The previous 48 hours have been all-encompassing as forex desks are dealing with a combination of month/quarter end flows, bloodletting in equity and rates, amidst a massive wave of USD short covering. The US dollar was again heavily bid overnight as equity markets had another horrible session getting dragged lower by the blowout in leading technology names. US yields responded by dripping lower. And what do we have to look forward to? Another 48 hours of course.
It’s as if someone flipped a switch and now everyone hates the dollar short position with the US administration swinging a massive economic and political stick to pressure friendly exporting nations into trade deals, and by extension, accidentally appreciating the US dollar. Probably not the desired outcome given the administration's trade policy intentions which suggest a preference for a weaker USD.
So the combination of early month-end position squaring and icing of trade tensions dominated in an otherwise slipshod day in the currency markets. Devoid of tier one data and with only a positive US GDP to gauge sentiment, but that too provided a sufficient US dollar fillip to accompany the premature month-end short dollar position culling. Indeed a painful few days for USDJPY bears if somehow you had not squared ahead of this potentially upending week given the likelihood of a stronger USD on the rebalancing theme. But there’s a distinct lack of participation from the short dollar perspective, most G-10 traders had already adopted a know when to hold em, and know when to fold 'em strategy but remain incredibly patient looking for more excellent levels to re-engage their preferred USD short positioning.
But for the mean reversionists in us all, if there was a strong case to be made to “buy on cannons sell on trumpets” it’s certainly shaping up to be a decent opportunity in both the weaker US equity markets and rebounding dollar narrative.
But unquestionably, some very strong persuasions are being tested given the market has been focused on stronger EUR, GBP and JPY storylines for some time. This current USD move will either prove to be a brilliant opportunity to rejoin the battle (short dollar trade) or a watershed moment for USD bullish contrarians.
However, on the back of a weak tail end bid to cover ratio from this week’s US Treasuries auction supply, USDJPY has moved off its overnight peak on weaker demand. But I wouldn’t make a meal of one tranche in this latest auction results since there’s been a stellar flight to quality demand all week. Indeed rates have proven a cleaner trade to play the evolving major macro themes in current market conditions.
Oil markets
DoE oil inventories released on Wednesday showed a build of total crude oil inventories of +1.64mn vs -0.85mn draw median, on the back of the eye watering API build of +5.32mn. Nonetheless, prices are icing ahead of the holiday weekend as WTI has stabilized towards $64.50. Inventory data is turning into more of a guessing game than pure science. So while offering short-term specs an opportunity to job the action, from a longer-term perspective, there are few specific directional takeaways from this extremely volatile data set these days.
There was also news that OPEC could be shifting goalposts once again with OPEC producers and non-OPEC compliant members suggesting a willingness to extend the supply curbs beyond 2018 with both Russia and Saudi Arabia leading the charge.
Gold prices
Gold prices came off heavy on the back of the resurgent dollar and easing of North Asia political tension, as the canary in the goldmine was sending off warning signals. But trading top end breakout signals are incredibly challenging amidst the multitudes of headline risk.But with the COMEX and DXY so strongly correlated, gold bulls were utterly overwhelmed by the resurgent dollar as stop-loss triggers amplified the sell-off. However, positioning should be much cleaner now below $ 1330.00, and if not for the long weekend approaching I suspect more investors would view current levels as very attractive, and while investor demand could wane ahead of the holiday weekend, institutional support at $ 1.323-1325 areas remain solid.
Currency Markets
The Japanese Yen
USDJPY has been steering the bus overnight on the backdrop of easing of regional geopolitical tensions. The equity meltdown has not translated into the expected JPY strength, and flat out levelling the most heavily subscribed USD short position in the markets.
The Euro
In the absence of relevant news, EUR was prone to the broader USD moves today and made another leg lower, dropping to a low of 1.2335. Big picture, the pair still looks relatively tame and rangy and suggesting Monday’s beak out a false flag signal
The Malaysian Ringgit
A bit of a puzzle with the easing of North Korea tensions indicate a big boost to regional sentiment, but trader remains confounded by the stronger USD narrative. And while the easing of geopolitical tension and the downplaying of trade war rhetoric certainly bodes well, with US yields rallying, this is a definite carry trade signal into the MGS’s even more so for those investors positioning for the re-emergence of USD dollar negativity. However, the stars need to realign again from a yield, risk and a weaker USD perspective to make the ringgit push towards 3.85 happen. It is unlikely to occur this week.