Markets are struggling to stay positive given the torrents of potential headwinds. Whether it’s the White House revolving door, an escalation of a global trade war or Japan's brewing political scandal, markets are grappling to find an equilibrium. But when you toss in the prospect of a more hawkish Fed, it’s not surprising risk sentiment continues to trade poorly.
Global foreign exchange markets are headed for a significant litmus test as traders set sights on Jerome ”Jay” Powell’s first live FOMC decision. Consensus suggests the hurdle is high for the Fed to shift to four dots, but markets are on guard and with good reason. While a March rate hike is a foregone conclusion, many Fed policymakers have upgraded their growth outlook for 2018, and even Federal Reserve Governor Lael Brainard, one of the central bank’s most fervent doves, sounded optimistic about the U.S. economy’s outlook and suggested the pace of monetary policy tightening may need to accelerate. Given this more hawkish Fed tone, many investors are acknowledging the risk heading into Wednesday’s meeting and reducing interest rate sensitive exposures.
Mind you, this meeting all about forwards guidance. Traders usually will take cues from recent Fedspeak while factoring in the latest growth and inflation metrics as that lays the groundwork typically for an altered official messaging. As for the current disappointing data, especially average hourly earnings, and retail sales, coupled with a tepid core CPI that remains tepid - therein lie the issues and the explanation for why gradualism and staying the course may frame Jay Powell's post-FOMC statement. But, he is still an unknown even though his policy views are believed to be close to those of Janet Yellen, Chair Powell could shake things up if he wants to stamp a hawkish lean on this sitting FOMC board.
Currency markets
Outside of dollar-yen, the US dollar has been showing a bit of moxy, despite the fact most traders believe it will soon run out of puff post-FOMC.
Most are pointing to pre-FOMC position reduction for the US dollar unusual amount of stamina.
But this week brings no less than 12 other central bank meetings, various speakers, and critical CPI & jobs reports globally which will keep FX traders hoping, regardless.
The Japanese Yen
The JPY continues to be the beneficiary of the wobbly risk sentiment while the Abe scandal continues to cast a dark cloud over USD/JPY, but given that the market is trading as if everyone is short USD/JPY we could see some offensive position squeezes higher in this environment. Keep in mind that while risk is trading exceptionally poorly, there is a growing sense that most of the current headwinds will not transpire as severely as feared so this too may factor into some of the pre-FOMC position squaring mentality.
The Malaysian Ringgit
The Ringgit struggled last week on repatriation outflows but there increasing acknowledgement and even acceptance for strengthening regional currencies with the Malaysian PM saying USD/MYR could well go to 3.80 in the near-term.
However, this week the local unit will be challenged by a possible move in the FED dots to signal four hikes this year. While the bar remains high for this outcome, investors continue to respect the possibility, but beyond this unlikely outcome and possible repricing of risk, the picture remains positive for the MYR.
Crude Oil prices continue to trade with a firmer bias, and robust demand for MGS bond yield carry suggests the market appetite for Ringgit remains solid.
Gold Prices
For gold prices this week It all boils down to a dovish or hawkish FOMC hike, and on a hawkish lean, most certainly gold will test essential levels of support due to the stronger US dollar implications. But potential market headwinds from the underlying susceptibility to risk appetite, heightened (geo)political tensions, inflation concerns and Russia tensions, to name a few, could help keep the floor on gold prices in check.
On the physical side of the equation, Asian investors remain incredibly wary of a possible shift in the Fed forward guidance, so demand continues low.
Oil Prices
While inventories continue to see-saw, the oil markets moved higher into the Friday close driven by short covering as the fear of weekend headline risk looms. Despite all the bearish US shale supply headlines, oil prices remain firm as in the wake of Rex Tillerson’s departure the odds are that the US will pull out of the Iran nuclear agreement continue to run very high.