The market continues focusing on central bank commentary, especially in the wake of Tuesday’s speech by Mario Draghi that whipped currency markets into a frenzy. While it’s been a year of political shockers as the whirling half-year comes to a close, politics, that was thought to be the main driver in the global currency market in 2017, more or less remains the sideshow as Global Central Banks once again assert dominance and take center stage.
Signs of G-10 policy convergence abound, leaving the USD prone and off-balance as traders mull which central bank is the next hawkish surprise. Coupled with soft to average US economic data of late, this weaker dollar trend could have much further to run.
Central Bank headlines continued to provide much of the currency fodder overnight as both BoE and ECB were trying their best to outdo one another on the highlight reel. But perhaps it was the Bank of Canada that stole the show after both BoC Governor Poloz’s and Deputy Governor Patterson offered little ambiguity by confirming BoC hawkish policy shift.
The British Pound-Carney Carnage
BoE Carney policy flip-flop, saw the pound powering higher to 1.2970 overnight.This abrupt policy shift saw chaotic price action leaving a swath of carnage in its wake.The markets have been trading GBP from the short side given the recent election results, and all the negativity surrounding Brexit. The markets punched through the 1.2950 level in the blink of an eye and the voracity of the 2nd “ flash rally” in as many days, has the hallmarks of nasty short covering acquiescence as GBP interest rate sensitivity comes to the fore and all but dampening the negativity from the UK political scene.
The Euro Roller-Coaster
ECB sensitivity to risk was evident when Draghi’s hawkish lean sent European equity and bond markets topsy-turvy.
ECB headlines emerged overnight suggesting the market misinterpreted Draghi’s intentions which set pandemonium in motion on G-10 desks in early NY trade. With dealers in a state of heightened central bank headline sensitivity, they were quick to drive the euro lower in aggressive selling, but the headline head fake blowout move below 1.1300 was quickly retracted, and the EURUSD powered ahead. The ECB is in transition from floating the taper trial balloon and are now preparing the markets for the eventual end of ultra-loose money policies.Traders are focusing on the broader picture as Global Central Bankers are singing a much different tune these days. Draghi, for his part, made a conscious effort, using Sintra as a platform, to send a clear and unambiguous message to the market. Discounting this type of guidance would be folly.
Australian Dollar: Ascending Asset
The Australian dollar moved to a three-month high powered on by broader USD weakness and rising commodity prices. The weaker US dollar is being driven by G-10 central bank policy convergence, and as traders take note of ex-RBA member John Edwards' suggestions the RBA could be the next central bank to deliver a hawkish surprise as inflation nears in on the RBA baseline.
But the fundamentals continue to paint a temperate USD landscape. The Fed is one-sidedly focused on inflation, and the lack of inflation expectations globally is keeping repricing of additional tightening from the Fed low, despite the hawkish rhetoric.
The Canadian Dollar: Market Darling
Dealing desks were ablaze with chatter through all timezones regarding Bank of Canada Governor Poloz’s hawkish interview yesterday in early Asia. The Canadian dollar continued to power towards the psychological 1.3000 level after Deputy Governor Patterson stayed the course, confirming the BoC's unmistakable hawkish policy shift.
EM Asia FX
Given the stable renminbi complex and light positioning in Asia FX, the landscape appears poised for further strengthening of Asian currencies. Even if the Fed does move towards a more aggressive path of interest rate normalization, the improving global growth narrative should support exporters in the region. While a shift is afoot towards global central bank hawkishness, the impact from ECB and BOE rate hikes tend to be less impactful for EM than a hawkish Fed, as these moves will weaken the DXY broad-based and should support the underlying EM Asia currencies
This view is evident this morning as inflows are roaring back and the KOSPI hits record highs.
WTI
In oil, Department of Energy crude inventories rose by just 117k. While still a disappointment from consensus calls of -2.16mn, it’s less than the +0.8mn build signaled by API. WTI dipped below $44.00 on an initial read of the data but bounced back to life.