By Stephen Innes
We ended last week singing a very familiar tune with US equities putting in another strong performance, helped by more positive corporate earnings reports, while the USD weakened further, as the market was still digesting the aftershocks from the verbal ping-pong match when both Mnuchin and Trump dabbled into the FX debate. We should expect more two-way uncertainty entering the fray this week, which could make for some touch and go moments, but for now, the markets remain comfortable to maintain a longer-term soft USD bias.
However, it is a massive week for the USD, featuring President Trump's State of the Union Address, an FOMC meeting, and the US employment report for January. We should expect some consolidation and possible short USD position squaring ahead of these potential USD hot spots, given that all the bases to sell the US dollar would come under some level of scrutiny this week. Ultimately, unless Dr. Yellen's final hurrah surprisingly offers up a serving of hawkish pie, the markets' long-term negative US dollar sentiment is unlikely to be dented.
Asian equities are poised to open on a positive note, with the market still very focused on China H shares. Investors continue to flock to H shares as lower valuation and robust economic fundamentals in China remain to attract large volumes of capital inflow.
Oil prices have received a significant tailwind from the weaker US dollar, which usually causes investors to flash-mob commodities in general. While the longer-term USD negative bias remains intact, two-way dollar risk is in play this week. And with everyone looking for a reason to sell oil at these levels, it could be a struggle to push higher early in the week.
Traders continue to look over their shoulder at the likelihood of US oil production ramps and supporting that argument; Baker Hughes reported the number of active US rigs rose by 12 to 759.
Given we've had a compelling move since early December, and while surveying the state of US economic data on tap this week, we could enter a period of short-term consolidation given short USD position risk at minimum take profit ahead of this week's crucial headline risk.
By no means are dollar bears folding up camp, but a healthy consolidation in gold markets at these extended levels would further support the bullish narrative.
Iron ore-inspired losses have been playing a secondary role to the free-falling greenback, which has supported the commodity bloc of currencies en masse. But as expected, there's more two-way risk entering the dollar picture this week due to significant headline risk.
External drivers aside, the next catalyst may come from a build-up of RBA "rate hike fever" that seems to be doing the rounds these days. The market base case is for the RBA to remain neutral. But with only 25 bps of rate hikes priced in STIRT for 2018 and a measly 5 bps baked into May, I think the next significant piece of the puzzle will reveal after this week's CPI (January 31), which could see a rapid repricing on RBA risks.
Traders are starting to take notice of the recent string of economic data, which has been particularly boisterous, led by strong employment print supported by an uptick in consumer sentiment.
However, there's no escaping the RBA's long-standing tradition of when Aussie dollar is soaring; there's a higher likelihood that the bank will remain faithful to current expectations as opposed to moving in front of them.
USD/JPY continues to trade with no correlation with UST yields, suggesting a limited upside. However, robust US data and surging risk sentiments are by no means contradictory for bearish JPY sentiment. However, conditions will remain unsettled for USD bulls until signals that are more definitive. In the meantime, the market will continue to sell on USD upticks.
Ringgit markets will move on broader US dollar sentiment this week, but investors will remain solid MYR buyers on weakness.
The well-entrenched supporting cast of narratives remains intact. Strong oil prices resonate, and positive regional risk sentiment and BNM that has left the door slightly ajar to further rate hikes in 2018 add to the ringgit's soaring appeal.
While the markets will become increasingly more data dependent, given the positive macro background and robust regional economic landscape, the ringgit's prospects remain rosy. With a bit of help for the greenback this week, we could zero in on 3.85 USDMYR.