Easing Into The Holiday Season, Not So Quick!

by: Dean Popplewell

By Stephen Innes

The USD regained some steam heading into the weekend as did US equity markets as tax reform finality is in sight.

G10 dealers are expected to ease into Christmas and New Year break. So expect low liquidity, and year-end flows will begin to factor into the equation. So far, there are few exacting signals, but typically, passive portfolios sell the surplus dollars and buy other currencies and bring the overall fund back into balance.

However, this year the funding scarcity is moving in the US direction as people seek dollars to cover them through the end of the year. Tighter USD funding conditions in early Dec. could imply 1) short dollar position funding will be very scarce over the New Year turn or 2) because US funding is expensive, demand for treasuries and other US assets will be low the final two weeks.

But it's no time to tap the breaks as the political calendar remains fraught with danger. As we near the finish line on US tax reform, market jitters could accelerate and legislators in the UK and EU continue to bluster about Brexit.


After Bitcoin's minor league debut on the CBOE, cryptos are heading for the big leagues with today's opener on the CME. Given the contract size difference 5 Bitcoin CME vs. 1 Bitcoin CBOE, it will likely be a better gauge of institutional or pro trader buy-in. While firms like TD Ameritrade have announced they will agency client orders to the CME, the lack of buy-in from the traditional and significant market makers has many banks and brokers still sidelined.

Oil prices

Amongst all the confusing narratives and shifting signals, oil prices are getting a bounce this morning as the Nigerian oil union talks have hit an impasse and will begin strike action on Monday, which has triggered some weaker shorts to cover at today's Futures open.

G-10 FX

The Japanese Yen

Some early volatility on JPY this morning as the market digests headlines surrounding Abe's cabinet approval rating and a report that Japan prosecutors will inspect four companies on Maglev. The dollar-yen fell from 112.74 to 112.50 bid. If non-consequential headlines can trigger a gap this morning, think of what the impact could be on significant data releases, which could trigger outsized moves in thin, year-end markets.

But with the Fed leaning dovish and the USD continuing to wobble despite stronger data, it indeed suggests the path of least resistance remains lower even more so with Japan's economy ending the year on a dominant note.

The US Dollar

The Fed's dovish narrative is inescapable, despite a probable economic bump from tax reform, it's viewed as insignificant enough not to alter their dot plots. Given that most market pros trade the fundamentals, this Fed view alone should erode any dollar positively heading into year-end.

I hate bringing out my crystal ball so soon but with the messy situation in Washington and the President's approval rating waning by the month, it's difficult to envision the Republicans holding on the House or the Senate majority making it virtually impossible to get any Trump proposal passed. Without the infrastructure boost, the US dollar could be a dead duck in 2018.

Asia Fx

The Chinese Yuan

The RMB complex continues to be a sea of calm in the wake of domestic market upheaval due to reforms and deleveraging. Indeed, the dovish Fed narrative weighs positively for the yuan as we predictably moved towards the critical 6.60 level last week. Given the tepid inflation narrative in the US, the Fed dots remain very sticky and portends well for the yuan.

The PBOC's move Thursday to boost market interest rates demonstrates the PBOC's boldness to continue with a deleveraging crusade, which has sent domestic bond yields higher. By PBOC intention or not higher bond yields are probably attracting investor interest, even more so with the likelihood China bonds will be included on the Global Bond indexes.

The Malaysian Ringgit

The turnaround kid of the ASEAN currency block continues to perform well in the face of stable oil prices, healthy economic outlook and a more hawkish tilt from the BNM. Also, inflows into emerging markets should increase given the dovish Fed narrative and a strengthening current account surplus. Although momentum is waning as we enter year-end, 2018 looks on the ups for the Ringgit with dealers now targeting 3.90 USDMYR level.

This week's key inflexion points


The Forties pipeline crack underpinned oil prices last week as Brent widened to +7 USD premium per barrel over WTI. Mixed signals from the oil patch giants are confusing the landscape. OPEC suggested production cuts will erode surplus while the IEA in Paris highlights a possible 2018 surplus. All this tells me the US inventory data will continue to provide the most action (Wednesday 10:30 AM EST). Besides oil inventories the markets are digesting the surprising build in gasoline stockpiles, which has some suggesting a turning point for crude oil futures (lower) is on the cards.


The upcoming PCE (Dec 22) release is the primary dollar event this week, but markets will be very tentative to add risk ahead of the Xmas and New Year break. Based on the weak CPI reading, PCE is expected to be another misfire. But as discussed last week, USD negative bets are relatively entrenched following the Fed dovish hike, Doug Jones victory and tepid CPI. The weaker inflation prints, however, will continue to cap dollar rallies. As for the big dollar trade this week, I suspect most of the US dollar bears are keeping the powder dry to fade the dollar bump after the tax vote goes through.


The BoJ will hold the last policy meeting on Dec 20-21, where the Bank is broadly expected to leave its policy unchanged. There will be no outlook forthcoming from this meeting, which centres the risk on Gov Kuroda presser. In the wake of his Zurich meeting and YCC back on the airwaves, the press will likely hound him from additional policy clarity. All things being equal, this suggests a degree of downside risk for USDJPY post press conference.


Eurozone's final CPI for November (December 18), German Ifo for December (December 19), Catalonia regional election (December 20). However, given the dovish tone of Draghi at last week's ECB presser and holiday thinned liquidity conditions, we could see limited price action regardless. EUR has been dead money the past few weeks, and that's very unlikely to change.


Brexit headline risk but we're getting into the meat of the matter as on Tuesday traders will get their first look at how cable will trade in this crucial phase of Brexit negotiation. The sterling may be vulnerable as U.K. Prime Minister Theresa May meets with her cabinet, which could be a messy affair, especially if the Brexit hardliners try to impose their views.


New Zealand trade balance (Dec. 20) and GDT are this week's risks. Given that political uncertainty continues to unwind more so after Adrian Orr was appointed the new Reserve Bank governor last week, the kiwi should react more favourably from stronger domestic economic data and firmer dairy prices.


Year-end premiums for physical delivery are kicking in as most gold refineries shut for the holiday season, but the market looks stuck in the middle of no-man's land. It will trade inverse to USD in the absence of any critical drivers. Over the weekend, Bloomberg markets are reporting that hedge funds are pulling out of gold bets in favour of equities and speculators are dumping gold at the fastest pace in 5 months.