Please attribute the following market commentary to Stephen Innes, senior trader at OANDA Asia Pacific.
The relentless risk rally on the back of surging global equities, compounded by oil prices outperforming, bolstered both Aussie and Kiwi sentiment overnight.
Retracing moves from the Doha fallout, in furious activity, the WTI futures (May 2016) tested intraday highs of 41.53 and settled in convincing fashion near the 41.00 handle. Brent Crude was the primary driver in the session as prices continued pushing higher as traders took cues from Kuwaiti oil workers’ union leaders comments that striking employees will not return to work until all demands are met. However, in early APAC trade, oil prices have given up some overnight gains after Kuwaiti oil and gas workers have ended a three-day strike that had temporarily cut the nation's production in half.
The key US equities benchmark, the S&P 500 Index, had a good outing falling just shy of November 2015 highs (2116.48) with the energy sector leading the charge. The Dow Jones Industrial Average settled above the psychological 18,000 level as investors’ confidence surged on rising oil prices.
I’m cautious chasing above the 0.7800 level which has been driven primarily on rocketing oil prices and the positive knock-on effect on the global equity market. However, for China’s rebalancing efforts, while showing recent signs of awakening from an extended slumber, it’s far too early to conclude that the PBoC’s stimulus efforts have taken hold. And the current over-supply/reduced demand oil patch landscape is still in play. In fact, there remain huge risks in store for commodity currencies with concerns over both China’s economic growth and oil supply/demand issues playing out through 2016.
Back to WTI. The American Petroleum Institute late on Tuesday reported that crude supplies rose by 3.1 million barrels for the week ending April 15. The survey was a little above estimate but not significantly so. With the market forecast for the Department of Energy on Wednesday standing at 2.295 million barrels, traders largely ignored the small build-up in the API survey.
After tumbling earlier in the week the USDJPY has enjoyed somewhat of a resurgence, as an uptick in global risk sentiment has reduced demand for the safe haven Yen. But the unwinding of CADJPY shorts as oil prices rebound and AUDJPY moving higher on improved risk sentiment has weakened the JPY over the last 24 hours.
More specifically, I think we’re starting to see pricing of speculative shorts for a few reasons. The market didn’t break below the key 107.50 handle on Monday and gradually found support as oil prices started to stabilize. Add in the backdrop of higher US yields from the buoyant Dow and a resurgent Nikkei. So traders are likely viewing these conditions as an opportunity to pair some overextended downside risk.
Risk assets continued to rally in overnight session in the absence of any new drivers as S&P 500 rocketed to its highest and commodity prices strengthened across the board. US housing start data came in below expectations and despite the US yields moving higher, traders continue to discount the likely hood of sooner rather than later rate hikes with Fed Fund futures pricing in only a 15 BP worth of hikes this year
Despite this backdrop, CNH has continued to outperform. Yuan fix came in at 6.4579 vs. 6.47 reflecting the USD trading on its back foot again.
Another day, another rally as Asian currencies continue to outperform.
The SGD touched a 10 month, despite MAS' more dovish stand on the Sing dollar; traders continue to focus on the Federal Reserve as markets have dramatically pared back rate hike expectations. Aside from the MAS surprise easing, it was clearly not sufficient to offset decreasing market expectations of US rate hikes.
Eyes are focused on today’s CPI release for March, which is anticipated to have cooled to 3.6 % year-on-year in March after a surprising increase o 4.2 in February. MYR trading is a bit weaker this morning as oil prices have given up some overnight gains after Kuwaiti oil and gas workers have ended a three-day strike that had temporarily cut the nation's production in half.
Despite this move, oil price action is very constructive and given the current positive risk environment, Asian currencies are likely to continue strengthening and the MYR should continue to outperform the region.
The Ringgit is only be held back by the alleged default by state investment firm 1MBD, which if true would leave the Malaysian government on the hook to pay off the debts.
On the RBA front, RBA minutes did not reveal any specific forward guidance and reiterated the long-standing mantra that current monetary policy is accommodative. But there is room to reduce interest rates if economic conditions warrant. However, with little expectations going in, the minutes were largely ignored.
RBA Governor Stevens’s remarks filled the airwaves overnight after a prepared speech delivered in New York. However, for foreign traders, it was more about what he did not say rather than what he did say. While the RBA head commented on general global macro themes and issues faced by central bankers, there were no verbal intervention shots regarding the Aussie dollar, which some market participants had anticipated. With little jawboning for the RBA in recent weeks, dealers are speculating that the RBA may remain sidelined on this recent wave of currency appreciation until 0.8000. I suspect the RBA views current Aussie appreciation as more justified than recent moves seen across other risk associated currencies. So they’re less inclined to increase rhetoric at this stage.
On the Kiwi, there was a huge uptick in interest after Fonterra had reported that whole milk prices jumped 7.5%. While the general theme is to sell NZD based on RBNZ dovish expectations, the definitive battle lines are forming as traders play out the improving risk landscape versus the prospects of RBNZ rate cuts.
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