The NY session saw a decent rebound in risk and a slight recovery in the USD, leaving USD/JPY sitting near 108.40 as we open the book for the final trading session of the week in Asia.
The main two stories the market has been following, the Fed and the US/China trade played a helping hand buttressing investor risk sentiment overnight as US equities rose for the fifth straight session weathering a bout of negativity from weaker holiday sales while some of the shine initially faded from the US-China trade talks. But indeed, the ability for the market to rally in the face of bearish news is a sure hallmark that normalcy is returning to the markets which suggest current momentum can be sustained.
However, Federal Reserve Chairman Jerome Powell took the spotlight amid a Fedspeak frenzy echoing his recent comments from last week that the central bank’s commitment was to proceed with caution on the monetary policy, which of course equity markets interpreted as deliciously dovish. While positive signs on the trade war front continue to resonate favourably with investors, all of which suggest Asia stocks are ready for gains.
Event-wise today the calendar is light so that investors will place much more weight on US CPI print.
Oil markets
Oil markets have gone from the outhouse to the penthouse after extending its best winning streak in nearly a decade. Both the S&P 500 and OIl markets have found solid footing from a thaw in US-China trade tensions, and Fed Powell stressing his patience all added to the positive buzz as energy markets continue to extend its recent period of close correlation with equity markets.
Yesterday, I thought the recent move was a bit overdone given the larger-than-expected increase in US product inventories. But I’m glad I stopped overthinking as clearly the market sentiment continues to run uninterrupted, and indeed the ability for the market to rally in the face of bearish news is a sure hallmark that the bulls are back in the game.
Trust me when it comes to trading in cross-asset markets, overthinking is much more dangerous than not thinking at all.
Gold Markets
Gold prices moved lower as the dollar showed some Moxy, particularly against the EUR and JPY as US yields firmed overnight. But we’re currently carving out an impressive structural range above solid support at $ 1280 as on the Fed policy front; everything is lining up for a weaker USD and an eventual breakthrough $1300 in convincing fashion.
Currency markets
Euro: Finally breaking through the 1.1500 is enormous, and if I’m reading this one correctly, G10 traders will put greater emphasis on the dovish Fed vs the already baked in downside risk for the EUR which suggest the EUR move higher to test the 1.1629 (200-day MA) on it’s the way to 1.1800
AUD: I expect the AUD to move higher as we move closer to an eventual trade truce but chatting with my AUD trader colleagues most have reached near enough to the .7200 target that they are in profit-taking mode. So, until more definitive trade detente or at least signs of one, further Aud gains could be a grind into the weekend.
Ringgit: Bonds Bonds Bonds... MYR bonds are in demand as the currency broker the key 4.10 as traders were scurrying for MYR bonds to get Ringgit exposure. In the absence of an NDF market, investors access MYR bonds to gain currency exposure. Indeed, the stars are aligned for the Ringgit with risk on, a dovish Fed a weaker USD, lower USD bond yields and rising oil prices all suggesting the local unit could extend gains to the next critical support level around 4.0750,
The “risk on” signs are compelling with the Fed signalling the Greenlight for risk which should benefit commodity and oil-linked currencies.
And this should be a sure-fire bet the MYR will trade favourably as there is nothing better for EM Asia risk than a sturdy local currency basket
But with the Fed pausing it walks back a lot of long USD positions that were built around the Fed policy normalisation vs BNM neutral stance, and if we get shot in the arm from a definitive Trade war truce, we could see the MYR extend gains to USD/MYR 4.05 in a heartbeat.