It was an extremely active twenty-four hours in all asset markets in what was expected to be an extremely busy and no less noisy week for the markets.
Currency markets were extremely active with traders primarily looking for opportunities to sell that dollar. Not only is the big 2018 consensus trade, long euro which is sniffing recent highs, but now yen traders are getting into the act, despite the fact that BoJ Kuroda attempted to ice a soaring JPY.
To summarize, the dollar fell as if it had an anvil around its neck, as did US yields Tuesday, while US stocks remained relatively bid on stronger earnings. Similar to last week, we’re back plumbing significant support on the DXY (90.10), and again suggesting a break lower would make a convincing argument for a steeper drop in the dollar. But unlike last week's attempt, the dollar bears are back en masse with the JPY bulls pulling the cart this time around.
Japanese Yen’s Reaction to BoJ Rate Decision
Going into the BoJ, as mentioned yesterday, traders adopted a mindset that with Japan's economy firing on all cylinders and signs of deflationary pressures abating, they would buy yen regardless. Thinking that it’s just a matter of time before the market does the tightening for the BoJ.(i.e. similar to what’s going on in the euro).
Price action said it all; the dollar sold on the rate announcement and when USDJPY failed to gain any traction above 111.20 after Kuroda dovish press conference, it was game on for the dollar bears. However, for the oldtimers dialing in on the real nuance within the statement, the proof was in the pudding. “Prolonged downward pressure on financial institutions’ profits under the continued low-interest-rate environment could create risks of a gradual pullback in financial intermediation and of destabilizing the financial system. However, at this point, these risks are judged as not significant, mainly because financial institutions have sufficient capital bases.”
So the system is bust, and the BoJ will need to tweak the YCC by perhaps moving down the curve targeting shorter dated tenors as currency markets have typically enjoyed a stronger relationship with the short end of the yield curve.
But the big challenge for the BoJ is how to deal with investor expectations as any tweak in policy will be viewed as an opportunity to hammer the USDJPY mercilessly lower. However, the issue at hand if the US yields continue to fall we will most certainly test the 110 level , and with a convincing break, all hell will break loose.
Energy Markets
OIL
Brent nudged above 70 for the first time this week after the IMF report concluded that the markets are in the midst of broadest synchronized global growth spurt since 2010.
The IMF’s beaming economic forecast along with stout compliance from OPEC and comrades in arms through 2018 and possibly beyond is providing convincing support. Comments from Saudi oil minister Khalid al-Falih over the weekend continue to resonate that the cartel and its allies should extend their oil production pact quota beyond 2018. While this all sounds fine and dandy, but ultimately absolute price points and missed opportunity costs will be the essential arbiter in future discussion, not Saudi oil minister rhetoric.
Nat Gas
China’s voracious energy consumption is coming to the fore as their nascent environmental movement takes hold, all but suggesting coal's days are finally numbered, but LNG’s outlook looks outrageously bright. Without question, China’s switch from coal to natural gas is sending demand through the roof, pushing up LNG prices to three-year highs. Given that it's early days in China's Green Movement, LNG producers are probably smiling after shooting themselves in the foot last year by oversupplying the markets.
Gold Markets
Gold could move higher as we are still in the early stages of a broader USD sell-off, with all eyes focused on 110 USD JPY
Besides the political hot spots in the middle east providing support, investors are looking to hedge equity positions. Investors are spooked by a possible escalation of trade wars and are becoming jittery about overextended equity valuations. All of which is pushing investors back under gold's safety umbrella.
G-10 FX
The Australian Dollar
The Aussie tumbled yesterday as Iron ore plummeted amid US trade sanctions and discussions. Iron ore got hit lower as the Trump tariffs caught markets in low a physical demand period ahead of the Chinese New Year which toppled Iron ore prices and crushed the Aussie dollar. Naturally, given Australia's significant role in the global supply chain, there was a risk wobble as the market came off pretty hard. But we have subsequently based around. While I think Trade War Escalation is a bit of a red herring, Trump is a wild card, so better not to take anything for granted. However, the edge did come off the mini trade inspired currency tantrum when the TPP agreement was rejuvenated and then Trump suggested NAFTA negotiations were going well. A definite scare for long Aussie positions, but its game on this morning.
Let’s face it though. The political optics of trade sanctions directed at China and South Korea are poor given that both country's leaderships are key backroom negotiators to resolve the North Korea problem
The Euro
Without repeating the bullish EUR views, buy on a dip.
Malaysian Ringgit
Despite a bit of a risk wobble overnight on the back of trade discussions, the sun shines on the ringgit again this morning. The combination of firmer oil prices, broad-based USD dollar weakness and positive risk sentiment on the back of an IMF report that suggested we are in the broadest synchronized global growth spurt since 2010, has the ringgit positioned favorably heading into tomorrow's MPC.
MYR vs Possible Trade Wars
The the first salvo was launched yesterday in what could develop into a long drawn out ” tit for tat” trade battle between the US vs China and Korea, and possibly the rest of Asia. The US administration imposed tariffs on imported solar panels and washing machines, in a move towards what could develop into the trade war between some global economies.
EM Asia will be following these developments closely as trade-related fears are probably the most prominent external risks since most regional economies are very trade oriented.
However, given the ringgit is less sensitive to external shocks than regional peers due to surging oil prices but nonetheless the MYR could wobble on an escalation of regional trade wars with the US.