One of the best Easter egg hunts shaping up is trying to find the elusive US dollar narrative. Outside of the dollar-yen, the market was distinctly bearish to open the week but then the likely combination of month-end/quarter-end and Easter holidays whetted into context, and the dollar tore through G-10 currency markets like a runaway train overnight.
While liquidity is a bit thin this week, but confusing, the landscape is that the intersection of month end /quarter end and Japanese year end flows have triggered some complicatedly confounding currency moves. Most quant models were indicating a propensity to buy the dollar during this rebalancing act period; unquestionably the movement tripped a few stops on the way to the accounting ledger contributing to the unusually messy price action even by usual quarter end standards. However, given the uncertain timing of month end/quarter end flows, position squaring appears to have taken place a bit earlier than usual due to Friday’s holiday.
Wall Street’s rebound fizzled as investors are still trying to figure what the US administration is doing on the protectionist front. On the one hand, we get a relief rally on the perception that the trade war was over before it even began. And now the administration is looking to clamp down on Chinese takeovers, while Commerce Secretary Wilbur Ross indicated Trump is planning “other action” on trade
The uncertainty over US protectionism isn’t going to fade anytime soon, and while investors should enjoy the small win on the tariff front, they’ll be best served to prepare for a long drawn out and perhaps more rancorous dialogue between US and China when it comes to intellectual property rights. Best get used to the new normal, especially around the S&P post with the President considering passing emergency law to restrict China takeovers of tech sector companies.
Oil Markets
The market position remains exceptionally long oil on the rising geopolitical premium, on growing concern that crude inventories look tight heading into summer months and the potential for Iran and Latin America supply disruption could support that evolving narrative. But with very stretched Hedge Fund long/short positioning and the omnipresent geopolitical hours of the decision, that seems to occur with increasing regularity; the markets will remain very choppy as it continues to climb the peak.
As with most cross-asset price action overnight, there was a higher propensity to reduce risk and given that oil prices were pressing significant resistance levels, as expected prices slipped on profit-taking in this holiday-shortened week despite the continually evolving bullish narrative.
Gold Markets
Gold markets continue to embrace the growing geopolitical risk premium with an anticipated frenzy of potentially geopolitical flashpoints occurring in May; markets will remain firm on dips. As far as overnight price action, it makes perfect sense for a rapid move higher to consolidated for a bit, and this movement will seclude and cement the long gold position and set the stage for further gains. Inventories remain skewed long gold, looking for more topside gains on the return of the weaker US dollar narrative.
Currency Markets
For every swing higher there is an unhappy buyer; and at every swing lower, an unhappy seller. So therein lies the problem trading in baffling market conditions. However, it’s probably not worth reading to much into the overnight moves as strangeness in the currency markets is all around.
Japanese Yen
Amid all the noise, USDJPY traded well on a softer trade war drumbeat but not to unexpectedly ran into the sell some resistance zone between 105.60-80. However, the downside continues to beckon on geopolitical uncertainty while the market continues to weave a cautionary tale regarding Abexit. Japanese exports remain well underhedged, with every move lower the propensity for Japanese life insurers to increase USD selling hedges grow closer and closer.
The Euro
The euro was prone to month-end rebalancing, and it didn’t take much other than a cooling on EU consumer confidence to send the euro bulls out to pasture in a day where flows dominated price action and positioning in the absence of any significant data.
The Pound
Cable was crushed all the way down to 1.4066 providing some buying opportunities before rebounding sharply. The pound is particularly vulnerable to month end flow but last night was a bit of overkill.
The Malaysian Ringgit
Yesterday positivity has given way to the reality that the Trade War drums while beating a little softer, are not about to leave the picture anytime soon. While we remain in this muddled landscape, the 3.87 level should hold firm until the broader US dollar negative bias takes hold.
However, the stars are beginning to align again with the ringgit's fortunes especially with the market under-positioned MYR With the break of 3.87 it could open the door to further gains, at a minimum, it brings topside resistance back to 3.90
With US bond yields remaining low and moving through the critical 2.79 % level there will be growing interest in the MYR carry, and with the long MYR positions undersubscribed it provided an early morning boost to the ringgit. With the trade war drums beating more softly and US bond yields dropping, this is providing a positive background for local bond markets. Renewed USD weakness should see the MYR trade to 3.85.