It has been a very unsettling time in the macroeconomic world since we entered 2018, but the plethora of USD destabilising headlines overnight stretching from Beijing to Washington has thrown a spanner into the works letting the foxes run wild in the USD henhouse. It all kicked off with suspicious headlines from “people familiar with the matter” that China officials are viewing US treasuries as less attractive. But the timing of the headline is what sent the market reeling trigging a frantic knee-jerk reaction on USD and gold as it was thought China was retaliating ahead of potential trade announcements from the Trump Administration.
We have been down this road before, and US treasuries are often used during the political ping-pong match when trade tensions escalate. While it’s entirely possible that China could take measure to rebalance their reserve as they have done in the past, but the markets quickly dismissed the headline first viewing it as little more than political sabre rattling and then correctly determining its highly improbable China will stop buying US Treasuries.
Equity Markets
The US equity markets waned in very choppy trading overnight as US yields jumped higher on the China rumors. More significantly equities waned on NAFTA speculation suggesting that President Trump would announce the US is pulling out of the trade agreement which sent the three major US stock indexes reeling given possible negative implication on corporate earnings. However, the selloff is likely a bit overblown, as political noise tends to exaggerate when there is a shortage of US economic data.
Oil Markets
Oil prices were buoyant, and while showing no signs of buyers remorse, traders did not substantially add to yesterday’s gains despite that the Energy Information Administration reported a higher draw than expected. After touching price peaks not seen since 2014 on Wednesday, the lack of follow-through from the EIA data could mean markets are getting a bit fatigued, and a healthy correction could be on the cards.
Gold Markets
Gold markets were predictably reactive to the rumour roil overnight. Nevertheless, that aside, rising oil prices and strong global growth suggest gold will remain supported as investors look for inflation protection. Also, a highly anticipated stock market correction is providing support on dips which continues to support the bullish gold narrative.
G-10
Canadian Dollar and Mexican Peso
Both currencies gapped lower on the NAFTA headlines. While we do not know the full extent of the US trade policy as of yet, there is some thought we are entering the year of US protectionism, and there is no better platform than the World Economic Forum in Davos on January 23-26 to unleash a torrent of protectionist America First policy. While uncertainty around the NAFTA agreement is swirling, the risk of its demise is elevated, wilting any Bank of Canada rate hike momentum the Canadian dollar was riding.
Japanese Yen
Asia is very much in focus this morning after the USD/JPY plummeted through significant support levels like a hot knife through butter. USD/JPY touched a low of 111.30 overnight as the China/Treasuries rumors triggered a wave of dollar selling. But unlike against other G-10 pairs, USD/JPY has failed to recover, suggesting the market remains on guard against a quicker pace of BoJ tapering. Also, while the latest move is screaming, “correction,“ surprisingly few are willing to take a pig and a poke at this juncture.
Asia FX
Good news is the market is not falling to pieces after the mini USD/CNY squeeze. Moreover, whatever whispers have been circulating about the imminent demise of Asia FX, they indeed have not led to a dramatic transformation or a notable shift in attitude. Instead now is the time to be patient and let the rumor-roiled markets settle.
Not to diminish the fact that rising US yields could present some significant headwinds for local currencies, but the USD is getting little support from higher US rates suggesting FX markets are less sensitive to that specific correlation near term.
China inflation data was a bit damp, and that too has given traders cause for thought.
The Malaysian Ringgit
The ringgit remains entrenched around the 4.00 USD/MYR level awaiting the next domestic catalyst. Industrial Production is due later today, but I suspect the market remains more focused on rate hike speculation. On a positive note, high-energy prices are most helpful to Malaysia adding a welcome boost to fiscal revenue.