innes
Are the markets about to deliver some March Madness? For dealers seeking volatility, it has been a challenging start to the year, kicking the can from one news event to the next, growing restless, mired in markets that are at "home on the range." Real average ranges are squashed like a pancake, and home run trades are a fleeting memory. However, as the greenback's pressure cooker elastomer bindings look set to yield, we need to remain cognizant that short-term market was carrying significant long dollar (and short Treasury positions), and we see those positions unwind. However, the lack of volatility suggests that while the buck is wavering, it's unlikely to give way anytime soon.
While Friday's APAC session was another muted affair, the gradual grind lower in USD yields was the real story as USDJPY dove below the significant 113 level, just as UST 10's slipped beneath 2.5%, ahead of the weekend's G-20. For now, and likely until the June FOMC, the "build up the divergence" theme has all but run its course. As such, expect shifting portfolio allocations to accelerate as dealers chuck the long dollar view for long yen, Aussie and Kiwi overweight positions.
While agnostic on the current market view and very on the fence, the randomness of Friday's session indicates that traders are practicing their duck and cover drills while stuck in the lacuna. I think the currency markets are a bit deranged, as dealers continue to maladminister positions, ending up shooting themselves in the foot time and time again. I think there will be a reluctance to chase this USD move lower.
Why do I get a feeling that the plethora of Fed-speak this week will lean against the markets dovish lean? Call it a hunch, but if history suggests anything, betting on Fed flip-flops is as predictable an outcome as siding on FOMC forward guidance.
The reasons to be USD bullish are fading for now, because: 1) the Fed is less of a factor; 2) the expected Trump reform is likely too far in the distance to be of immediate concern; and 3) G20's bark is probably more ferocious that the real bite on a trade. We are likely to see risk continue to shine, but I sense the markets are waiting for the Fed-speak this week to clarify the FOMC statement before overcommitting to any one side.
The AUD is holding on to the top side of the ranges, but as we all know, the so-called death valley .7720-60 will be a tough nut to crack. Iron ore is finding support, and with Yellen sounding ever so risk-friendly, the Aussie continues to be the vehicle of choice for shifting short dollar portfolio flows.
It's hard to refrain from putting up a good argument for the AUD not to test .7800, even if the greenback holds current levels on the G-3. While some less welcoming remarks on trade from the US occurred at the weekend G-20, the market is viewing the comments as more bark than bite as this stage, despite the possibility of a shifting global trade landscape. After all, much of the recent global growth storyline is written on the back of lowering trade barriers, so one should expect the opposite to hold true in the face of protectionism.
The euro lost a bit of its topside momentum, as the French election risk is still a key concern for EUR. The first French presidential TV debate was to be held on Sunday night, and the market would be in "wait and see" mode. However, the comments from the ECB's Nowotny the day prior, suggesting that the ECB could commence with raising rates before the conclusion of QE, continue to resonate and provide support for the EURUSD above 1.0700
The break of 112.75 has opened up the door for a move lower, but the market remains bid as current levels are viewed by traders as good medium-term levels for dollar bulls. Only a washout below 112 will likely change that tune. Despite the dovish Fed hike, the dollar apple cart has not tipped as of yet. More so if you're of the view that the Fed considered it premature to take a more hawkish stance before seeing details of the Trump policies, after which the market expects the Feds to take a more hawkish tone and bolster the USDJPY upside trajectory.
China is back on the market radar, with the PBOC surprising markets by increasing OMO and MLF rates by 10 bps for the second time this year. In addition to tempering financial market leverage and possible asset bubbles, it is clear that the PBOC hike, coming in on the back of the Fed move, is also designed to keep interest rate differentials between the US and China moving in tandem, in order to curb capital outflows.
The less hawkish stance by the Fed has opened the door for local EM trade, even more so with the stronger-than-expected Chinese data last week, adding to the global dollar squeeze. Stability in China will bode well from regional sentiment, which will be supportive of a recovery in commodity prices, along with higher inflation, all of which should pass through to the region.
The MYR is picking up interest on the back of infrastructure investment and as investors view the stability in the commodity space as a positive for the region. Indeed, the prospects of GDP growth on the back of local infrastructure projects bodes well for other commodity-related baskets and could provide much-needed reprieve to local rubber markets.