Uncertainty And Anxiety

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Includes: CROC, DRR, ERO, EUFX, EUO, FXA, FXE, FXY, JYN, UDN, ULE, URR, USDU, UUP, YCL, YCS
by: Dean Popplewell

By Stephen Innes

No coronation for the US dollar just yet, as investors spent a significant part of Monday analysing the latest edition of Fear and Loathing in Washington. To say that confusion reigned would be an understatement, as waves of jittery headlines more than sullied investor sentiment. Special Prosecutor Mueller's recent arrests reminded us that some stories just never go away, while the journey down the yellow brick road to tax reform is still fraught with peril. And rounding out the headlines, Jerome Powell remains the odds-on favourite. The mash-up of all three headlines sent equities, yields, and USDJPY lower.

The greenback was always the first player this week given the massive US economic data diary. But even without getting sideswiped by risk-averse headlines, there was an increasing air of reluctance to chase the dollar higher, given that long dollar positions were a bit overextended. But even traders who like the USD story were playing the patience game given the plethora of economic data releases this week, and are looking to buy the dollars at better levels.

The scope of Special Prosecutor Mueller's investigation will likely widen. But at this stage, we have no idea if there's a smoking gun or it's all a tempest in a teapot. Regardless, look for this inquisition to remain in the headlines for the foreseeable future.

Tax reform took another detour after Bloomberg reported that "the House is said to be discussing phase-in of the corporate tax cut," implying no one-off haircut, but instead, it's to adjust gradually.

Powell is 75-80% priced in, so we should only expect a more significant USD knee-jerk if Trump pulls a rabbit out of the hat.

Japanese Yen

The markets spent the more significant part of last week buying USDJPY. But it struggled to gain momentum after the buoyant Q3 GDP, and then fell victim to the Jerome Powell headlines; it has spent most of its time in recoil since. There remain a lot of events to get through this week, including the BoJ, FOMC, and of course, Friday's NFP, and while there remains a valid argument to move higher, it's challenging to trade USDJPY continually looking over one's shoulder for headline risk. At the moment, the market is still tentatively buying the dip, but a break below 112.75 could lead to a cascade of stop-loss triggers, and pricing could get very messy.

One can sense the level of angst and frustration brewing, as dollar bulls like it higher, but given the yen headline risk sensitivity, USDJPY will continue to march to its own beat.

Euro

A willfully dovish ECB suggests the euro should remain under pressure. The single currency received something of a reprieve from last week's onslaught, as the push for independence in Catalonia has taken several severe blows over the weekend. But the market momentum continues to lean lower.

Australian Dollar

Let's see what the Aussie bears have to say about the China ban on Australia beef lifted. I suspect they'll be hungry as the market approaches the .7700 level. But all eyes should remain on the USD side of the calculus with the deluge of economic data, FOMC, and the new Fed chair announcement.

In the meantime, the Aussie received a get out of jail card as US bond yields fell and US dollar bulls retreated at the prospect of Trump Tax cuts getting phased in as opposed to a one-off haircut.

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