A predictable wave of profit taking and risk reduction, as is standard form ahead of US long weekends, dominated Friday session leading to USD gains as US yields pulled back. And while the broader US dollar negativity continues to seep through capital markets, some traders are suggesting of potential shifts in conviction levels while others believe Friday to be little more than pre-weekend risk reduction. But one thing that’s clear, even the most prolific purveyors of price action are baffled regarding the breakdown of historical correlations across most asset classes.
One telling feature, however, is long-term investors continue to shun the greenback and this should continue to weigh on near-term sentiment. So no don’t go barking up the wrong tree in this Year of the Dog, stick to the basics and follow the flow.
By way of the ordinary course of developments, the various market holiday observances might challenge liquidity conditions. Golden Week celebrations continue across Asia through Wednesday, while both the US and Canada take holidays Monday. Still, it could be an actionable week with numerous Fed speakers on tap and the FOMC minutes are sure to liven things up. Keep in mind; March rate hike is all but entirely priced-in so the markets will be keying on forwarding guidance.
As the markets pivot to Fed speak and the FOMC minutes this week, “deficit mania” is sounding a few decibels lower this morning. But none the less, ongoing concerns about swelling deficit’s and the Feds sequence of interest rate normalisation should be the markets key focus this week and the primary drivers of near-term volatility.
And while US Bond yields eased on Friday, traders see icebergs ahead suggesting Friday’s price action was little more than a reprieve amidst a bear market.
Equity Markets
Equity markets continue climbing the wall of worry despite inflationary fears gaining momentum and Bond Yields moving higher. Eventually, something has to give, but so far investors are betting on corporate earning rather than the shifting macro narratives.
Oil markets
Oil prices finished modestly higher on Friday to chalk up a weekly gain as prices continue to see-saw between the binary descriptions from OPEC’s ongoing efforts to blow out the worldwide glut against the indications of rising U.S. production. Although Friday's price movements were likely position sensitive amid USD risk reduction and book squaring ahead of tomorrow's oil contract expiration.
We should expect the WTI whipsaw to continue as debate rages between US shale and OPEC, but we’re starting to carve out near-term ranges as longer-term oil bulls remain in dip buying mode with shale oil hedger looking to sell upticks.
Gold Markets
Gold prices eased late Friday as the dollar tentatively lifted off the canvas, despite taking a standing eight count earlier in the session when the DXY hit a three year low. A couple of hours USD short covering is unlikely to change the broader USD negativity, but when coupled with inflationary concerns heightening and a probable follow-up correction in equities markets around the corner, gold's haven demand should continue to glitter.
On the physical side of demand, China Lunar New Year has seen few gold bars change hands despite physical premiums easing as futures prices continue to grind higher.
G-10 Currency Markets
Japanese Yen
Although the reappointment of Kuroda and the reshuffle of deputy governors is slightly more dovish BoJ, it is hard to reverse USD/JPY downside given that continuous USD weakness could further drag USD/JPY into the abyss. With the tables turned upside down on ten year US yield to JPY correlation and the US ”deficit mania” likely to return, USD/JPY is in a precarious position.
Predictably we heard from Japan as Currency Chief Asakawa that he’s readying the necessary action to prevent “one-sided” currency moves, but with the Buck getting pounded against all major currencies, Japan's verbal intentions are falling on deaf ears.
The Euro
The pace of the EUR/USD rally post-CPI last week surprised everyone but none the less if not for timely comments (seems always to happen when EUR rallies) from ECB Cœuré, we should have closed closer to the 1.2500 rather than 1.2400 handles. His remarks spooked the markets in pre-weekend risk reduction mode after he suggested policymakers are unanimous in sequence when market positioning was suggesting the Hawks were gaining the upper hand. But at some juncture, the market will ignore this verbal balderdash, and in reality, 1.3000 shouldn’t be unimaginable before long predicated on strong fundamentals, the realisation of more hawkish ECB guidance but also the mechanics of the taper could reverse bond outflows.
Asia FX
Malaysian Ringgit
External drivers and specifically the broader USD moves will dictate the Ringgit momentum this week with the critical focus on USD/JPY 106 level. But on the positive side of the equation, one of the primary headwinds that we considered to be a negative for the Ringgit was higher US yields which typically and historically have supported the USD. But the US interest rate to FX correlation broken, and despite USD bond yields pushing much higher, the USD continues to sell off.
The markets are still feeling the hangover effect from the Chinese Lunar New Year, and risk appetite is waning and with a plethora of Fed speak along with the FOMC minutes likely to cause an uptick in volatility this week, offshore demand could remain muted. None the less, 106 level USD/JPY will be a crucial US dollar sentiment gauge, and if the market pushes through again this week, we could see the Ringgit move to 3.87 and below as traders would then set sights on the critical 3.85 level.
Singapore Dollar
The US CPI fallout was somewhat unusual; triggering moves out of the dollar and into riskier currencies, so the SGD benefited as the CNH rallied hard this week. But CNH could start to underperform. Let me qualify this next comment as no one, and I mean no one knows what the PBOC are going to do. So we can only make hay from innuendo and strategically placed criticisms from regulators in HK press. But there seems to be a pickup in debate onshore about the merits of further RMB appreciation which could dent SGD appeal. But in the mean times, we should enjoy the SGD strength (not because I get paid in SGD, although that is always a welcome bonus). But there is some real value appeal that has emerged in SGD ahead of this weeks budget, as a rosier outlook in the statement could be the precursor to monetary tightening. But also appealing to foreign investors is the government will take measures to cover the current operating fiscal deficit gap.