Not much to be gleaned from Friday’s pre-long weekend activity.The markets were reticent as traders were in snooze mode by week's end.
As we turn the page in the month of May, the US dollar battleground amongst various competing market narratives rages on. And with recent Fed speak as much ado about the balance sheet as it is about the rate hike path, now enters another level of confusion to dissect.
US equities continued powering higher last week as concerns about the capacity for the Trump administration to pass through its pro-growth agenda subsides. But given the levels of political noise likely to emanate from Washington on Trump’s return, investor bravado could turn on a dime. Dealers will be on the lookout for any Comey/Russia developments.
The Euro
There was a minor dent in the euro's armour heading into week’s end on suspected positions squaring. However, Coeure’s dovish stance, lessening a chance of an ECB December hike along with the Fed's ratcheting up the tapering rhetoric has dealers thinking that we have not seen the maximum rate differential just yet, which is likely weighing on euro sentiment. But EU inflow remains buoyant, and from a flow perspective, this should be respected. In the meantime, with the ECB June meeting approaching and the market building higher expectation for an ECB policy move, both ECB and Fed speeches will be monitored more intently.
On the EU front, a big inflation print Wednesday could swing euro views leading up to the June 8 ECB meeting. And the always important NFP will shape dollar sentiment leading up to the Jun 14 FOMC meeting.The battleground will likely get more intense in the weeks ahead.
The British Pound
The pound was a G-10 worst performer as election polls are pointing to a narrower-than-expected win for Prime Minister Theresa May in June. Whatever thoughts the market once had about a “ soft “ Brexit are now shaping up to be an unrealistic political pipe dream. Not only are negotiators dealing with an extremely contentious divorce bill, but the uptick in UK political uncertainty could send the pound toppling lower. There’s a growing sense of unpredictability in the markets, and if I didn’t have the GBP symbol on my sterling chart, I would have trouble differentiating the gaps, blips and madcap price action from an EM currency.
The Chinese Yuan
CNH markets are back in focus after suspected intervention amidst stronger CNY fixings. Additionally Tom Next ratcheted higher to 88 pips on Friday as the fear of another market squeeze had dealers aggressively paying the forward curve. While month-end financing pressure is expected, this surge in funding is well beyond the norm so that traders will be monitoring the short-term interest rates markets this week for additional clarity. These tight conditions make it extremely prohibitive to carry short CNH positions and within the PBOC arsenal to kerb speculative activities.
Lots of confusion with China’s plan to add a ‘counter-cyclical factor’ in their CNY fixing formula. I’m in the two steps back camp as far as moving towards free float, as this “get out of jail” card could and will likely be used to iron out intraday market pressure points. The policy shift could be another hit to PBOC credibility as they continue to struggle to get their house in order.
Australian Dollar
The China growth narrative—or lack thereof—is gradually coming into focus as concerns about an adverse economic shock from China are building, which should present a clear problem to commodity exporters like Australia. I expect industrial metals to remain dark as talk of a China slowdown fans.
With the AUDUSD carry trade shaved paper thin to nonexistent in short dates, it's all about the commodity plays these days. With the markets growing increasingly concerned about demand for iron ore, the Aussie could continue to struggle, more so if both the Fed and ECB point to a more hawkish shift in forwarding guidance. Notwithstanding, the odds for a rate cut by the RBA are now increasing oh so slightly.