After the massive global stock market rally on Wednesday, equity markets have spent the greater part of the New York session consolidating those gains. However, currency markets were in catch-up mode as the USD finally woke up from its recent slumber. We can point to a few minor reasons for the recent dollar disengagement, but it looks like dealers have shaken off their current angst as the focus has correctly shifted back to the interest rates divergence narrative. With US yields surging, interest differentials were just too luscious for dollar bulls to sit idly.
With upward momentum capped on the back of Wednesday’s CPI miss, the Aussie succumbed to the broader US dollar rally overnight but remains supported on the crosses. The tepid inflation print remains a consistent theme and a huge problem for the RBA. With elements in the market leaning toward an RBA cut ahead of the next US Fed hike, topside momentum will likely be capped near term as macro funds sell into rallies. However, AUD support remains intact from surging, while iron ore prices continue to froth. Indeed, we are back to the tug of war between the prospect of higher US interest versus rising commodity prices. After all is said and done, it seems we always come back to this endgame.
USDJPY rallied overnight, benefiting from substantial gains in the Nikkei and surging US bond yields. The move above 114 triggered stops, and while battle lines played out around 114.30 technical resistance zone, and the dollar went “bid me buy me” on a convincing move to 114.85 before profit-taking. However, there remains an element of doubt concerning Tumpenomics. Which could over promise and under deliver on economic policy. With regards to the speculative element in the market, another leg higher in the ten-year UST’s yields, would be hard to ignore and we could see an extension through 115.00. Markets remain extremely fragile, and accepted correlations can once again break down as quickly as they melded overnight.
Chinese YuanShort-term speculative money on USDCNH is tracking broader USD movements, while the longer term players remain buyers on outsized dips. China watchers continue to be in evaluation mode while digesting the plethora of headlines.
S&P fired a shot with a negative outlook based on the the Mainland’s credit-fueled economy which poses downside risk for a hard landing. A topic the market has been deeply focused on for some time.
The big story is that the PBoC has told lenders to control their rampant lending policies, to curb the excessive leverage they have contributed to the markets. Indeed the curbs are guided more to the mortgage markets as the feel of a real estate bubble looms large
As for the currency, dealers focus is now shifting back to the “currency manipulator”. I think this will become a major theme after the Lunar New Year holiday.
Times are certainly different from yesteryear, when China was prone to manipulate its currency to the benefit of Chinese exporters. Today, China continues their iron grip on the Yuan to prevent unwanted currency depreciation, which has been at heart of the financially destabilizing increase in capital outflow. So much so, that it is hindering the Yuan’s global acceptance among international investors who have been advocating for more liberal exchange rate policies for years. Given the fact that the US Treasury has not declared China as a currency manipulator since 1994, it is unlikely they can or will make that claim. However, the real question is: what would happen if the US Treasury takes this course? Well not much, other than a futile attempt to jawbone the markets, investors will likely brush aside the comments and will continue to express their current bias for longer term Yuan depreciation.
Regionally, it is hard to divorce ourselves from the Mexico storyline. How that plays out could have far-reaching ramifications locally. The whipsaw we see in APAC currencies is likely due to the confusion in USDMXN, as President Trump is pulling few punches in his proposed trade sanctions directed at Mexico.When politics becomes the primary driver behind currency markets, expect confusion to reign. In the meantime continue to expect fast short term money to move markets intraday as the longer term positions await clarity on numerous fronts.