Currency markets have come to a byroad as debate rages on concerning the formation of the next FOMC board, but more specifically who will be captaining the ship. Betting odds remain skewed for Kevin Warsh, but Fed Governor Jerome Powell is emerging as a potential dark horse and along with it a far more significant dovish inference. If one is wondering why the dollar was playing a game of ” pass the orange” overnight, the Fed Chair debate is what likely sent US bonds bid which basically quashed the market's dollar appetite.
At the heart of the Fed Chair discussion, Kevin Warsh favors a more aggressive path on interest rate normalizing whereas Governor Powell is more aligned with Janet Yellen’s preference for maintaining the Goldilocks policy of more gradual interest rate hikes. Expect the debate to crescendo as the Fed Chair appointment will be one of if not the primary driver in dollar sentiment as we near year's end.
Q4 has gotten off to a whimper as currency markets have more or less turned into a crap shoot with EU political risk simmering, Brexit negotiations ongoing, and of course the markets remain on the “qui vive” for the Fed Chair line of succession. But with the Tump administration burdened by the Las Vegas tragedy and fiscal reform while readying a request for $29 billion in hurricane disaster relief, the decision process will likely be delayed
With G -10 trade turning into a game of a chance, balance of risks are not too favorable on any side of the dollar coin at this stage.Small fractures are developing on most traders’ crystal balls which explains why currency markets have turned timid to start the week.
Japanese Yen
USDJPY gave back yesterday’s LDP poll inspired gains as the Fed Chair Debate rages on. Markets remain confined to tight ranges with 112.50 support and 113.30 being the critical topside level in most traders near term master plan. But there remain sizable Japanese export offers in and around this level and we should expect 113.20-50 to be a formidable barrier until the next dollar catalyst.
Euro
When you can make good arguments to go both long and short near term, it’s likely best to head for the sidelines. With that said, overnight price action and volumes suggest speculators are doing just that as ranges remain tucked up.
Case in point, yesterday the market threw the kitchen sink at EURUSD 1.1700 when 500 mil selling appeared on the EBS net aggressor between 8:45 and 9 AM Singapore time, but with tepid follow through. Similarly, the test of overnight highs around 1.1750 came and went with little fanfare. Clearly, the ongoing political risks in Europe have taken the steam out of the euro. Looking ahead this week, the single currency remains very susceptible to any pushback from the ECB
Australian Dollar
RBA is firmly on hold and guidance unchanged but revived concerns over housing saw the Aussie trade below .7800.And despite the chorus of acknowledgement that the RBA is lower for longer, shorts were quick to cover sensing this week’s primary AUD downside risk event is behind us.
The AUDUSD remains a USD story as the big picture US policy narrative continues to distract traders from selling the Aussie even with commodity prices weakening.
FX Asia
This picture is nowhere near as dangerous as some would have you believe. With global PMI’s in the green, US ISM surging to the highest level since May 2004, robust China data and Korean exports rising, whats not to like?
The Global growth narrative is alive and well and likely to better by the month which should play favorably into global risk appetite
Despite the likelihood of a Fed hike in December and the plentitude of uncertainties currently facing the G-10 landscape, the ASIA EM background portends favorably for local exporting countries.
The undeposited and undervalued Malaysian ringgit could find significant support in this scenario.