The dollar has regained some semblance of composure after its mid-week shellacking, as bond yield surged on the back of Chairperson Yellen’s hawkish speech yesterday. While her delivery provided a stable footing for the greenback, the downside risk for the USD remains elevated more so from Trump’s inauguration if he fails to underscore economic policy. On the other hand, if Donald comes out firing on all fiscal stimulus cylinders, bond yield will surge, and the greenback would catch an enormous updraft
The dollar bulls certainly had the pedal to the metal overnight, as dealers were quick to re-engage dollar longs on the back of stellar US economic data. Housing starts came in above expectation, but the real stunner was “The Philly Fed Index” which printed the highest figure in over two years, a huge boost for the dollar bulls.
US equity market has remained sidelined as Wall Street expressed little appetite one-way or the other.
Yellen is due to speak later today, but the President–elect takes centre stage as we begin a new chapter in American politics and global financial markets. Buckle up; we are likely in for a wild ride in the coming 100 days.
Dr Yellen Effect
Point counter point. Offsetting yesterday hawkish delivery, Dr Yellen has tossed a monkey wrench into the equation by inferring the Fed is not behind the curve. Indeed she’s much more dovish than yesterday’s speech. The market was shading for a hawkish delivery, but she has opened the door for two-way USD risk as the Dollar Bulls are expressing some disappointment in this latest twist
The Euro
Adding to the dollar momentum was Dovish ECB headlines as the EUR/USD nudged below $1.06 after Draghi commented that the continents’ wage growth is weak and one of the main reasons the Central Bank was willing to look past the recent oil price induced spike in inflation and improving macro landscape. However, with the highly charged French elections around the corner and mounting political uncertainty, it certainly weighed on their outlook. I suspect Draghi views patience as prudent. Nevertheless, with inflation and overall consumer sentiment improving, and if these metrics remain on the rise; it would suggest that the ECB would put their foot on QE breaks at some point this year.
The Australian Dollar
It was a relatively underwhelming employment print yesterday but had little impact on the Aussie bulls. After briefly testing below the .7500 handle the AUD returned with a vengeance only to be thwarted again in the .7550-75 congestion zone.
Despite this, I have been fielding more questions about the AUD resilience over the past 24 hours than any other currency. There remains substantial appetite for this trade, perhaps not ideally suited against the USD but on the reflationary trade, the Aussie is a clear winner on the crosses.
From the investor appeal, Australia continues to offer an oasis in this politically hostile global environment. In addition to the political stability, yields remain attractive and with the RBA’s next policy move is likely an interest rate hike. Investors are to find tranquillity under the Aussie umbrella.
Nothing on the domestic front but keeping an eye on the China GDP this morning.
China GDP and Industrial Production
My first impression
I think the cat was out of the bag on this print after President Xi Jinping told the World Economic Forum in Davos that China’s economy grew 6.7 percent in 2016. However, Q4 GDP did beat market expectations coming in at 6.8 %
Mind you China’s growth remains supported by massive government spending and record-setting bank lending which in itself, continues to fuel asset bubble fears.
None the less, the market should embrace the relative stability and signs of an improving Mainland economy, and the print should continue to underpin commodity prices providing a welcome reflationary spark in the region.
Unfortunately, the GDP print, a cornerstone of Bejing policy legitimacy, continue to fall under suspicion after a regional governor admitted to cooking the books. Mind you this is a long running favourite debate among China watchers, but at minimum, the GDP print will inescapably spark further controversy over the trustworthiness of the official data
China’s industrial production shrank, suggesting that efforts to boost growth through significant government spending, are showing signs of diminishing returns. The big question is how long are policy makers willing the keep the monetary spigots open on full bore.
The Japanese Yen
USD/JPY continues to mirror US 10-year bond yields. UST 10’s surged to 2.495%, which propelled USD/JPY to 115.60. Positioning is much lighter, so traders were eager to re-engage dollar longs as position event risk is significantly reduced after the midweek dollar deep cleansing.
Not lots of interpolation on this trade, over the short term it is a symmetrical risk on the prospect of US fiscal spend. Also, if you like to trade correction after correction after correction, this is the currency pair for you.
The Chinese Yuan
It has been a very bumpy ride this year, and we have finally reached a major inflexion point as we enter what may be a very highly charged 100 days for the incoming US administration.
After plumbing the depths below 6.80 mid-week on US dollar policy confusion, the market has regained a sense of equilibrium much to the relief of CNH traders. However, this could be a short respite, as the markets will test both the CNH and the PBoC’s resolve in the following months. In addition to domestic structural vulnerabilities, higher US yields will weigh on the yuan while the ambiguities around US trade policy will add an unwanted air of confusion.
EM APAC
The primary concern for the region is increasing trade friction with the US, as it is expected that Asia will feel the brunt of shifting US policies. Therefore, those local currencies and countries vulnerable to US dependency on trade will feel the weight.