A triple dose of verbal intervention was enough to stem the dollar bloodletting for the time being.
During his Q&A, Draghi was doing his best to deflect questions on the euro then just as 1.2500 broke; Draghi said EUR’s gains were due to comments from “someone else.”
It is becoming all too predictable from the ECB, who now apparently have a preference to express currency policy through “sources familiar with the matter”, that a division in the ECB ranks is forming over removing the ECB easing bias in March due to the strong euro.
But the real short-term game changer was Trump suggesting that he “ultimately wants to see a strong USD” and proving far more adept than Mnuchin, Draghi or ”sources familiar with the matter”, of swaying the market that Mnuchin’s “weak USD” comments were taken out of context.
Given the extent of oversold US dollar positioning on the euro the market back peddled in convincing fashion, legging down some 125 pips and tumbling below 1.24 with fast money speculators and weaker intraday longs bearing the brunt of the move.
However, it’s obvious to anyone that the US administration trade policy would benefit from the weaker dollar policy, but I suspect Trumps latest support for the dollar comments are more about optics and little more than a case of temporarily taming the dollar bear ahead of his Davos speech. Ultimately, the market will decide the dollar fate and perhaps its a bit early to bring out the eulogies this morning as the weaker USD dollar narrative remains intact for 2018.
But heading for the weekend with US GDP and durable goods on tap later tonight, the dollar short may be more sensitive to US economic data than they may have before Trump’s comments so we could see more short USD position squaring ahead of tonight’s US data.
Oil prices
Oil prices have moved lower following President Trump's strong dollar comments. WTI remains tentatively supported above 65 per barrel in early Asia trade but with the likelihood of more short USD position squaring ahead of the weekend, commodities in general, should come off the boil and could struggle to push higher in today’s APAC session.
However, the continuous fall in US oil inventories and the anticipated return of USD weakness should keep the dips supported.
Gold prices
The USD is not out of the weeds by any means, and of course, a position whipsaw unfolded overnight on the Topsy Turvy dollar movements, but the unwinding of Mnuchin comments does not change the long-term views regarding the US dollar. And while catching short-term speculators off guard, the gold price retracement will not threaten long-term positions who’s view are cemented around a probable equity market correction and an extension of the US dollar downtrend.
Frankly, gold markets were already taking a breather prior to Trump’s comments suggesting short-term positions were prone to any dollar correction.
Malaysian Ringgit
The market had more significant exposure in the ringgit than market projections, so when BNM delivered the consensus rate hike, we did not get the follow through as expected. It was likely a case moving too far too quickly and market players were ready to book profits on the initial move lower.
Nevertheless, MYR immediate gains were likely held back by a somewhat laissez-faire view towards domestic inflation projections when the statement suggested that CPI is expected to average lower in 2018 implying this is a one and done rate hike for 2018 and more dovish than expected on the inflation front.
Bank Negara Malaysia is suggesting inflation pressures are not that strong meaning this policy decision was little more than removing emergency accommodation delivered as a buffer for the potentially destabilising effect from Brexit.
The suspicion is the market is going to become more data dependent and extremely focused on inflation readings for any possible shift in rate hike expectations. For example, if inflation starts moving towards the upper-end of the Central Banks 3-4% inflation band, it will increase the odds of an additional rate hike for 2018.
However, moving forward, the ringgit should remain well supported by robust macro foundation and higher energy prices.
If we consider that we could be entering an extended cyclical downtrend on the USD dollar, the MYR could still rally below 3.80 near term with a possible move to 3.70 if another rate hike in 2018 becomes a reality.