After a tumultuous week marked by a USD rally that caught everyone by surprise, testing recent trader fortitude should come early in the week after US Treasury yields moved lower into the weekend. The rise in US yields is thought to be the primary driver behind the USD resurgence, but unwinding of USD short positions, given that CFTC market positioning was at seven years highs, also goes a long way to explain the dynamic shift in USD sentiment. All of which raises the critical question is the move about positioning or an impressive set up for a leg higher. Despite a slight pullback at the end of Friday’s session, USD is widely expected to remain in the driving seat near term as everyone wonders where the USD’s political risk is hiding.
While the inflation impact from higher oil prices and commodity prices in general, continue to pump up inflation expectation and push bond yields higher, keep in mind that much of the recent spike in Yields is about as much about supply as it is about inflation. 10Y UST yield broke 3% and traded as high as 3.03% this week, boosting the dollar. And when combined with a very dovish ECB it sent the DXY towards 92 – But indeed, over the medium, an expansive US fiscal deficit and the markets ability to ingest the supply of bond needed to fund it implies the dollar should continue to struggle long term. Speculators continue to add to short positions according to the CFTC by 90,444 contracts in the week ended April 24 to an unrivalled 462,133.
Over the near term, however, this week’s US NFP number will go a long way to cementing the dollar’s near-term trend. The recent rise in US yields is responsible for crystallising USD strength, and this appears to have been accentuated by comparatively strong data flow in the US. So look for US economic data to continue having a substantial impact on USD sentiment. On the FOMC front, it should be relatively uneventful as most non-press conference meeting are, but the policy statement should offer some insights.
However, this week’s US Trade Roadshow to China, which includes “Team Trump” Steven Mnuchin, Robert Lighthizer and Larry Kudlow, has undoubtedly calmed investors nerves triggering an unwind of USD risk premiums around tariff and trade. Also, the North Korea talks should play our favourable for the dollar as it evaporates much of the political risk weight that has been hanging around the US dollar's neck like an anvil in recent months.
The epoch-making North/South Korea summit is helping regional risk sentiment and on the back of the massive earnings beat from Samsung (KS:005930) should see the regional bourses do well. The KOSPI will understandably attract a lot of attention and should continue to bolster local markets. But it’s essential to contain ones exuberance as regional risk can easily entangle in higher US yields, but so far the push in treasury yields has not been intense enough to cause a substantial adverse shift in risk sentiment, but caution prevails as the move higher in US Bond yields could be far from over.
In other local trade news, The China Securities Regulatory Commission (CSRC) officially issued the “Administrative Measures for Foreign-invested Securities Companies” as expected Wall Street access comes along with the usual amount of Mainland Administrative Red Tape.
Sentiment remains positive amongst the Regional Comprehensive Economic Partnership (RECP) participants that issues of complex trade rules and other infrastructure concerns can be ironed out to makes ASEAN economies a desirable destination for trade and commerce.
US Equity Markets
Strong corporate earnings supported equity markets which saw most US equities nudge higher.But with signs, the synchronised global growth is reverting to a synchronised slowdown amidst rising US interests rates and higher commodity prices make for convincing argument profit margins are cresting. But as far as bond yields are concerned, the equity market tipping point is undoubtedly above 3 % so traders will be keying on the pace of interest rate rises over the near term which could signal the end to the equity party as the interest rate party in the US shut down months ago.
Asia Equity Markets
Of course, rising US yields pose the biggest obstacle to local equity and bond markets but the peace and unification discussion with North and South Korea along with President Trump outwardly supporting the progress, it is hard to envision these talks as nothing but positive for the markets.
Oil Markets
Oil consolidated near recent highs on Friday but in the absence of any significant pre-weekend profit taking it suggest concerns that the US will exit the Iranian nuclear deal as early as May 12 continues to resonate with investors.
The markets reacted apathetically to Baker Hughes US Crude Oil Drilling Rig Count., UP 5 to 820 Rigs, Most Since March 2015 suggesting that the primary focus is falling on Iran sanctions while declining production is overshadowing the rig count in Venezuela and Angola.
Precisely what happens with Tehran’s nuclear program remains the most significant driver in oil price sentient
Gold Markets
Rising interest rates and a firming dollar remain bearish risks for the gold and silver while leaders of North and South Korea undertaking to remove nuclear weapons from the peninsula has convincingly reduced geopolitical risk premiums. Also, the latest USD GDP reading showed growth but unfortunately for gold investors, came with few hints of inflation. With that in mind, gold positions continued to be rolled back as the markets are adjusting portfolios given the increased potential for the dollar to rise in the weeks head becomes a reality.
G-10 Currency Markets
EUR: Many traders are still licking their wounds and probably have not positioned for a downside move as our platform has not seen many chase the recent EUR step lower. On a break of 1.2050, we could test 1.1915 as trader flood into downside exposure
JPY: Less conviction on the longer term move to 100 with the BoJ stuck in neutral. “Abexit” could keep the top side in check despite the evolving stronger USD narrative.
AUD: No rate hike nor change in RBA bias should keep the AUD in a defensive posture and with only six basis points of rate hikes priced in this year, it would suggest rising US yields will continue to hurt the Aussie sentiment. The market has been caught way short adding at these levels before, but this time it feels different. The market continues to add cash shorts given that traders will probably be short gamma on the break lower.
Asia Currency Markets
Several of the ASEAN carry trades remain extremely susceptible to the broad USD strength such INR and IDR, but as tension ease in Korean Peninsula, North Asian currencies, should be relatively hardy over the short term due to both robust Bond and Equity inflows suggesting USD shorts versus both CNH and KRW should remain in vogue.
MYR: The Malaysian Ringgit is being very much weighed down by the shifting game of Prime Minister political thrones. The contest is shaping up to be much closer than expected which has seen some bullish pre-election currency bets pared back as we enter the final countdown to GE 14. There was some interest to buy MYR ahead of USD 3.92 by locals but continues to be overshadowed by the unwinding of foreign bond inventories, but this was more so prevalent when the UST 10 yield was above 3 %.
High oil prices and the decline in risk premium around North-South Korea peace talks should continue to resonate favourably and will unquestionably have a longer-term positive impact on the Malaysian economy. So if US bond yields begin to crest, the Ringgit could be poised to make another run at 3.80 provided no electoral surprises.