No Stopping Me Now
The focus overnight was on Fed Chair Janet Yellen's testimony before the Joint Economic Committee, which reaffirmed what everyone has suspected - that barring some major hic-up in the US economic data releases December lift off is a green light. Her comments were perceived USD bullish, but it was the release of mostly stronger than expected US economic reports that proved to be the catalyst, sending 10 year UST to 2.27% and an extension of the USD rally.
In a classic case of the technical converging with fundamentals, the DXY (Dollar Index) rocketed above the key 100.51 and surged towards the 101 level setting 13-year highs. There appears no stopping it now with traders hell bent on taking the US dollar higher.
Despite no concrete economic proposals on the table from Trump's team, regardless, the market is fully subscribing to a return of Reagan-esque fiscal spend, along with a steeper path of interest rate normalisation. The markets continue to price in a less dovish Fed in the future, as the market is still likely underpriced the actual inflationary impact of the anticipated fiscal spend. Trumphoria is definitely in play.
It's all about the Fed reflationary trade, as the market continues to reprice a quicker pace of Fed rate risks than was previously anticipated. The US inflation Bellwether 10Y USDT moved convincingly 2.27 % overnight after robust US economic data. And while logic would dictate a degree of uncertainty over the anticipated Republican policy, the market is convinced a rainbow is in sight and an economic pot of gold for the US economy is there for the taking. With risk appetite skyrocketing and aggressive repricing of the future slope of the US rate hike trajectory in play, the dollar took out the key ¥100 level in early trade. Add in the BOJ’s first Rinban operation to stabilise the JGB curve, which all but suggests the JPY will continue to be the favoured short amongst dealers provided the US curve continues to steepen. The further widening of US/Japan rate differentials should continue to support USDJPY.
A toxic combination of steeper US yield curve, along with the every present discussion of a trade war with the US, dominates the current currency landscape, which favours a weaker Yuan. However, the inflating mainland asset bubbles and uncertainty over China's growth trajectory will continue to provide a tailwind for the current USDCNH move higher.
The Ringgit is still the local whipping boy as a defenceless Bank Negara cannot halt the Ringgit slide through moral suasion alone. A dangerous combination of extremes is likely amplifying movements, as volatility expectations remain elevated, yet liquidity is extremely weak. I expect investors to rotate assets from MYR into US Capital Markets as 10 Year UST continues moving higher. The fire alarm is sounding and I expect a mad dash for the exits if we break the critical support 4.40-42 levels. Bonds remain under pressure as waves of liquidation from real money players continue.
The AUD breakout lower has traders probing .7400 level this morning, looking to test the bottoms of a new range. The AUDUSD has been under pressure all week, given a steeper US yield curve and a softer outlook for commodity prices.
Yesterday’s underwhelming domestic employment change came in at 9.8K versus 16K, with much lower revisions to last month, which was the driver for traders to stick the fork in the pair. Also, while copper and iron ore prices have stabilised after this week’s tumble, the current year-end industrial commodity price forecasts look bleak. This should all but green light the AUD lower into year-end as the Aussie bear scenario gathers steam.