The Mnuchin Media Roadshow

News   •   Feb 28, 2017 13:35 +08

It was a flat session overnight for US equities. While US bond markets traded a touch firmer, investors continued to absorb the FOMC minutes. However, there is no smoking gun as the FOMC minutes failed to move the March rate hike needle, but rather, the currency markets were engrossed by US Treasury Secretary Mnuchin, whose comments have left investors dangling about the US administration currency policy as there appears to be a subtle shift in the Trump administration’s rhetoric on USD.

Regardless, his remarks on tax reform and positive US growth outlook failed to persuade equity investors; but one reason the market is reading a great deal into Munchkins views is the proximity of the comments to President Trump's speech before a joint session of Congress next Tuesday

Currency markets are very much in a state of limbo, struggling to decipher the numerous factors that are moving the dollar markets. If it is not the US bond yield yo-yo, then it’s the EU risk roller coaster or FOMC Flim Flam. We are left deciphering the US administration’s currency policy, while grappling with a market that has few, if any convictions. One thing is certain though, there is no perfect place to hang your hat.

Australian Dollar

The Australian dollar has benefited from the general dollar sag, as investors were disappointed by the latest FOMC minutes.

Iron ore prices toppled some 3% overnight and the base commodity remains in rarefied air, above the $90.00 per ton region, so the carry trade appeal remains strong versus the USD dollar. European investors continue to find the Aussie parking lot appealing to shelter growing political uncertainty.

RBA’s Governor Lowe offered little opposition to the stronger AUD in this morning's speech and dealers still view the bar as extremely high for an interest rate cut from the RBA. I suspect the RBA will remain parked in neutral while the US Fiscal and Tax policies unfold and as the Feds move further along the path of interest rate normalization. Look for more noise surrounding the Fed debate on the balance sheet in upcoming Fed rhetoric and see a greater emphasis on it during upcoming Fed meetings.

The AUD is trading back in the .7700-.7750 death-valley zone, and if recent history tells us anything about AUD trader sentiment, it is going to take some work to breach this zone.

Japanese Yen

USDJPY has moved a fair bit lower, as disappointment that the FOMC minutes did not clearly reprice a March hike has all but escorted the dollar bulls back to the bullpen. What is also becoming very apparent is that political nervousness is weighing on the USDJPY.

Given that price action has been limited to all the moves on Wednesday, I suspect the broader market is still struggling with the bigger picture surrounding the FOMC, US Fiscal policy and the overhang from EU political risks, as divergent views abound.

Asia EM 

EM risk got a jump after Mnuchin said that there would be no action on trade with Mexico, which is expected in the short term. Given the far-reaching implications across the region, investors appear less nervous about US trade relations. USD MXN continues to be a fantastic sentiment gauge for how investors perceive US trade policy, as MXN rallied from 20.00 down to 19.62 overnight.