With the numerous crosscurrent still in play, US shutdown and Brexit notwithstanding, a mild bout of risk aversion seeped into global markets Friday pressuring US equities, oil prices and US bond yield lower and we saw mostly US dollar buying as traders pared back extended short dollar positioning on the EUR and CNH.
There wasn’t any specific catalyst other the then general concerns over Brexit, the US Government Shutdown and more balanced debate over the USD’s near term direction led to a flip flop Friday of sorts.
The Brexit uncertainty continues, and the clock is ticking with PM May running out of time to get concessions on the unsettling nature of the backstop.
As for the government shutdown, we could say the writing is on the wall, as Trump threatens to declare a national emergency to bypass Congress. And while there is still no definite end in sight, S&P issued a report estimating that the US economy has already lost USD3.6bn due to the shutdown suggesting the markets will pay increased attention to this as those numbers are not small potatoes. And speaking of potatoes, Trump is due to talk to farmers in Louisiana who might not be receiving aide checks due to the shutdown.
Fed Chair Powell remained coolheaded in his latest speech drawing attention to the fact the Fed is ” waiting and watching” and in little rush to raise rates. Despite some Fed members discussing the chance of rates moving in either direction, at this stage of the game, a rate hike remains far more likely than a cut.
In late New York, a Fed release raised some eyebrows when transcripts from the 2013 FOMC minutes were released which reminded everyone that that Chair Powell urged the end of bond buying “well before the end of the year” and encouraged “tapering the Fed’s balance sheet.” Just before the taper tantrum, he urged “taking the next plausible opportunity” to taper bond purchase. Indeed, he was far more aggressive back then than the patience messaging he is delivering today.
Overall this type of Friday consolidation and market correction looks and feels perfectly normal especially with the amount of turbulence still in the water.
Brent crude oil turned lower Friday on profit-taking as advancing equity markets hit the pause button. Also, traders were very unimpressed by reports that indicated Russia had only reduced crude oil production by 50,000 bpd for January.
While the Fed interest rate pause and hopes for a US-China trade resolution continue to support prices slowing global growth continues to temper top side ambitions as speculation across dealing desks was rife with rumours that China will set a lower GDP target for 2019 of 6.0-6.50%
Much of the current USD move on the implied Fed dovish shift is getting played out on the EUR and CNH which makes both currencies very susceptible USD positioning and of course a retracement on USD haven appeal.
While it could be argued that much of the EURUSD push to 1.1570 was short covering, but that would belie the number of EUR USD longs that were entered on the break of 1.1525 only to have a “mea culpa “moment during the brutal move lower as stops were triggered on the break back below 1.1500.
Still, the Fed’s about-face is significant, and it should play out in as weaker USD eventually, but as lest for today the market disagrees. However, I remain confident that provided we can hold above 1.1450, there is scope for a more significant rally to play out.
First and foremost, the stabilisation in CNH has no significant domestic economic rationalisation but instead momentum from a softer Fed coupled with easing in US-China trade tensions. In other words, its highly speculative driven CNH rally and uber prone to retracements. And while I’m confident the US administration is pushing for a weaker USD but certainly during this depressing economic downturn, China would prefer a stable to weaker Yuan due to the monetary tightening effect a stronger Yuan generates.
And predictably we did get some verbal intervention on Friday “Market News International around 8:00 EST: “Any further rapid appreciation by the currency, which has risen sharply at the start of this year’s trading, could impact China’s exports, the source said, without saying whether the PBoC would intervene to slow any move in the yuan. Separately, a government advisor told MNI he saw a little further upside for the Chinese currency.”
So, if we are looking for a reason why the Euro fell look no further then the move in USDCNH that was driven by some concerns that the Pboc was preparing slow the pace of the Yuan appreciation.
CNH and EUR connection?
If there were a deal afoot between the US and China to weaken the USD, it would make sense for China to buy Euro given that China has an enormous appetite to diversity from USD over-reliance.
The “risk on” signs are compelling which should benefit commodity and oil-linked currencies driven by a Fed pause and easing the US -Chian trade tensions.
The Fed pause walks back a lot of long USD positions that were built around the Fed policy normalisation vs BNM neutral stance. And if we get shot in the arm from a definitive Trade war truce, we could see the MYR extend gains to USDMYR 4.05 in a heartbeat.
Over next week traders will put greater emphasis on the dovish Fed vs the already baked in downside risk for the Ringgit.
One of the big key for the Ringgit next week is that Malaysia will soon issue Samurai bond(A samurai bond is a yen-denominated bond issued in Tokyo by the non-Japanese entity). While adding money to the government coffers is always a welcome boost the Samurai issue will remind investors of the fear of a credit rating downgrade, which has been looming over Malaysia capital markets, has left the picture.
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