Hawkish central bank rhetoric, the largest first-half slide in oil since 1997 and global political risk have imparted a level of uneasiness in currency markets. The squally trading conditions across most asset classes have traders looking every which way for select opportunities as both risk and uncertainty abound.
There has been little follow through on the USD revival that started the week as in the absence of any actionable US economic data the dollar bulls are erring on the side of caution.
But with the with the GOP struggling to push through economic agenda, it’s difficult to envision an extended US dollar rally until the US administration gets their ducks in a row.
As for the rest of the street, traders are looking for short term selective opportunities as opposed to perusing any trend in this turbulent market.This environment supports chasing opportunistic price action, and dealers found a sweet spot in both oil and the pound.
WTI
Oil prices spiked after the EIA weekly crude stock data showed a decline in US inventories. But bears prowling the oil patch cut that rally short in a heartbeat as WTI plunged to 42.05 before pulling back into the close of NY futures trading.The oil bears are steering this tanker as the weekly inventory decline failed to put a dent in the overwhelmingly bearish market sentiment. The currency market spillover saw the Canadian dollar, which correlates to the movements of oil prices, trade lower while equity markets continue trading with a softer bias weighed down by energy sector stocks.
The pound
BoE’s Chief Economist Haldane through a spanner in the works when he flew out of the dove’s nest right into the Hawks. Coming on the heels of BOE Governor Carney Mansion House dovish tilt, it added another level of confusion to the already muddled UK currency market landscape. The hawkish surprise saw cable gap 65 pips to 1.2700 as the market got caught short again toward the lower end of recent ranges.
Japanese yen
Despite the ripples of risk aversion the USD/JPY move towards 111.75 overnight which seemed to coincide with 10:00 AM NY option expiry and cross yen demand after BoE comments. But falling oil prices and weaker equity sentiment carried the day which continues to weigh negatively in early APAC trade. Without a rebound in oil prices, risk sentiment remains extremely fragile, and we could see a push lower.
Australian dollar
The hawkish Fed narrative combined with metal weakness has taken the wind out of AUD mainsail despite an upturn in domestic economic data. While the Aussie remains offered vs. the dollar, it came under further duress on the crosses particularly against the pound after the surprising hawkish tilt from BoE’s Chief Economist Haldane.
The oil price gusher is not helping commodity sentiment, and with the market still clinging on to some small longs a convincing push below .7550 could trigger stops and a risk for a deeper correction to .7525-15 level. But given the focus remains in the USD narrative, I suspect the Aussie will hold current ranges in the absence of any tier one useful US economic data to support current USD strength.
New Zealand dollar
The RBNZ left the OCR unchanged as expected at the June OCR review, and the overall policy assessment is also consistent. With very little to glean from the RNBZ assessment, but in the absence of any dovish suggestion, it should prove mildly supportive of the KIWI.The market was poised for dovish expectations as some expected the RBNZ re-instate its concern about currency over-valuation. So .we could see the kiwi return to favour on any hint USD selling pressure.
Chinese yuan
CNH seems to be moving on its own accord, and with the realisation, the MSCI inclusion shouldn’t have much of a currency effect in the near-to-medium term, it’s back to the USD narrative and extremely vulnerable risk narrative.