Surprises Galore

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Includes: BIL, CROC, DFVL, DFVS, DLBL-OLD, DLBS, DRR, DTUL, DTUS, DTYL, DTYS, EDV, EGF, ERO, EUFX, EUO, EWM, FIBR, FTT, FXA, FXC, FXE, FXY, GBIL, GOVT, GSY, HYDD, IEF, IEI, ITE, JYN, PLW, PST, RISE, SCHO, SCHR, SHV, SHY, SPTL, SPTS, TAPR, TBF, TBT, TBX, TBZ, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBT, ULE, URR, UST, VGIT, VGLT, VGSH, VUSTX, YCL, YCS, ZROZ
by: Dean Popplewell

By Stephen Innes

Surprises galore are greeting Asia traders as we digest the astonishing overnight headlines. Betwixt by an incredible rate hike from the Bank of Canada (BOC), a sudden resignation of Fed Vice Chair Stanley Fischer and a rare bipartisan deal on the debt ceiling, all caught market watchers by surprise.

Debt Ceiling

In a move designed to put the focus back on tax reform likely, President Donald Trump sided with Democrats over fellow Republicans, to achieve a deal with congressional leaders to extend the U.S. debt limit until Dec. 15 as well as avoid a government shutdown and provide disaster relief. This outcome was our expected results in that this debt limit increase is tied to an aid package to assist victims of Hurricane Harvey relief. Republican back room squabbling aside, I think we all have to agree with Senate Democrat Minority Lead Schumer that this was “a positive step forward.”

Stanley Fischer

Vice Chair Stanley Fischer’s resignation helped to ignite a much-welcomed risk rally. While citing personal reasons, it’s not hard to read between the lines this move is more about clearing the way for Fed Yellen’s likely departure in February. Given that this move weakens the Fed Troika (Yellen, Dudley, Fischer) who were currently viewed as less dovish leaning members, his departure could eventually support a dovish Fed outcome throughout 2017.

Canadian Dollar

With the market pricing in only a 40% chance of a rate hike from the BOC, USD/CAD tumbled in the wake of the decision, down from 1.2400 to a low near 1.2140. This surprise will likely open the door to further gains for the loonie as the market will start to price in a quicker pace of rate hikes from the Bank of Canada which is showing little concern for the high reaching Canadian dollar. Unless the roaring Canadian economy takes an unexpected and abrupt U turn, it’s more likely than not the BOC will be leading the global central bank charge towards interest rate normalisation this year.

It is amazing how a rate hike can improve risk sentiment as EMs and other commodity linked currencies rallied on the fact that at least from the BOC perspective, reflation is not dead and buried, and there are real macro concerns to focus on beyond the North Korea bluster.

Global central bankers were keeping close tabs on the Toronto Stock Exchange reaction in the wake of the surprise hike. And while the stock market reaction was not huge, it does italicise that stock market buoyancy is a direct result of central bank largesse and perhaps a small foreshadowing of what’s in store for the ECB if the hawks take a flight of Draghi fails to temper the euro.

Euro

Expect the Euro pre-ECB positioning to dictate the pace today. But the market is struggling to reach a collective view heading into today’s meeting. If there is a consistent look, it’s that the ECB will kick the can to October before making any serious policy announcement, allowing them more time to digest both the N.Korea risk fall-out and the Federal Reserve Outlook. With that said, there remains a high chance that Super Mario will attempt to bludgeon EUR strength.

Japanese Yen

The greenback received a modicum of support after the debt ceiling extension as USD/JPY prices were lifted to a session-high as US Treasury yields blipped higher. Other than the debt ceiling bounce there doesn’t appear to be a whole lot of other reasons to buy USD/JPY at present; so very questionable if this rally holds and I expect the market to be a better seller on the average.

Australian Dollar

The Aussie regained some composure overnight on the mini risk revival, as the market refocuses on the reflationary trade after the BOC rate hike.

Yesterday, the Aussie tripped after a marginal miss on GDP. This slight data miss and the subsequent market reaction was
more a symptom of pent-up expectations than anything else as the domestic GDP data has surprised the market consensus
in recent times.

The market is still in buy the Aussie dip mode.

Malaysian Ringgit

Are we finally getting our anticipated expansive shift in MYR sentiment? It appears the bulls are coming out on mass supported by a decent carry, a stable to a strong currency, the 1MDB risk is in the rear view mirror, and the Malay Macro fundamentals looking solid.

Yesterday's soaring exports is certainly not a sign of a struggling economy and bodes well for the MYR.

Firming Oil prices of late are also supporting the Ringgit cause.

The party may only be starting.