By Stephen Innes
Instead of a major roadblock, the ECB was a significant catalyst for the US dollar. And it is tough to argue against the intensity of the EUR downside move as the ECB didn't just disappoint to the dovish side, they were overtly dovish pushing back rate hike expectation well into 2019 while revising down their growth outlook. Draghi not only laid it on thick but he applied several layers of heavy-handed coats to his dovish guidance.
The signals from the FOMC and ECB couldn't be more different. The Fed, barring any unexpected financial market calamity, is primed to raise interest rate every quarter while the ECB will continue to sit on their hands well into 2019. These opposing views should see interest rates diverging more between the two most powerful central banks in the US's favour, which should continue to lend support to the USD. And should keep the euro circling the drain well into the summer.
It was a big day for the greenback as the robust US retail sales all but confirmed the Fed's hawkish stance from Wednesday. And after back to back loud retail sales prints, suggesting the trickle-down effect from Trump tax cuts are putting more money in households' pockets, vindicated the Fed for their hawkish view. There is no denying it; the US economy is on a roll.
US equity market
Equity investors took cues from the stronger-than-expected US retail sales and the overtly dovish ECB, which saw US stocks closed mostly higher on Thursday. But investors remain very cautious as President Trump is preparing to announce tariffs on Chinese products later tonight, a move that could trigger retaliatory action by China. As it stands right now, the President is unlikely to wrap himself in political correctness as he moves forward with tariffs directed at China.
Traders continue to express their bullish and bearish views on oil, which has seen prices test both the upper and lower ends of the near-term ranges as headline risk remains the primary driver of volatility.
But given the signals from Saudi Arabia and Russia that view easing of production limits as inevitable, the market is still left wondering how much and when. But suggesting this will be a gradual process has some traders position for the lower end of the 500 K-1.5 m barrel per day increase.
With extremists clashing in Libya forcing the closure of Es Sider oil export terminal, oil has been testing the upper end of the recent ranges overnight, but again OPEC supply uncertainty is capping gains, particularly against Brent.
On a positive signal for gold investors, the precious metal is trading above the critical $1300, despite the USD dollar running on overdrive suggesting we may have seen a near-term bottom in prices.
But indeed, as US-China trade deadline looms ominously, investors continue to view gold as an excellent hedge against a possible equity market tumult if trader wars do escalate beyond the status quo. An escalation of trade war could prove extremely disruptive for financial markets, so gold should hold its bid as we enter another phase of geopolitical uncertainty. Like a nagging backache, there appears to be little relief from protracted trade unease between the US and the rest of the world.
While we didn't get the expected reaction from the hawkish Fed, fortunately history reminded me that it would be folly to dismiss the USD before the ECB.
EUR: While few currency trends move in a straight line, given the apparent widening policy divergence between the ECB and FOMC, the euro should continue to circle the drain for the foreseeable future as traders are in full out bear mode.
JPY: Risk aversion is keeping the top side in check, so G-10 traders are viewing the short EUR and AUD as the quickest road to the bank.
AUD: With the RBA all but hanging their policy hat on the illusive wage inflation, there is little sign that will materialise. And since I've been doing a lot of handicapping this week, I would think an RBA rate hike anytime soon is about as unlikely as McLaren P1 showing up in my garage.
CNH: Yesterday's weaker China economic data dump suggests the PBoC will be in little rush to match the Fed hike, so expect more CNH weakness to ensue. The question is will this interest rate divergence be a threat to capital outflow?
Local EM: Still waiting for the dust to settle on US-China trade before taking a strong view on local currencies. But with the dollar ratcheting higher vs. most of G-10 it would suggest there is Asia FX pain in the making.