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Forever Fickle

News   •   Feb 28, 2017 13:29 SGT

US equity investors returned from the Presidents day holiday in a very bubbly mood as both the S&P 500 and Dow Industrials closed in on record territory again.

The dollar put in a wily rally yesterday as the dollar bulls, like their US equity counterparts, put on their happy face after returning from the US long weekend. These markets are very fickle, as last week the dollar could not hold a bid after Yellen’s hawkish comments as well as the stellar US economic data, yet it turns on a dime after the Fed’s Philadelphia President Patrick Harker mentioned that a March rate hike was still on the table. It is a bit bewildering, but nonetheless a sign that the market is desperately searching for an opinion, while lacking any serious conviction.

I suppose we could make the argument that the March probability is well under-priced, but I suspect it is has more to do with the markets storyline shift to a more concerted focus on all things Fed; more so with the plethora of Fed-speak on tap later today, ahead of Thursday’s FOMC meeting minutes. If the FOMC has any real intention of guiding the market above a 60% probability for a March lift-off, now would be the time to show their cards. While my market radar is telling me to beware of the dollar bull trap, the stage is indeed set for the Feds to come out firing on all cylinders this week, so it would be wise to tread cautiously until the airwaves clear.

Australian Dollar

The RBA minutes came and went with much ado about nothing. The Aussie dollar momentum was engulfed by a broader US dollar bid, but AUD continued to perform well in the crosses.

After all was said and done, we are back to yesterday levels as traders remain on ‘Lowe’ watch. The Aussie bulls are not giving up on the Governor leaning a bit hawkish during his Friday speech, so the Aussie has remained bid on dips overnight.

Oil support was also evident in the commodity block. While we have seen this movie before, headlines from OPEC Secretary General Barkindo suggested that there's a solid buy in and a chance of more production cuts to come. Also, he indicated that he expected greater compliance from Non-OPEC producers while adding that oil was not at the equilibrium price yet. All in all, a fairly impressive move higher on WTI prices.

Japanese Yen

I think we see a classic case of pre-FOMC jitters. We have seen this play out before with recent USD bull runs running into serious resistance in at the 114.50-115 zone. Some traders are heading for the outside chance the Feds will wax hawkish. However, if history tells us anything about this sitting Fed, they are more likely to obfuscate than flip the rate hike switch early.

While the Feds are grabbing headlines this week, EU politics are still a major play, and the threat of a French election risk aversion will likely cap USDJPY topside momentum in the absence of any definitive economic policy moves from the US administration.