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The Washington Sinkhole

News   •   Jul 19, 2017 10:20 +08

Currency markets kicked into overdrive as a massive political sinkhole forms in Washington sending a strong bid across US fixed income and hauling the US dollar lower.

The market has been waiting for the Trump failure cascade to begin and yesterday’s health care headlines once again bring into question the administration's ability to enact on their key legislative promises leaving investors in limbo and the USD sagging.

But factoring in doubt about the US economy, over reaching equity markets and inflation that seems to have gone missing in action, uncertainty rages at so many levels it's no wonder investors look for cover under the US Fixed income umbrella as storm clouds gather overhead.( The latest JPMorgan Treasury Client Survey showed the lowest levels of shorts in longer-dated US Treasuries since April 17. Bloomberg)

Australian Dollar

Besides the all consuming US political quagmire, currency speculators continue to pin their hopes on hawkish central bank follow through. And this bias saw the Aussie dollar propel to a two year high on the back of RBA minutes which were interpreted hawkish by the markets. Unquestionably one of the best Aussie dollar frenzies in a while as dealers took the panel’s discussion of a neutral rate of 3.5% cash rate as a signal the RBA is joining the G-10 central bank policy U-turn.

There been much debate over night and even this morning the first call was regarding the scope to which the RBA was hawkish. I suspect the move is as much about trend following as it is about dealers falling for the seductive allure of catching a central bank policy shift. Nevertheless, price action can not be ignored and if the RBA wants to push back on this move, Debelle will be on the wires Friday and Lowe early next week. The buzz on the street is tactical shorts are building ahead of the RBA speeches.

Euro

The ECB “sources” were back at it overnight signalling limited appetite to shift policy language at this meeting. Regardless, the market does not want to be late to this party and although the likely timing of the policy change is September meeting or even Jackson Hole, the broader droopy USD narrative is supporting Euro risk appeal. The big question going into this week's ECB meeting is whether or not any governing council's eyebrows are raised about the elevated Euro level.While there may be some pushback, it's more likely the sagging USD narrative wins out.Regardless traders are pretty giddy about the tactical trading opportunities that the ECB meeting does offer.