The Foreign Exchange markets are incredibly muddled at the moment.
“We are seeing the Asian basket of currencies trading on the USDJPY pair’s tailcoat, amid broader emerging market gains, seemingly ignoring the region’s economic woes,” says Stephen Innes, senior trader at OANDA Asia Pacific.
The Malaysian Ringgit is showing tremendous resilience to the slide in oil markets. Innes says, “As long as the WTI is trading off the back foot, I expect ongoing support at USDMYR 4.10 -12 region. Malaysia’s political scandals show no sign of abating and continue to weigh negatively on foreign investor sentiment.”
Overall, currency flows continue to run light in Asia, perhaps awaiting the onshore market in China, which will reopen on Monday post Chinese New Year celebrations.
Traders reacted yesterday to Yellen’s statements by aggressively the shorting USDJPY. The Fed is widely perceived to have missed on all marks, creating a vortex of risk-off in the markets.
The Australian dollar succumbed at times, yet held its own among the downwards spiral of global equity markets. “One has to wonder about the AUD’s topside potential,” comments Innes. “The AUD is a very tricky place to invest.”
“While investors are overly pessimistic as to the potential for global growth, the outlook for commodity prices does not bode well and should prove negative for the AUD,” he adds. “On the other hand, investors continue to temper expectations of US interest rate hikes, which makes the AUD look attractive from the perspective of an interest carry trade. Until this deadlock gives, I expect the AUD to trade in a relatively narrow band.”
Innes indicated that as haven flows reverse and divergent monetary policy returns, the major issue will be how to “dot plot” the Fed interest rate curve. “I think the US dollar will remain under pressure till we see a rebound in US economic data.”
The RBA Governor Glen Stevens appeared before the House Economics Committee this morning sounding rather upbeat, stating that, “Activity outside the resources sector has been gradually improving” and also making mention that “a fall in oil prices, resulting from additional supply, has usually been seen clearly as a bonus for consumers and many businesses in advanced economies, including Australia.”
Innes says, “This certainly make sense as Australia is not yet dependent on oil revenues.”