Currency Markets
The US dollar gave up some of its gains overnight as investor keenness for greenbacks temporarily abated. The shifting dynamics around trade and tariffs does give pause for thought as US dollar bulls are consolidating gains at a very tricky and treacherous junction for both the USD and US bond yields. After making some significant advances last week, USD profit-taking was the name of the game during Monday's NY session.
Commodity currencies are beaming on the back of surging Commodity Indexes as oil prices broke through last week's high water mark. The de-escalation in the US-Sino tariff and trade has put to rest, temporarily albeit, some of the biggest market fears around a global growth slowdown and commodity markets and prices are returning in vogue.
Also, there’s the usual air of uncertainty with both May FOMC minutes and April ECB minutes due this week. Trader’s will be more inclined not to get ahead of the curve before these releases.
EM currencies performed better overnight as stretched positions unwound and the bounce in oil prices provided some idiosyncratic benefits to petrol-related currencies. However, the common denominator in the EM space remains the stronger USD which could continue to run amok after the overnight profit taking inspired u-turn.
So far, the beginning of the week is shaping up to be all about consolidating and gingerly contesting last week’s significant breakouts
Oil Markets
The market's positive takes on “no trade war “and Venezuelan political woes are driving oil prices higher. The global condemnation surrounding the election of incumbent Venezuelan president Nicolas Maduro has, as expected, triggered the Trump administration to levee new sanctions on the debt-ridden country. Tightening the economic screws will severely cripple Petróleos de Venezuela's ability to export while making it virtually impossible for the country to acquire dollars.
Also, US Secretary of State Mike Pompeo raised the Iran sanctions bar by promising to impose the “strongest sanctions in history” on Iran to bring it to the bargaining table for a new nuclear deal.
The effect of OPEC / Non-OPEC supply compliance and the US abandonment of the JCPOA has created ultra-tight supply conditions, to the point where any hint of supply disruption will send oil prices soaring. Supply-side dynamics are apparently in the driver’s seat, suggesting prices should push higher near term.
Equity Markets
Equity investors reveled as trade war fears have temporarily abated, suggesting the parties are heading toward a far more appealing approach than feared. But hope springs eternal that both superpowers can iron out a market-friendly bilateral trade agreement and at the minimum stay at the negotiation table until the more contentious trade issues can be ironed out. The fear is that the “no trade war “announcement is little more than kicking the can down the road, but only time will tell.
Gold Markets
Gold price movements continue to be as much as anything a USD trade. Gold prices moved off overnight lows on the back of USD profit taking. But from both a fundamental and technical picture, gold bears continue to have the upper hand as bullish signals are non-existent. Given the resurgent dollar, a reprieve on the trade war front, equity markets stabilizing and evaporated geopolitical risk premiums, the balance of risks suggests gold prices move lower over the near term.
Currencies
EUR: A bit of a mixed bag overnight for the euro with ECB’s Nowotny erring dovish but Italian political risk premiums eased after Conte is said to be the next Prime Minister. However, given the Italian affair has little chance of a spillover into other peripheral debt and with the ECB already leaning very dovish with the first hike not priced until September 2019, the Italian risk should be of little influence on ECB policy.
JPY: After the yen failed to move above 111.40 overnight, dollar bulls turned more conservative without the support from higher US yields as the 10-year UST was little changed from last week's levels
AUD: Strong beta currencies are benefiting from the conciliatory actions on the US-China trade front as global equity markets soared and Wall Street has followed suit, starting the week on a robust note. But the bullish case for commodities on the back of surging oil prices is building which is underpinning AUD sentiment.
MYR: We would typically expect US/Asia to trade lower as the US dollar has taken a bit of a detour overnight. However, the ringgit remains vulnerable to the lack of insight into fiscal planning. But market levels look attractive from both a bond yield and currency perspective, not to mention surging oil prices, so we are left to surmize that once fiscal clarity is offered, we could finally see the ringgit sentiment improve. I the meantime EM Asia FX will remain susceptible to the stronger USD.