It’s difficult to determine a trend into year-end as USD has been dominated by Washington noise of late, be it the tax bill debate or the reports around the Mueller investigation.
As we enter the business end of the of the week for currency traders, position adjustments are steering markets as the focus is shifting to Friday's AHE release while the exhaustive Tax Reform process remains in the centre of all debate.
Hopefully, when we get closure on Tax reform, the balance of risks will move from political filibuster to economics and central bank policy.
The U.S. trade deficit increased to a nine-month high in October because of rising oil prices and the widening of America’s long-established deficits with China and Mexico.
US 10 year yields failed to hold above 2.4 % while two-year yields touched their highest level since Oct 2008. On the short end of the curve, investors are pricing in multiple US rate hikes while the markets insatiable appetite for long-dated notes was on display again after the trade deficit widened to its highest level since January.
As the yield curve shifts flatter than a pancake, it is sending a clear and unmistakable signal that while the tax reform will be a boon to tax-sensitive sectors, bond markets are not buying into the boost to economic growth bluster the GOP have been dishing out.
Institute for Supply Management (ISM) said its non-manufacturing index fell in November, missing economists’ expectations which has caused a bit of dollar retracement but overall the market has bigger fish to fry. November wage growth is the most critical data point following firmer core CPI and PCE in October. Expectations are for the data to shift higher to 2.7% YoY, based on stronger November reading. But we should expect both the dollar and bond market to be reactive to any data delta +or – while equity market likely remains unprejudiced.
The jury remains out on the Tax reform trade as both bond and currency markets remain in flux trying to determine Tax Reforms transitory boost to real GDP growth a the cost of a cost of massive deficits and more debt.
Equities market are likely feeling tax fatigue, and it took little more than a weaker ISM to shift the bullish sentiment as US equity markets declined modestly in New York.
The British Pound
Brexit Buzz strikes again!! Reports are circulating that Boris Johnson and Michael Gove will lead a Cabinet revolt against Theresa May over fears she is forcing a soft Brexit. The pound fell 40 pips in a blink with little to no volume. Trade should remain at the mercy of incoming headlines and given the low GBP liquidity in Asia even more so in early Asia; things could get a bit chippy as market eyes 1.3400. Fortunately, long positioning is not too heavy, so we’re not expecting any gap trap or falling knife scenarios.
The Euro
So much for the euro being the markets driving force this week. The euro seems more than comfortable holding on to the 1.18 handle, but as we’ve continued to make lower highs the past few session, from a positioning perspective, it suggests we could see a move lower despite the positive medium-term outlook.
The Japanese Yen
The USD/JPY is trading constructively despite US ten-year yields falling and tax reform euphoria losing steam. Although some traders remain in buy the dip mode, far too much ambiguity persists to get pent up bullish right now. Likely best to sit on the fence with AHE looming.
The Malaysian Ringgit
Its been a fantastic 24 hours for the ringgit despite pulling back from yesterday highs. To recap: The move below 4.06 initially triggered a wave of exporter selling to a low of 4.0470. But fast money speculators also got into the act after the China PMI’s came in above expectation which spread positive sentiment across regional currencies. But after breaking the critical 4.05 level offers were far and few between and profit taking flow drove the USD higher.
Oil prices remain stable to higher after OPEC reduction which offers benefits asymmetrically to MYR as Malaysia is net oil exporter and fiscal recipient of the proceeds. Also, ” fair value” quantification peg the ringgit closer to the 3.9 -3.80 USD/MYR suggesting the MYR rally could run deeper if the economic and monetary policy stars align. While upcoming elections could cause a hic-up, a stronger currency would be a definite signpost that the economy is doing exceptionally well so we could see the government lend support to the stronger MYR narrative for an election campaign bounce.