Dollar Sell-Off abates

The markets have continued to play off Wednesday’s press conference by US President-elect Donald Trump, as dealers appetite for US Dollars ebbed when US Treasury yields traded with a softer bias.

Commodity markets were again the stars of the day, as crude oil prices recuperated; WTI topped the charts above 53, while gold continues to shine from safe-haven flows. Uncertainty over fiscal policies to be implemented by the incoming US administration, along with the fact Trump neglected to address them, affected the USD price.

Adding to the confusion, Fed Members took to the airways and as usual with this sitting, offered little in the way of consensus. Uber-hawk, Patrick Harker, told his gathering that he projected three rate hikes in 2017. While at to opposite end of teeter totter, St Louis Fed's James Bullard said that he would stick with his forecast of just one rate hike in 2017.

Dr Yellen, on the other hand, did not comment on Monetary Policy during this morning's speech. While it is always a challenge is deciphering what is being implied, I suspect it means there is little to add to her current view and there is nothing majorly dollar negative.

In her follow up Q&A, Yellen suggested that the US economy was doing well and she foresaw no major issues on the horizon. Tentative dollar bid back in the market.

Australian Dollar

The Australian Dollar has been the clear beneficiary of the yield-driven USD weakness along with underlying support from Iron Ore prices. What is interesting about the new yield induced USD dollar sell-off, and perhaps a better indicator of overall investor sentiment, is that risk assets have held up relatively well. Sure we have seen some Trump-related capitulation on US equities, but dip buyers emerged en masse, suggesting the investors outlook remains rosy.

The AUD breached the .7500 level, the first time since the recent Fed hike, but the bulls are treading cautiously at these elevated levels as the risk reward above .7500 is shifting for the short positions. Current price action is suggesting this, as the Aussie is trading near the .7480 level in early trade.

Commodity prices, especially the industrial bulk subsection, have remained extremely well bid. It is a bit surprising, given the scepticism in the market over Trump’s fiscal spend. After all, it was Trump's pledge to spend $500 billion on US infrastructure that stoked the commodity price furnace. However, recent supply-side reform, to ensure lower quality steel will be eliminated, that which is produced by electrical furnaces, is weighing on short-term supply.

Japanese Yen

The USD dollar sell-off was uncompromising at times as dealers did little more than hit bids, as the amount of USD coming to market was a clear indication that dealers had miscalculated the breadth of long USD positions and were grossly overextended on pent-up expectations going into the Trump Press Conference.

The slide in US rates has been the primary sentiment driver that saw USDJPY meltdown to a low of 113.75 in early London trade. Yesterday's support levels of 115 -115.25 are now offering key resistance.

While the Tump Trade ship has sprung a few leaks, my view is that the reflationary trade remains intact and that recent events are more related to extend positioning over, rather than sentiment reversal in USD, which was likely exacerbated by stop loss and some Japanese exporter panic selling.

While USD dip buying latter emerged in the NY session, it was driven by a combination of nimble long dollar re-engagements and fast money short cover profit was taken. USD gains will likely be capped today ahead of US retails sales in what is shaping up to be a much higher risk event than expected as Investors are freeing about the possibility of back to back weaker data points on the core. Expectations are for a print of .5 vs. last month’s sour .2 reading.

However, I fully expect the market to reload USD long positions ahead Trump's inauguration and State of the Union where once again traders will brace for confirmation on the Fiscal spend.

Chinese Yuan

The underlying tone continues to be driving on the weaker USD sentiment. However, offshore funding costs appear to be moving higher which is the major topic of conversation this morning on the CNH desk which could be extending the momentum.

If investors were getting antsy about the increase in the mainland’s capital controls regulations, there’s unconfirmed chatter relating to cross-border CNY payments that suggest the ratio of inflow and outflow will be monitored under the 1:1 ratio (it was previously 1: 1.6). This suggests that corporates can only move 1 Yuan out of onshore when there is 1 Yuan flow into the onshore market. The clampdown on capital outflows continues.

EM Asia

The South Korean Won continues to perform well as bullish equity sentiment is lending support to the currency. USD long liquidation was the name of the game the past 24 hours. EM currencies, in general, have performed well since the Trump presser, but I suspect this is merely a position event as opposed to an overall shift in sentiment. Nonetheless, South Korea is issuing $1B of forex stabilisation bonds at a record low spread to Government Debt. International investors are snapping up the Capital Market broadcast, which suggests that there certainly is foreign investor appetite for all things related to the Korean economy.