Currency Markets
U.S. Consumer Price Index increased 0.2 percent in April, less than the 0.3 percent rise projected. Naturally, there was a bit of disappointment from the dollar bulls after the critical index fell a notch short of quenching bullish views on the US inflation outlook.
Mind you, the markets had already moved off the EUR/USD YTD low point on profit taking before the inflation print, so the USD setback was quite tame given the breadth of the recent dollar rally, and dollar buyers are far from being knocked for six.
Understandably, the road to inflation has been a directionless and frustrating one, and while short-term market views become all too consumed by the headline print, the NY Fed's underlying inflation gauge as measured by many disaggregated price series in the CPI index is punching higher. This suggests that the elusive US inflation is not too far away from taking the stage. Certainly, the CPI miss is not cause enough to shift the Fed outlook, but inherently, the markets will be more cognizant for Fedspeak and US retail sales to provide the next USD guidepost.
Given the dovish display by other central banks, the lonely Federal Reserve Board appears to be the last man standing as speculation about interest rate rises and policy normalisation in the eurozone, Japan and Britain get kicked down the road. Despite the suggestion that the dollar should remain rented at the minimum over the next few weeks, the politically challenged greenback is building a convincing argument for some longer-term views. But overall it remains challenging to see just how much the EUR/USD can fall given the inflationary aspect of the weaker EUR not to mention the staggering rally in crude oil over the past two months which could reignite inflation on the continent.
Oil Markets
Oil prices are here to stay, and that is a tame view. Besides the fillip from the Middle East geopolitical flare-ups, the fragile supply and demand dynamics continue to tighten on the prospects of an ongoing collapse in Venezuelan output and impact of US sanctions on Iran which will be felt toward the end of 2018.
The 2018 price floor it is well entrenched, so now the real work begins on 2019 forecasts. From a geopolitical perspective, it’s highly unlikely there will be a melding of minds from Syria, Israel, Saudi Arabia and Iran. And while US oil supply is being soaked up by the foreign marketplace as quickly as it can get pumped out of the ground when combined with continued OPEC compliance, the path of least resistance looks higher.
Gold Markets
A slightly weaker US dollar and heightened geopolitical risk have pumped gold higher overnight. Pick your Middle East hot spots, whether it’s the tremors on the Iran front or the latest Israel-Syrian flare-up, the Middle East powder keg is set to ignite once again. Also, the US CPI headlines suggest that the Federal Reserve Board will maintain a very gradual pace of interest rate normalisation, which has provided some much need shine to gold market overnight.
Equity Markets
US equity markets raced to a seven-week high as traders reprice lower the more hawkish expectation from the Fed. Risk continues to trade symmetrically with US interest rates, so Asia shares should open slightly higher on the back of the Wall Street gains. The market singularly focused on this CPI print, which could have been a critical signpost for Fed policy if it had came in above expectations. With Wall Street breathing a sigh of relief, investors were gingerly bargain hunting as the 10-year US Treasury fell to 2.96 percent.
Around the currency horn:
G-10
EUR/USD: Short-term views will continue to be driven by economic surprise indexes which continued to favour a long USD position over the near-term. But just how much more juice can be extracted from the differential play remains a question. EUR/USD YTD lows should form a significant base.
NZD/USD: Dovish outcome from RBNZ’s Governor Orr’s inauguration has increased the spectre of NZD/USD weakness especially on a charged-up greenback.
USD/JPY: Failure to crack the 110 level has again frustrated the dollar bulls after being undermined by the CPI disappointment. General desk housekeeping will dominate today’s session as traders get recharged for next week.
USD ASIA
USD/MYR: The market remains closed Friday, but the bellicose move yesterday on the sparsely traded one-month NDF to 4.255 + had everyone frantically searching for that USD bid. But this move was more about fragmented liquidity than anything else which has been a huge part of the ringgit experience since BNM banned the collaboration of offshore markets vis a vis NDF’s. I think on Monday's open, however, locals will respect the implied one-month NDF which is predicated on foreign money risk transfer expectations. And despite my rather overly optimistic 4.05 USD/MYR Monday open view, I still maintain this will be much closer to the plot than some of the outrageous 4.50 calls. But the resurgent USD and higher US yields remain the biggest headwinds for the local sentiment and should keep investors on the defensive over the near to medium term.
Korean won: On the first sign of dollar weakness the won continues to be the go-to regional currency. It's very difficult to ignore the communal benefits from the Panmunjom Declaration by the two Koreas. Also, the upcoming Trump -Kim meeting in Singapore on June 12 is taking on very congenial swag.
Indian rupee: Beside the strong USD dollar and higher US yields, the bulk of the stress is coming from the oil patch. And it certainly looks like oil is here to stay if not push higher in coming months based on the dwindling supply narrative. This suggests more pain for the rupee.