As we enter the new week, Central Bank policy qualm has significantly reduced for now. However, the US election risk hovers on the horizon for markets with the first general election debate of the 2016 presidential campaign set for tonight. Given the highly polarizing and politically divisive cast of characters, could the drama be any greater?
With several signs emerging that this year’s elections could be more riveting for markets than past unforgettable elections, what appeared to be the first real landslide victory in 30 years (Democrats), now has the polls pointing to a close result and with the market likely under-pricing a Trump victory, the cost of hedging market volatility leading up to Nov 8, will increase as the outcome has become uncertain.
I often struggle to quantify how the market under-prices election risk, but with this US election we are dealing with a different kettle of fish, so I would expect traders to seek solid footing while the markets start to rumble. Certainly, with the “anti-establishment” Brexit vote still on investors’ minds, could that be a Harbinger of a Trump victory?
Australian Dollar
The Australian dollar continues to rebound post-FOMC, as the market shows some partiality to the Carry Trade Grind in the wake of the FOMC (on hold) and with Governor Philip Lowe in little rush to drop rates.
The markets should remain positive for the aussie short term. However, the week ahead brings key speeches by Fed Chairwoman Janet Yellen, BoJ Governor Kuroda and ECB President Draghi which will likely temper markets carry trade expectations. Notwithstanding the political and market intrigue from the first Clinton –Trump US presidential debate, which could create some shock waves in risk appetite.
Overall the aussie could be a tad vulnerable early in the week. However, keep in mind any pre- election risk jitters are likely to create a minor rumble and not a deeper rout. So far in early trade, we’ve seen a weak move to the .7610 level, but with little follow through, as the markets remain relatively quiet awaiting the next catalyst.
So far in early trade, we have seen a weak move to the .7610 level but little follow through as the markets remain relatively quiet awaiting the next catalyst.
The New Zealand dollar continues to stay under pressure trading below .7250, approaching the critical .7200 level, where we should see some significant support, but a break will indeed confirm the downtrend is intact. The expectation of narrowing differential will likely weigh on the NZD fortunes near term and with political rumblings in the US likely to impact risk sentiment, we may see a follow through on the aggressive move lower initiated by the RBNZ dovish forward guidance. Look for the divergence on policy between RBA and RBNZ to favour the long AUD/NZD trade.
Japanese yen
As the dust settles after last week’s BoJ, the debate remains elevated. However, overall the market preference remains the USD/JPY bear track, but it feels that those positions will need a convincing break of 100 to re-engage aggressively. In the meantime, be prepared to add to short positions on pullbacks to ¥102 levels.
The bottom line is that there is no certainty that the innovative strategy of trying to peg 10-year rates near 0 will be any more successful at waking the economy from its decade slumber than the failed negative rates policy. In fact, it appears more like a strategy to safeguard domestic banks rather than a means to economic revitalization. Regardless, the market continues to sense weakness in the BoJ and without an exemplary shift in overall policy, the path of least resistance should remain lower with the bears looking for the ultimate test of ¥95.
In the early trade, we’ve seen a subtle move lower on a general trend basis as upside seems very limited.
In early trade we saw a subtle move lower on a general trend basis as upside seems very limited.
On Friday, after a fall in oil prices, the WTI splattered up to almost 70 cents when Saudi Arabia qualified the Algiers OPEC meeting as a “consultation”. This was the primary catalyst for price action in Forex and equity markets, however, with rumors flying left, right, and center, traders went on headline alert as the meeting was set to begin. The latest headlines have Saudi Arabia agreeing in principle to a production cut if Iran will halt their output increases. While an absolute agreement is unlikely, it may nonetheless provide the groundwork for a production deal when the cartel meets again in Vienna in November.
Regardless of what production deal gets made, it would be best to look over your shoulders, as the Baker Hughes US oil rig count rose by 2 to 418, putting oil bulls in a somber mood.
RMB trade is stuck in a rut as traders are decidedly sitting on their hands ahead of the yuan’s inclusion into Special Drawing Rights (SDR) on Oct 1. The market continues to run mixed after the FOMC decided to stick their head in the sand and hope for the best come December. The Fed move tempered the decidedly bearish yuan tack. Also, the yuan’s inclusion in the SDR should increase yuan demand from foreign central banks and sovereign funds, which should help counter a generally bearish yuan trend in the short term.
Finally, the carry high cost of short yuan funding is another reason for lack of interest, while abating it is still weighing on traders’ sentiment.
Traders are less convinced an OPEC oil production agreement is in the cards, while increased US political risk simmers and should keep USD/MYR bid on any pullbacks. It is expected that the highly volatile EM Asia currencies, especially the export-oriented Malaysian Ringgit, will be vulnerable to US election risk off sentiment as it starts to grip markets. Overall markets are treading very cautiously in early trade.