Tricky Year-End Markets

by: Dean Popplewell

By Stephen Innes

It’s not getting any easier deciphering the continually shifting market sentiment in the currency markets as the USD has gone bid across nearly every currency. While some are hanging their hat on possible year-end repatriation flows, others suggest it has more to do with the year-end "turn" positioning. But the bottom line, currency traders are desperately seeking guidance.

It’s a bit of a mixed bag for the USD in my view as all the good news seems to be priced in on the tax reform bounce, yet the Federal Reserve will hike this month and continue to do so next year. Speaking of which, discussions are heating up on the Street about the Fed's 2018 path and more so should we start baking in more reflation risk for the dollar, given the boisterous US economy (employment) and the likely massive increase in US fiscal spending in 2018. But it remains a struggle being long dollars as the Fed debate will be tested out of the gate in 2018 as the market tries to decipher if we've priced in or yet to factor in the full extent of the Fed's normalisation cycle. Ultimately, it all boils down to whether the US data support or not.

ADP National Employment Report modestly beat forecasts and managed to underpin the US dollar, but ADP has been notoriously unreliable predicting non-farm payrolls. Relying on this forerunner is like looking for love in all the wrong places.

After an equity meltdown in Asia, with all the major indexes closing deep in the red, Europe and the US markets were far more temperate overnight. But don’t get too complacent as risk aversion remains barefaced in bond markets with 10-year yields falling as US President Donald Trump’s recognition of Jerusalem is igniting a global political storm of protest and at the same time, Tax Reform uncertainty remains in the backdrop.

Asia equity investors found themselves standing in a sea of pain at yesterday’s market close and are likely breathing a sigh of relief that both EU and US equity investors appear a bit more level-headed for the time being. Likewise for local currency markets which traded in the red. The regional equity market meltdowns triggered a wave of USD short covering on outflows, and as usual, $KRW was the most notable mover given the market's more massive weighted positioning. Besides the tax reform uncertainty narrative, and wobbly commodity markets, geopolitical risk wobbled after headlines scrolled that US B-1B bombers flew over the peninsula and that South Korea is set to build its unit of swarming drones in the latest Pyongyang staredown.

The Japanese Yen

The USDJPY is holding up well despite the lack of encouragement from ten-year yields, but we did eventually test the 112 after the Nikkei closed in a sea of red.

Battle lines are forming with half the street looking to own JPY near-term, as the USD positivity from tax reform fades while dip buyer remains entrenched in the repatriation flow speculation and or the more aggressive Fed narrative.

I for one certainly prefer calling plays from the booth on this curious trade as far too much ambiguity persists, and choose to wait for Friday NFP and AHE data before playing the hand.

The Australian Dollar

The bears pounced on the weaker Aussie GDP data which showed no growth in consumption, complimented by no increase in income. The song remains the same in that Australian consumers are in a world of pain drowning in a sea of debt. Despite the better jobs growth, it’s all moot without collecting a better paycheck. Any tactical long Aussie dollar aspirations dealers were holding onto entering year-end vaporised on the data.

Energy markets

In the topsy-turvy oil markets, WTI prices cratered despite the Energy Information Administration reporting a 5.6 million barrel drop in weekly crude inventories. Indeed, traders were more concerned about the steep rise in gasoline inventories. WTI dropped from $57.19/barrel to below 56.00/barrel. Naturally, any gasoline supply shocker will stoke fears of lower demand and a sagging global economy. We saw this play out in other commodity markets when copper plummeted this week, as the market infers any deluge of supply as a China wobble hence a global economic stumble.

Asia FX

The market should be able to pick up the pieces after yesterday's regional currency tumble.

Currency markets can be inexplicable at times and at this time of year, EM Asia FX tends to overshoot directionally.

The Korean Won

USDKRW gained 8 won yesterday on short covering, and the then nervous year-end corporate dollar demand stoked the fires. The regional risk sentiment is opening more stable this morning, but global investor sentiment remains pedestrian awaiting tax reform resolution. And this wary risk appetite should keep the KRW trading defensively but range-bound, given medium-term bullish sentiment.

The Malaysia Ringgit

Despite the regional currency upheaval yesterday, the USDMYR remained relatively stable through the brawl. However, the ringgit will likely trade steady to slightly weaker given the global investor’s chary point of view as a sprinkle of risk-off sentiment is inducing some moderate headwinds to counter medium-term bullish sentiment.

Also, the fall in oil prices overnight is marginally weighing on MYR risk, but prices remain well above any significant negative trigger level.

On the data front, Malaysia exports came in better than anticipated printing at 18.9% (highest since August), while imports printed at 20.9% also better than expected. * (Reuters Eikon)

Usually, a positive export print would trigger a broader rally in the ringgit, but the market had already factored in the volatile crude oil component as Brent prices have been on the ups since September. So the ringgit reaction to the export print was somewhat muted.