The dollar always seems to struggle in the absence of tier one US economic data, so fortunately for dollar bulls, next week will offer up both US CPI and Retail Sales. But given that the underlying inflation is expected to remain muted, the risk is skewed to a more significant upside response whereas only considerable downside miss on the print will rattle December rate hike expectations. But for the greenback’s near-term fortunes, there is no escaping the Tax Reform torrent as next week will likely bring a vote in the House to set the stage for the Senate showdown. As far as markets are concerned, the mood will be established by the probability of passage as opposed to content within at this stage.
Digesting the US tax reform is an unpalatable experience for most as the noise triggers tightly correlated moves amongst all asset classes which has traders jumping from screen to screen.The fact is, in this low volatility world even the smallest shock can help trigger an outsized move, and that’s what we saw over “Taxing Thursday”. But with equity markets at the significantly stretched levels and Christmas just around the corner, investors will be more inclined to book year-end profits adding to sell-offs momentum, so we could see more of these mini-meltdowns heading into year-end.
Similarly, currency traders will be looking to book profits early this year given the most of the confident USD drivers have run their course. I suspect if next weeks US CPI print fails to trigger more Fed tightening expectation into 2018, that should be a signal for the dollar bulls to unwind gradually.
The Australian Dollar
While next weeks focus will be on the Australia employment data, I suspect more interest will centre on Deputy Governor Guy Debelle speech which comes on the heels of the SOMP that gave little reason to buy the Aussie dollar. But unless there is an abrupt shift in RBA rhetoric, a sidelined RBA should be cause enough to sell the AUD.
The New Zealand Dollar
An intense focus will remain on the Kiwi as the recent wave of post RBNZ NZD cross buying got hosed down on the back of yesterdays comments from Finance Minister Robertsons where he said that the dual mandate could result in looser policy in specific situations. Any thought of RBNZ uncertainty fading into the background after the CB struck an upbeat chord at last weeks OCR was quickly extinguished on Robertson’s verbosity.
The Japanese Yen
Price action for the dollar-yen around the tax reform headlines will continue to be exigent especially when prices move within a stone’s throw of 113.00. But logic dictates lawmakers will pass tax reform in some form or another knowing the ensuing market meltdown is on there watch if they fail to do so. With that in mind, we should expect dips to remain supported, but with an increasing number of stops entering the picture just below 113, a break of this tipping point suggests things will get messy quickly.
The Euro
No shortage of ECB dissenter Hawks flying into the picture this week as the bank’s dovish taper becomes a distant memory. And with the USD all but stuck in the muck on tax delays, the euro appears positioned to test 1.1700 in the coming days. But with USD CPI and Retails sales on tap next week, the most obvious path for the EUR appreciation would be via the Aussie dollar given the apparently dormant RBA
The Malaysian Ringgit
Although the MPC kept rates on hold as expected, BNM did validate our view that the Malaysian Economy is on solid footing by sounding very upbeat on growth. Overall the market interpreted this as a hawkish MPC and pointing to a Jan 25 rate hike. But if Malaysia’s economic performance continues to overshoot expectations, look for markets to price in one additional interest rate hike in 2018 which will offer even more support to the MYR.
Favourable macro conditions support the Ringgits latest rally while rising OIL prices come as a bonus. On the dollar side of the equation, the GOP internal squabbles over tax reform will continue to hang like an anvil around the dollar’s neck near term and should play favourably for the regional basket.
However, the most significant headwinds for the MYR will continue to come from being a faster rise in the US dollar than expected and or a sudden drop in energy prices.
In the meantime, the broader uptick in interest rate differentials will favour the MYR, and with the BNM tacitly indicating a stronger currency could fend off inflationary pressures, by all accounts, the BNM is welcoming a stronger Ringgit.