Doves in the Hawks Nest
The Fed rate hike balloon has successfully been floated, and the market has continued to reprice the March rate hike probability fuelled by the dove of doves, Lael Brainard, who came out ‘Hawks-a-blazing’ at exactly the appropriate time. One of the conventional ways of trying to anecdotally determine the proclivity for FOMC members to vote on monetary policy decisions is known as the dove-hawk scale; with Brainard flying the dove’s coup, she has tipped the scales in overwhelming favour of a rate hike as the market now views March as a fait accompli.
In the absence of any policy clarity from the US administration, the FOMC will continue to be the dominant dollar driver. The market is left pondering if the hawkish lean from the voting dove members is a signal that the Fed will accelerate the pace of tightening after March, which could add to further dollar strength over the near term.
Australian Dollar
Against another wave of broader USD buying, the commodity currencies have finally responded. The AUD was handicapped by yesterday’s downside miss in domestic trade balance data which likely fuelled downside momentum, as the .7560 region was tested overnight. Even though the global growth theme remains intact, it ‘s hard to stand in front of a USD freight train, especially when clear-cut interest rate divergence drives the move.
Investors were comfortable in the 76 zone, content to build lazy longs. Now that positioning is a bit cleaner after a run of stop losses below .7600, we are monitoring this current area, but demand so far has been fleeting which suggests we may push lower in the near term before demand re-emerges.
Oil prices continued to be weighed down due to concern that record US crude inventories will more than offset benefits from OPEC production cuts. WTI dropped from $53.42/barrel to $52.55/b.
Yen
USD/JPY is dominating speculative flows in G10. The pair ripped higher, as dealers flipped their USD/JPY short term view on a dime when the Fed rate hike rhetoric gathered steam. USD/JPY remains well supported above 114, as buying interest continues to be very steady, and the top side is clearly the path of least resistance. The 114.82 level than a clear break of 115 is needed to confirm the uptrend remains intact.
EM Asia
EM currencies have been suffering from the Fed repricing. Regionally there was heavy buying after USD/JPY ripped higher on the Hawkish Fed rhetoric. Before that, positioning was rather neutral in EM Asia as there was no clear-cut consensus up until the Fed floated the rate hike balloon. Dealers are now jockeying for some top side dollar hedges, but EM Asia is far from down for the count. The global growth story line remains intact as is the reflationary trade.