Holiday Induced Consolidation
With the USD consolidation of sorts and the UST 10’s stabilizing around 2.31-32% as the global bond market sell-off abates, G-10 traders’ attention was diverted to the oil patch as the usual raft of OPEC headlines will provide crosswinds. The latest of which is not sitting well with traders, as WTI turned lower after it was reported that members have failed to overcome the biggest obstacle: whether Iraq and Iran will join the deal. I expect the rumor mill to be running in full gear as we near the Nov 30 meeting.
While US bond markets have stabilized Euro Bunds have rallied on heightened speculation, the ECB will extend QE beyond March next year. With the anticipation of further interest rate divergence between the US and Europe and as Euro headwinds increase the closer we get to the Renzi referendum, EURUSD upticks. The waves of political populism spreading through Europe might just represent the biggest hurdle the Euro will have to overcome.
The Australian Dollar
The Australian dollar was exhibiting its multiple personalities again reminding traders there are no sure bets when it comes to the Aussie. The sell-off on Aussie yield strategy saw the AUD buckle under in the face of steeper US yields. While a global flight out of USD after the Japanese earthquake got the ball rolling, it was the surging commodity prices that continue to underpin the Aussie, while other G-10 currencies have returned to pre-earthquake levels. Clearly, the Aussie outperformance can be attributed squarely to commodity performance.
However, let us not get ahead of this current move to .7400 as slight US weakness, improving CRB index and a US holiday-induced consolidation factor is more likely a temporary respite to the expected continuation of broader dollar strength. Regardless the Aussie propensity to latch onto commodity prices and risk appetite at the first sign of USD weakness suggest it may not be the best currency to express a USD strengthening bias as the Australian Dollar Commodity narrative remains firm.
Despite the earthquake and the notion of waves of repatriated Yen flow, the aftershocks did not result in any substantial damage and the USDJPY quickly retraced toward the 111.25 after the first earthquake-induced dip. Traders were quick to pivot from potential disaster to the broader USD theme, despite a lull in the action as the market turned consolidative ahead of the US holiday. Keep in mind traders usually turn Thanksgiving into a long weekend, so price action will likely remain muted.
If there is any takeaway from yesterday's USDJPY price action, it is how committed the USD bulls are on any USD dollar sell-off. I would expect the dips to remain shallow as the USD should remain king of the hill as the markets appetite for greenbacks remains solid. Liquidity is tapering so stay vigilant, as some market moves are likely amplified in these conditions
Regardless of the fixing, markets remain willing to buy any dips reinforcing the perception that until we see a shift away from higher US yields, the stronger USD trend will continue to be intact.
In the interbank market, offers are sparse, and so far, there has been no reported sign of state-owned banks to defend any level (sell USD). As with the broader Dollar, I would anticipate the market to take a breather through the US Thanksgiving holiday period where traders usually take the Friday off for an extra-long weekend
Markets are taking a breather as the broader USD strength and global fixed income sell-off abates. However, we should anticipate any corrective moves to be shallow, as regional outflows should persist given the uncertainties around US interest rate trajectory and President-Elect Trump’s trade policies. Also, the fear of massive redemptions may accelerate the feedback loop if local EM conditions continue to deteriorate, which will put additional pressure on regional bond and equity markets.
The BMN reserves stood at RM407.8 billion (equivalent to US$98.3 billion) as at Nov 15, 2016, compared with RM405.5 billion (equivalent to US$97.8 billion) as at Oct 31, 2016. However, given the reporting is right on the cusp of suspected intervention amidst a wave of capital outflows post-US treasury sell-off, it will not get reflected in this release and the next reserve release may be more telling of reserve depletion.
Focus shifts to the BMN rate announcement where it would come as an absolute shocker, if the central bank were to cut interest rates. Speaking of which, the lack of participation and liquidity is spooky and certainly not a conducive environment for investors to position or hedge.