Short on Themes, Long on Dollars

News   •   Oct 27, 2016 10:51 +08

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

Short on Themes, Long on Dollars

Australian Dollar

It was hard to ignore the AUD surge post-CPI data with the headline beating (0.7% vs. 0.5% QoQ, 1.3% vs. 1.1% YoY). With the core print failing to provide a clear signal, the +70 pips move higher caught a few by surprise. I suspect the dramatic uptick had more to do with positioning, as the market may have found long dollars, given the broader US dollar moves of late.

My view: “exorcising the inflation demons will be a lot harder than what the market has currently priced in.”

Heading into the data, the market was pricing in a minuscule risk for a rate cut through 2017 and since the RBA is certainly not about to hike rates, the veracity of the move was a bit surprising. However, the pair may have been caught up in the broader USD move as the greenback was trading slightly lower in Asia.

The AUDUSD once again gained little traction above AUDUSD 77 with a risk reward of pressing higher in the face of an impending US rate hike, making little sense. However, the headline data should confirm a positive tilt for Australia. Better traction on the long Aussie trade played out versus the EURO and the Canadian Dollar, where the interest policy appears divergent.

The AUD is getting little support from oil, which has continued to fall; the WTI is trading just above $49 in early APAC as OPEC deal worries and US inventory data narratives keep resonating within the oil patch. This, despite a relief rally on the better than expected DoE inventory report. Yet $50.00 per barrel is proving a tough nut to crack and the move quickly faded.

US Dollar

US economic data was generally USD supportive overnight as the US Services PMI and new home sales topped market expectations, pointing to stronger Q3 growth. Moreover, the overall US trade deficit came in narrower than expected, but with exports higher than anticipated and imports lower than expected, it suggests a buoyant Q3 GDP. Of concern, the US consumer continues to tighten their purse strings as reflected via lower import demand.

Japanese Yen

JPY continues to range trade, but holding the 104.00 levels. With the markets ascribing a 75% probability of a rate hike by December, with only six weeks before the December FOMC, further dollar momentum from additional Fed repricing is likely limited.

Overnight currency movement was on the back of a new Florida poll showing Trump with a 2.0% lead over Clinton; USDJPY sold off to 104.05, then a ground higher on the positive US economic data.

Overall trade remains directionless and choppy on headline risk, likely a sign of things to come, as trading themes other than the Fed and election narrative are tough to source.

Normally the week before the BOJ meetings the markets are on edge, but with the BOJ bazooka days apparently behind us, traders are quickly acclimatising to the BOJ’s newly adopted patient approach to policy, as the probability for any near term BOJ policy action is minimal.

Chinese Yuan

The most interesting takeaway is that during the recent Yuan depreciation, risk sentiment has held up remarkably well in a market where that I believe is itching to sell risk, given the proximity of the high-risk US election event and the multitude of Central Bank meetings next week.

The Feds continue to ease potential election risk by suggesting the path of interest rate normalisation will be gradual, thus supporting risk sentiment in the face of an imminent hike. I fully expect the Feds to reinforce this notion at next week FOMC, while I expect the BOJ to remain on hold, to maintain the current seemingly happy equilibrium.

However, with CFETS basket not depreciating, the move appears strictly dollar related therefore the global apple cart remains upright.

EM Asia

Emerging Markets were the clear loser overnight versus the USD, as renewed fears of higher global interest rates and a stronger USD continue weighing on investor sentiment. While the on the surface all is calm, the market is starting to get a bit nervous about further weakness in the Yuan, which could lead to greater capital outflows and could negatively influence the regional basket, especially the low yielders.

Given the wave of speculative long USD Asia position-betting for further Yuan weakness, risk reward is feeling a bit stretched at these levels, especially considering + 75% probability of a rate hike.

We saw a bit of this play out on the MYR yesterday as the USDMYR traded to a low of 4.1440, but import hedgers were reported on the bid and pushed the market back above 4.16.