OANDA FX Market Commentary from Stephen Innes, Senior Trader at OANDA Asia Pacific
As we head into the Chinese New Year break, today is all about pre-positioning ahead of the tonight's all-important non-farm payroll data which can set the tone for the week ahead.
While the market has remained relatively stable since Wednesday’s USD capitulation, investors should not be fooled into thinking it is smooth sailing ahead. In fact, the ride could get bumpy after the US employment report is released. The markets are normally quiet ahead of a public holiday and that’s when traders need to be on their guard, as volatility could be just around the corner.
Looking at the U.S picture, on-going soft economic data continues to weigh on the greenback, while the tepid US production data release overnight missed on all fronts. Factory orders were down by 2.9% in December versus -2.8% expected. So the general theme of unwinding long USD speculative bets continues.
Closer to home, Australian retail sales stayed flat in December versus a 0.4% expansion expected. Ex-inflation, retail sales grew by 0.6% quarter-on-quarter in Q4, well below the consensus. But given the current shift in market dynamics, it was largely ignored as traders continue to reprice the slope of 2016 US Federal Reserve board rate hikes. Also, the relative hawkish tone within this morning’s RBA Monetary Policy Statement definitely signals a further unwinding of speculative short bets against the Aussie, as the relative interest rate yield again looks attractive to investors and speculators alike.
So all in all, time to fasten your seatbelts.
The regional currencies continue to trade stronger on the back of the weaker USD theme, with USD CNH at one point trading below USD-CNY overnight as weak short-term long USD speculative bets unwind ahead of the Lunar New Year. Of course, one has to take these moves with a pinch of salt as they’re likely to be amplified by dwindling liquidity as most regional interbank players are likely to square or hedge going into the Chinese Lunar New Year.
Despite the relative calm in the market, we could be in for a rollercoaster ride on the IDR as the calendar is jam packed with data. While Indonesia’s Q4 GDP will likely print 4.7 % on market consensus, the always volatile inflation numbers will garner the most focus. By all accounts, the CPI inflation reading is expected to rise slightly to 3.6% in January, up from 3.4% in December. As for a long-term perspective, fuel price cuts in early January should keep CPI inflation in the range of 3.5% to 4% this year.
The MYR continues to strengthen on the back of a souring of USD risk appetite along with relative stability on the Oil Patch as WTI continues to trade above $30.00 per barrel. However, I expect USD bids to resurface across the region after the knee jerk reaction to Wednesday’s USD capitulation.
Market expectations are also running high that we’re nearing a devaluation in the USDCNY, based primarily on the huge capital outflows as China continues to struggle with reforms and makes adjustment to its currency policy regime.
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