By Stephen Innes
The US markets had a tremendous post-election session as the great divide offers investors with some sense of relief that there are more checks and balances on President Trump's freewheeling style of politics, but has left analysts debating what this will mean for policy going forward. One positive takeaway from the Republican side, President Trump does have solid support from the Republican base.
While the likelihood of tax reform 2.0 has lessened, I still believe that there will be bipartisan support for the Trump administration's key infrastructure initiative as the Democrats don't want to be perceived as wet blankets and trying to suppress any action which is supportive for the economy as the Democrats begin their run-up to election 2020.
However, on foreign policy, the Democratic takeover of the House of Representatives has "no influence whatsoever" on the Trump administration's hawkish view. But this does offer the Trump administration some bargaining opportunities with Congress, that is if both sides can ever put partisan politics on the backburner.
On the currency front, I should be happy that things worked out pretty much as scripted. The US dollar initially drowned in a wavelet of blue, but later gained momentum as risk sentiment remained supportive. The problem is, however I hate when things work out too scripted, especially since we are still dealing with election haze and moves that came on the back of little to no data, the main question now is where we go from here.
Not expecting much from tonight's FOMC but eventually, I suspect the diverging global growth narrative will come into focus as election risk passes and this should favour the USD at least over the short term. Old dollar bulls die hard I guess.
Oil had another eventful session as OPEC and its partners were reportedly planning discussions about possibly reinstating production limits next year, likely in response to surging U.S. supply as US crude oil production rose to a new record high and the largest in the world ahead of Russia.
But I'm not sure how this added up to be a U-turn storyline that was getting spun in cyberspace. I don't think OPEC and their allies' intention is to drive prices higher, especially when the global economy is slowing on the cusp of a more profound fall; but instead, is to achieve a more consistent goal of price stability, which plays into the long-held assumption that dynamic adjustment from time to time would be necessary to hold the delicate price equilibrium in check.
Of course, OPEC producers are concerned about the potential oversupply that was again highlighted by the larger-than-expected 7.8 million barrels jump in API reports and then supported after EIA reported that crude inventories rose by 5.8 million barrels - almost double analysts' estimate.
Looking at Cushing, inventories rose 2.4 million barrels from the prior week's 1.9 million barrels and is pointing to a jump to 3 million barrels next week. Plains Sunrise pipeline is starting up this month and should add about .2 billion barrels of net inflow per day, according to industry sources.
But as an aside, this has got to be the most tumultuous head over heels oil markets I can remember in some time. But looking over the near term, I would suspect the old $65-75 Brent Crude range would likely keep suppliers and their customers happy.
Investors took no joy in the very supportive risk markets and even more so with the dollar picking up steam, which added up to an election event disappointment for gold bulls; and with spot falling to break out on the topside, traders took profit at the first glint of the US dollar's strength.
I suspect gold will ping pong along with the US dollar as traders begin to re-evaluate the current state of the USD.
The ringgit got a bit of a reprieve overnight on the back of the market's overexuberance to chase down everything and anything with a yield attached to it. In other words, EM assets were getting snapped up on the assumption the Fed would slow the pace of rate hikes post-election.
But back to reality, post-budget, it is expected Malaysia will receive a negative outlook if not a complete rating downgrade. While credit rating downgrades are not the death knell for a currency, it will have significant short-term impacts and that threat alone will keep the MYR trading defensively in the weeks ahead.
But with the deficit target at the higher end of market expectations, the MYR could weaken at a faster pace than expected and we could see 4.20 + by year-end.
4.20 is the main resistance with key support at 4.15.
Yesterday the US dollar sold off influenced by US political risk, but the USDMYR market remains bid on the dip.
As for today's policy review, regardless of the BNM tone, the market is pricing in a dovish outlook based on moderate inflation slowing economy and the general fiscal malaise. But I would be surprised if BNM came across overtly dovish as that would trigger unwanted and unnecessary weakness in the MYR, so I believe they will hold a neutral tone.