Shifting Tides

News   •   Nov 03, 2016 00:45 +08

Please attribute the following commentary to Stephen Innes, senior trader at OANDA. For direct comment, call Stephen at + 65 9176 1384 or email sinnes@oanda.com.

Shifting Tides

A case of pre-FOMC and US election jitters gripped cross-asset markets overnight, dampening market enthusiasm and ensnaring trading desks with a severe case of the fidgets.

November has gotten off to a frenzied start as shifting US election tracking polls now show Clinton and Trump in a neck and neck race for the Oval Office. We have been saying all along; the market has been itching to sell risk in the pre-election build up, and the recent polling results from ABC News/The Washington Post indicates Trump in a statistical tie agitated the risk play into action.

Predictably, the S&P 500 is down around 0.6%; the Mexican Peso has slid from 18.80 USD to 19.25 as the market view the Peso as the barometer for election bias. Not to be left out in the election across asset play, Gold ripped higher to USD $1,292 in concert with the USDMXN move.

Japanese Yen

The Japanese Yen benefitted from safe haven flows as the USDJPY was sold off from the opening bell on the New York Stock Exchange. The JPY narrative remains a global equity market play in the pre-election build up.

With risk heebie-jebbies setting in, the USDJPY finds itself straddling the 104 level in early APAC trade, a very critical sentiment level. Markets are scrambling for election hedge, JPY “ Vols” are getting paid up, so downside USDJPY remains very much exposed.

On the Bank of Japan front, there was little new from the central bank's policy statement, but much discussion continues to revolve around their yield curve control policy. In itself, the plan appears to be ineffective at depressing the Yen as the markets view the September policy shift as effectively tapering. However, the key to the September policy change was to calm markets, offer up a more calculable versus a Wild West approach to BoJ policy, and attempt to embolden global risk on sentiment. Certainly, the USDJPY will trade well with supportive global risk and will ride the wave of the seemingly buoyant US economy. However, given the fragility of this US economic recovery, Kuroda expectations will be severely dented if the US economy hit the skids in 2017 and or Global Risk sentiment tanks, both of which are not so far fetched.

Australian Dollar

Dr Lowe delivered a decidedly a tad hawkish statement the market was expecting all but dismissing the recent negative turn in employment, waning core inflation while sounding optimistic about China, but the policy remains in neutral. The China comments came on the back of strong China manufacturing PMI earlier in the session which provided decent support for the Aussie pre-RBA and with Status Quo, the market likely latched on the positive China Data rather than any the subtle shift in RBA language. What is interesting however was, the Aussie dollars resilience overnight in the face of changing risk sentiment? While there is some appetite for the carry trade, I think given the US election uncertainty that the market is pricing in both the RBA neutral tack and China PMI support. I suspect the AUD may fall to broader USD whims as we navigate the FOMC while keeping the US election in the crosshairs.

I think it is evident that the RBA has shifted from inflation concerns to the threat from inflating asset bubbles, particularly the housing markets in both Melbourne and Sydney, which confirmed our view from recent Dr Lowe speeches.


On the cusp of a divisive presidential election and with market expectations of a policy move at this week's FOMC minuscule, the key focus will be, ‘how strong of a December signal will be on offer?’

Bear in mind that there will only be a statement released, and no Q&A session post the event. Realistically, Fed members have all but signalled a willingness for a December hike, so the market has priced in a 70%+ probability. In this sense, the Feds have accomplished their job of sufficiently guiding the market expectations and are very unlikely to backtrack.

Despite some strong economic indicators in the US, the data is not without its share of blemishes, which has the market acutely focussed on Friday’s Non-Farm Payroll figures rather than the FOMC. Given just how data dependent and dovish the current sitting FOMC are, it is not out of the question that another outlier NFP could change their view, but at this stage, the bar is very low for the Feds not to move in December.

Chinese Yuan

The Yuan has been trading in line with broader US narrative while discounting positive on-shore risk sentiment, driven by yesterday’s stellar PMI prints. While we saw a move lower overnight, through USDCNH 6.78, bids remain firm on dips as the market continues to price in a high probability of a US December rate hike.

CNH trade continues to be a USD play, and as the differential favours the long USD dollar trade, we should expect the Yuan to struggle ahead of the FOMC. In the past, following the crowd mentality on USDCNH has been a painful lesson for those last in. However, this time around it does certainly feel we are in the throes of USD bull party, so provided that upcoming US macro data does not fall short of expectations, the US rate hike sentiment should remain firm as should the USDCNH trade.

The Hang Seng has opened below the 23000 support levels, down .9 % after a wave of risk-off sentiment gripped US equity markets, on the back of the narrowing US election polls.

The Yuan Fix came in as expected at 6.7562, the strongest CNY setting since Oct 21.

EM Asia

EM Asia remains caught up in the pre-election and FOMC vortex, complicated by very mixed signals. The market will likely remain bearish until both the election and US interest rate policy clear the air. While I remain bullish longer-term Asia from the growth differential perspective it 's hard to stand in front of US political risk, falling oil prices and an imminent US rate hike; and additionally, political headline risk for the KRW and MYR.

Indonesia is flexing its military muscle in the region as, according to a Reuters report, Indonesia’s Defense Ministry is in talks to buy nine or ten Sukhoi SU 35 jets from Russia. Such a purchase could be viewed as a result of growing regional tension over the hotly disputed South China Sea area annexed by Beijing.