The Dollar Beat Goes On
It was a very subdued session in both equities and currencies in Asia yesterday where range trade was the order of the day. The US dollar continued consolidating and exhibited some weakness in London, but the greenback ticked higher after a cheery report on the manufacturing sector when the US manufacturing PMI for October comfortably beat market expectations.
Investors were also watching Fed speeches overnight, including market favourite James Bullard for new clues on the prospect of higher Fed rates.
Fed Bullard did not mince words and explicitly gave the green light for a December lift off, but suggested that the longer term rate cycle is much lower, supporting Dr Yellen's recent pivot.
Forex markets have been void of short term themes of late as the market remains focused on stronger USD with the Fed hike narrative the primary driver. Investors are ascribing to a 74% likelihood of US rate increase, according to the CME Fed watch, up from 60% at the beginning of the month. The long USD trade is starting to feel a bit crowded at these elevated ranges, and the catalyst for a reversal could be Friday’s high-risk Q3 GDP, which has the potential to bring "long dollar" positions back to reality in the event of a downside miss.
For the time being, the Australian Dollar is showing some moxie after testing the waters below the .7600 level. While most of the commodity bloc action is on the Canadian Dollar gyrations, those swings are likely trigging subtle moves in concert on the AUD. However, the market continues fading these upticks against the strong USD backdrop.
It is a very critical week for Australian Dollar, with Q3 CPI released tomorrow, which could be one of the leading disruptors in re-pricing for the RBA into year-end.
The Canadian dollar has been at the mercy of Governor Poloz in late NY session which saw the USDCAD move lower to 1.3280 when the Central Bank suggested no rate cut was imminent. However, Poloz has subsequently clarified the statement, "My statement concerning the need to wait 18 months was about the time frame over which the output gap is expected to close, as noted in the Bank's October Monetary Policy Report. It was not intended as a reference to the Bank's monetary policy." Which sent the loonie flying higher at the 1.3360 level.
Given USDJPY’s correlation with US rate hike expectations, the pair has moved convincingly through 104, triggering a few stops on the way before slowly stopping around 104.25. The pair ground to a halt after running into technical resistance at last Friday’s high and reported layered exporter offers. There was little action on the Yen crosses, however, and limited follow through is expected, as range trade has once again settled in. Keep in mind that investors are bracing for next week, which brings the BOJ, Fed and BOE meetings. Friday's key US GDP also report looms large.
Not surprisingly, state-owned banks are reportedly offering USD to slow down the Yuan selling frenzy which has gripped the market after 6.75 level gave way. I think the PBOC is ok with the current move to 6.77-78 level, but they certainly want to slow down the rate of depreciation as capital outflows accelerate.
In the face of the resurgent Greenback and weaker commodity prices, the MYR is showing some bravado as GDP is predicted to fall between 4 and 5% in 2017. Although interest differentials will work against the MYR in the short term, if the Fed implements a rate hike in December, Malaysian growth differentials should continue attracting foreign investors and should support the MYR medium term. The pair is currently running into solid exporter interest to sell USD capping upside momentum as we test recent support levels.