Just Can't Get Enough, USD’s
The primary sentiment driver for USD is the bond markets as selling continues across Global Capital Markets. The yield on 10-year Treasuries has increased above to 2.20% as pricing for a December FOMC rate hike is now pegged all in at 96%, after Dallas Fed President Robert Kaplan sounded extremely confident the Fed would move in December. By all account, there appears no stopping the US dollar's recent ascent based on the current interest rate trajectory.
With the Trump Factor fully subscribed, will Dr Yellen spoil the USD‘s recent coronation as King of the Hill, or be the catalyst for another leg higher when she delivers her economic outlook before the Joint Economic Committee of Congress on Thursday?
As the December rate hike probabilities are all but entirely price-subscribed, it comes down to a call on the future pace of interest rate hikes (dot plots) that the Fed projects for 2017. A more aggressive Fed lean will see the USD rocket higher, and while a less aggressive tack will not necessary spoil the party, it will certainly stall dollar momentum. Realistically, I cannot see how the Chairperson would not be anything but cautious, as the US and global economies shift for a world of accommodative monetary policy excess to one of fiscal indulgence. So let’s not bring out the party hats just yet.
The USDJPY struggles last week to break through big offers in and around the ¥107 levels are now a distant memory as the market quickly cleared the significant ¥108.25 level yesterday, with traders crosshairs now set on ¥110.00; a significantly large psychological level.
Given the ease of the current move higher, and provided Dr Yellen does not spoil the new dollar party on Thursday, a big if mind you, we could be pressing the psychological 110 figure barrier by this week’s end.
While exporter’s offers are touted to be layered on the way up, the ease of which the current move has taken out 107.50 and 108 suggests the Tokyo-based standing offers have pulled, looking for better levels to hedge, which should on the margin provide a window to move higher. I will look for profit taking to set in ahead of Yellen’s speech Thursday, when hopefully, some forward Fed guidance will be offered.
Yesterday’s activity data which came in mostly in line was largely ignored as the markets attention is squarely focused on global rates. The CNH and the domestic interest rate curve continue to track with global sentiment and with the bullish USD move is still entrancing.
Traders are reluctant to fade recent moves, but there is growing trepidation amongst traders that the recent USD move is all too quick so that we could be setting up for a backlash. Focus now shifts to Dr Yellen speech on Thursday.
Sentiment continues to be driven by asset rotation as a trade implication and US re-inflation, as expressed through higher US bond yields, dominates sentiment.
Investors will move to underweight EM risk in favour of waiting for better times, as indeed growth differentials, especially if the US economy picks up, should support APAC EM flows from a growth differential perspective.
The real unknown is where Trump foreign policy sits. Cautiously optimistic bargain hunters will gradually emerge, but are likely waiting for confirmation of a global Bond market sell-off abating and to receive some clarity on Trade policy from the new administration as Trump’s election statements will not necessarily translate into policy.
Emerging Markets are still spilling over into the commodity currency complex as traders try to iron out what side of the fence they want to make their stand. The AUDUSD is by no means an easy trade, now sandwiched between bubbly risk appetite and strong commodity prices on one side and higher US yields and broad-based US strength on the other.
One can only assume that the market will continue to chop around in the 75’s until something concrete gives on the central bank policy front. Currently, I view a huge tail risk for the Feds to underwhelm, given the markets pent up rate hike expectations. While December US rate hike looks like a done deal, the market may be getting too far ahead of the 2017 rate curve expectations, especially given this sitting Fed’s proclivity to err on the side of caution (dovish).
While it is always difficult to pick bottoms, with the regional EM sell-off running out of gas and Dalian Iron ore making 30+ monthly highs, we are likely to see some long term value investors step in and provide support on the AUDUSD front ahead of Dr Yellen’s speech on Thursday.
New Zealand Dollar
The NZD has rebounded nicely after yesterday's earthquake-induced sell-off. Investors would be wise to have bought the dip, recalling the economic recovery New Zealand went through after the Canterbury earthquake. However, about recent events, there was less than expected structural damage and despite the threat of a tsunami, any thought of an RBNZ state of an emergency rate cut quickly evaporated.