Please attribute the following commentary to Stephen Innes, senior trader at OANDA. For direct comment, call Stephen at email@example.com.
Trade the Move or Fade the Move
Trading conditions this week will be slippery and shifty throughout the G-10 complex. The calendar is full of high-risk events making for a treacherous path to navigate in the lead up the monumental November 8 US election. With the central banks taking centrestage (RBA, BOJ, BOE and Fed) and given the recent global bond market sell-off, and yield curve steepening, traders will be focusing on comments that suggest central bankers will be less aggressive about boosting monetary stimulus going forward. But let's not forget the week concludes with the Granddaddy of them all, Non-Farm Payroll, which will offer its usual share of US dollar shenanigans.
US Election Risk
The FBI announcement that the agency is reviewing the Clinton email investigation hit the forex markets like a bolt from the blue on Friday.
The "Tumpometer" registered off the scale with USDMXN surging to 19.10. In the G-10, JPY and CHF were the beneficiaries from the sudden risk meltdown, as the Clinton campaign remains hounded by scandal. With only a two percentage point separation in the recent tracking poll, and with "Shy Tory" effect likely to influence on election day, the race for the White House is far from over.
US GDP Effect
Real GDP grew 2.9% in Q3, faster than Bloomberg’s of consensus 2.6%. However, the superlative headline was slightly tarnished by consumption, which came in weaker at 2.1% vs. 2.6% expectations. Regardless of the consumer blemish, the headline supports the Fed’s view that economic activity track. In fact, without the election looming, this print is supportive enough for the Fed to hike rates this week.
The Reserve Bank of Australia is on tap tomorrow, and with expectations running very low for any policy action, traders will be primarily focused on what forward guidance will be on offer from Dr. Lowe. Traders will look for guidance on both inflation, and the latest tepid employment data suggesting a dovish lean from the RBA, but my sense is the RBA will continue to view rates as accommodative and see little to be gained at this stage via a rate cut.
It's been difficult to find a definitive trend on the Aussie of late, and that's unlikely to change with the US election risk starting to froth. The high beta currencies like the AUD will be in for a busy fortnight as the market navigates the US election but then quickly makes a tack for the Fed December lift off. I expect the US dollar to remain supported against the higher beta currencies but it’s unlikely all the relationships will play out as scripted, especially for the resilient AUD.
Whatever pre-OPEC November meeting support the commodity bloc expected, from energy markets evaporated after OPEC members agreed not to agree on production cuts over weekend meetings in Vienna .With Iran and Iraq in dispute nothing concrete was agreed.
After tracking USD bond yields higher most of the last week, USDJPY sold off Friday after risk sentiment collapsed in the wake another purported Clinton e-mail scandal. The move illustrates just how weak risk sentiment is to any negative news out of the Clinton camp, and how underpriced the market is for a Trump victory.
The Bank of Japan is on tap for tomorrow but given the bank’s latest signal; there will be few policy implications from this meeting. I expect Kuroda to stick with the current narrative that the BOJ will be ready to act when needed (add stimulus) as the BOJ remains committed to achieving the 2% inflation target.
Friday fix was a bit lower than expected and traders concluded that the new line in the sand is 6.80 and the Yuan depreciation came to a temporary halt as traders took profit. But there remains the sticky issue of Capital outflows, which have accelerated on the back of the recent currency declines resulting in tighter interbank liquidity.
Sentiment clearly favors a stronger USD amidst the steeper US yield curve causing an acceleration of capital outflows playing into the feedback loop resulting in an even weaker Yuan.
In an attempt to slow outflows, the latest call to action was a move to ban Chinese customers from purchasing overseas insurance investment products via China's Union Pay, likely a sign of bigger things to come. Traders are adjusting year-end Yuan targets and beyond as a deflation property markets, and capital outflows should continue to accelerate.
Malaysian RinggitLast week saw how inclined regional trades were to pursue USD Asia higher as the US 10Y yields breached the 1.85% barrier with little ease as traders guard against a liquidation of regional assets in the face of higher us bond yield. The nervous traded the move, but the savvy faded the move making for some exciting action in the region. Caution still prevails as both political and policy risk remains heightened in Asia and the US, so the waters should be tricky to navigate this week.