Volatility in Hiding or Disappeared?

Fed repricing continues to dominate markets with US Treasury yields nudging higher. But FX volatility has gone into hiding while FX traders remain somewhat dormant within extremely narrow trading ranges. Higher US Treasury Yields suggest a firmer dollar, but verbal intervention by Commerce Secretary Ross on Tuesday, who said that it's “not that the US is too strong”, but that “other currencies are weak”, likely kept the dollar bulls temporarily at bay. The overall storyline is little more than ‘another day of consolidating’ for global FX markets.

US equities backpedalled as investors tapped the breaks. All asset classes are looking to the Non-Farm Payrolls on Friday to seal the deal for a March rate hike. In the meantime, it might be best to cosy up with a good book.

Australian Dollar

The RBA statement yesterday remained primarily unchanged, but there has been lots of banter on the removal of ‘having eased monetary policy in 2016’ in the forward guidance, which should offer the markets some repose to rule out any easing and perhaps start pricing in rate hike expectations.

After surging to a high of .7630 post-RBA, the AUD has retreated on a combination of higher US Treasury yields and lower commodity prices. Predictably the commodity sag is spilling over into local equity and EM markets. While the street continues to run long AUD, there was likely some opportunistic profit taking spilling into space ahead of Friday US Jobs data which weighed on sentiment. Overall, there appear to be little fuss or concern in Forex Land, with volatility getting squeezed and participation rates running thin.

New Zealand Dollar

The significant drop in dairy product prices at the overnight GDT auction has weighed on the New Zealand dollar. While the prospects of an increase in US interest rates has significantly weighted down the Kiwi, the slide in dairy prices did little more than to encourage dealers to double down on the short NZD bets. The technical picture looks dire with the NZDUSD retreating to mid-January levels.

Japanese Yen

Dollar-Yen made little progress overnight despite UST 10 year yields topping 2.50%, which is perceived to be the line in the sand for US dollar traders. But with the overhang, Secretary Ross’ verbal shots that “other currencies are weak” led to very dull trading ranges and a severe lack of participation. One can only conclude that the market remains in wait and see mode ahead of Friday’s Non-Farm Payroll.

Chinese Yuan

Prospects of the US March rate hike are weighing on Yuan sentiment, as USDCNH movements track broader USD sentiment. Monthly FX reserves for China came in better than expected, above the supposed psychological 3 billion barrier. It is the first rise in 8 months and will be viewed as a short-term reprieve from the economic fidgets that have been caused by capital outflows. However, with US interest rates set to rise, we should expect the Yuan to weaken, and perhaps the capital outflow feedback loop comes back in play.

A Reuters report said that ‘Citi announced the inclusion eligibility of Chinese onshore bonds to its emerging markets and regional government bond indices. If China continues to meet eligibility criteria for the next three consecutive months, Index inclusion will likely begin in February 2018 in a staggered manner over a three-month period.’ (CITI velocity)

China has a burgeoning government bond market and its inclusion into CITI global bond indices could be a source of much welcome capital inflow to counter the economic sting of the recent waves of capital outflow.

I think this is a very positive move that will be embraced by foreign investment funds, even more so after news last week that the onshore FX derivative markets in China are now open to foreign institutional investors.

WTI

WTI straddled $53 a barrel again as oil traders jockey for positions while the usual theme plays out. Will OPEC supply cuts or increased US supply win out in the long run?