By Stephen Innes
While the markets get distracted by Central Bank discourse and Friday's crucial NFP report, the tariff story continues to linger over the market like the foul smell of rotten eggs as the day of reckoning nears for the release of the official tariff details. Given the overwhelmingly negative response from industry leaders, international financial markets and even the furious backlash from loyal members of Trump's administration, there is growing optimism that perhaps significant exemptions will be forthcoming. The ink has not dried on the tariff bill, so investors remain guardedly optimistic.
US equity market rose Monday as investors' apprehension about the impending global trade war has tempered hoping for a diplomatic solution, and at the minimum, a process would be in place for businesses to get exemptions from the White House. However, expecting for cooler heads to prevail might be far too optimistic given that President Trump promoted reforms of U.S. trade policies as a cornerstone of his election campaign and it's challenging to envision him back down.
With traders eyeing NAFTA headlines and extrapolating possibility of steel tariff, the latest round of talks made little progress and negotiations remain fractured as political headwinds build.
Oil prices moved significantly higher overnight following reports of a drop in crude inventories at the prominent US Cushing Oklahoma storage facility with WTI chalking up its most significant days since Feb 14.
Also, lingering optimism that the CERAWeek by IHS Market conference could generate some production consensus, but with the trade war rhetoric filling the air suggesting little compliance from the Shale elements, the risk will be a two-way street subject to the outcome of the meeting.
Still, the upswing in US Shale production estimates continues to soar as the International Energy Agency suggested that the U.S. would become the world's top crude producer by 2023 with production hitting a record of 12.1 million barrels a day.
Gold market continues to run hot and cold on the back of fast money. With higher headline risk comes waves of fast short-term money plays that can leave a sizable imprint on the daily charts. Again, price momentum becomes headline challenged at the principal $1330 level as investors reduce risk hedges as global trade war rhetoric tempers.
Price action will remain choppy within near-term ranges until the prospect of higher US inflation receives increased attention. But even in the near term, given the unpredictable nature of current market sentiment, investors will continue to buy gold on dips to hedge the growing tail risk from Trump's controversial policies.
The Euro has traded positively in the wake of the Italian election aftermath despite the growing wave of anti-establishment populism. But the Euro has a convincing history story of reversing EU political negatives. And with the main political risk for Germany behind us, with compelling headlines, the Euro could punch higher.
But the sentiment is predictably muted ahead of the ECB given the recent soft run of data as traders are erring on the side of caution. But even if the ECB play their cards close to their chest, it's as sure of a bet as one can get in FX markets that the ECB will continue to march towards policy normalisation and the EUR will move higher in this weak US dollar environment.
The Japanese Yen
The risk was a bit overextend, and traders found themselves far too stretched heading into the Tariff announcement while simultaneously positioning for a possible upgraded inflation expectation ahead of this week's NFP's wage data.
US yields moved higher overnight, and USDJPY caught a bit of a tailwind, helping USDJPY move towards crucial resistance levels (106.35-50).
But looking at a broader class of risk assets they too are trading more favourably this morning assisting the USDJPY sentiment. But given this could be little more than a short-term reprieve, the market will continue to look lower for the USDJPY from both a short-term risk perspective and longer-term BoJ policy implications.
The Malaysian Ringgit
For now, the downside surprise in Jan's headline inflation and tepid core give MPC ample room to hold policy steady on Wednesday, with the BNM preference for a stronger MYR to act as the cantilever for tightening monetary conditions as the Malaysian economy will continue to overperform through 2018
The BNM well telegraphed January's rate hike intention so traders will be looking for forwarding guidance, mainly the BNM's in inflation outlook, to gauge if they could move the dial one more time in 2018. As such traders will keep a close watch for any hawkish nuances. Overall the statement should be very favourable for the local economy and will be supportive of the local bond markets. However, given the current currency malaise in the regional market, it could be less favourable in that regard.
In the meantime, OPEC compliance continues to support oil prices, which play favourably for the Ringgit fortunes. And as far as the regional basket is concerned, the MYR should remain in favour given its strong external position, the lack of dependency on US trade and improving current account balance.
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