The euro regained its debatably rightful throne as King of the Hill overnight, stampeding higher across the board as currency traders applauded German GDP after Q3 YoY printed an impressive 2.8 %, the highest rate since 2011.
And while the GDP print provided the initial catalyst, the velocity of the move suggests that investors are finally discounting the ECB dovish guidance in the face of stronger economic data and have now entirely back-peddled the sell-off in EUR following the Draghi press conference on October 26.
Besides the robust economic data, there was no shortage of ECB dissenter Hawks flying into the picture last week that probably added to the momentum. As we test the 1.1800 level in early APAC trade, the ECB’s dovish taper is all but a distant memory.
But it was a challenging day for the dollar across the board as investors were unabashedly offloading dollar risk ahead of tonight’s critical US CPI print. And, with year-end quickly approaching, investors are more predisposed to reduce rather than hold risk, so USD appetite was low anyway.
It wasn’t just the dollar that was getting hammered. EM investors were dialing into the year-end mode as well and reducing risk. Predictably the natural risk-correlated assets were moving in tandem as Gold suddenly spiked up to over 1280.00, USDJPY came off the interday highs, and WTI prices spilled lower.
While not quite the perfect storm for dollar bulls, indeed a sobering reminder about the greenback's numerous shortcomings. And what started off as little more than an exercise in consolidation could quickly snowball into an all-out blizzard, even more so with the judge Roy Moore scandal presenting blustery headwinds to tax cuts and the Republican Senate majority
Petro FX
In oil markets, it was more or less a belief that eventually something had to give after this month's tireless 10% rally. And while the overnight sell-off started with a global risk wobble, profit-taking likely triggered the more significant move amidst extended money manager positioning in the petroleum complex. But given the correlation between oil and FX has been sidelined most of the year, any proportional currency knock-on effect should be limited. The market remains ramped up bullish crude, so currency traders expect any correction to be finite.
Japanese Yen
Another chop fest for the yen, but if anything, overnight price action should remind us just how entrenched current ranges are as positions are quick to mean revert from the maximal edges. But traders are becoming frustrated and capricious and getting no joy from long USDJPY. With that in mind, a definitive broader-based selling theme is developing from uncertainty on both risk and US inflation narratives. So I suspect only a considerable upside surprise on CPI will get the markets anywhere near 114.50 levels suggesting the downside may open up on a CPI fail
Australian Dollar
Just when the Aussie looked positioned to move below .7600 The frothy NAB business conditions in October said NO. Unquestionably a solid print, but the AUDUSD couldn’t muster up enough steam to clear .7650 even when the big dollar wobbled overnight. If it’s not a perceived dovish shift in the dormant RBA, its fickle economic data out of China and yesterday’s dialed back China production numbers have weighed on commodity prices overnight, and the Aussie is once again moldering at the lower end of recent ranges.
Indeed the bearish signals are aligning, but I’m not sure just how much energy the market has left heading into year-end to make any significant downside assault. Stretched positions are suggesting any move lower will most likely be driven by the US side of the equation which at this stage is as big a question mark as it's not clear what the RBA policy will be in 2018.