The US Dollar bids were far and few between thanks to Treasury Secretary Mnuchin’s outward endorsement for weak USD policy. While we already knew the administration previously favored a weaker dollar, his comments caught the dollar prone and defenseless, opening floodgates to a massive wave of dollar selling.
His comments have turned into a bit of a fiasco and will end up going down in market folklore for marking the first time since the early 90s that a US Treasury Secretary endorsed a weaker US dollar. The bond market took an immediate and predictable defensive posture as US 10-Year yields soared topping out at 2.66% as memories of savage bear markets resonated from when then-Treasury Secretary James A. Baker III threw down the gauntlet and endorsed a weaker dollar in the early 90s. But we are far from the fractures and turbulent world economy of the late 80s or early 90s, so the Munchin fallout is unlikely to trigger the tsunami of global risk aversion that occurred in yesteryear. Nonetheless, the aftershocks are still reverberating in the early APAC session.
Oil Markets
Oil markets too were at the epicenter of volatility with WTI breaking the $65.00 per barrel and marking the highest close since Dec 2014. Oil prices pivoted higher after the U.S. Energy Information Administration (EIA) reported a 10th straight drop in US crude inventories. The report solidifies the view that OPEC production caps are working.
But let’s not lose sight of the US dollar follies, which are underpropping oil markets and providing the bounce to all commodity markets. Since we may only be in the early stages of the US dollars demise, and when aggregated with the oil markets' OPEC induced positive developments, the market could press significantly higher from increasing sensitivity and stronger correlations to the US dollar alone.
Structurally, the dollar can push much lower as signs are developing that we may be in the early stages of a multi-year secular bear market.
Gold hit an 18 month high as investors were more than willing to pay hefty insurance premiums as a hedge against the inflationary impacts from a hapless dollar. US Treasury Secretary Steven Mnuchin opened the floodgates to dollar sales, but with traders' best case scenario to sell the dollar at all costs, gold prices should remain well supported on dips and could be poised to move even higher on the next US dollar wobble.
G-10
The EUR
Decision day for the ECB and the traders are jointly overseeing price action which usually sends a convincing signal to reduce risk as it's typical to reduce longs ahead of the ordinarily dovish Draghi.
Given the extended EUR position, we should expect the EUR to give way some points on dovish Draghi. But with the primary macro theme in FX markets being USD weakness, it’s unlikely those euro offers will hang around too long, especially after dollar red flags raised when BoJ Kuroda erred as dovish as could be and the market still bought JPY.
The Japanese Yen
They Yen has been tracking the general dollar weakness overnight, but traders are waiting for the BoJ next move. USD/JPY is too high to sound the intervention alarm bells, leading me to believe a swift shift in policy may be in the offing.
The Australian Dollar
AUD has recovered all of Iron Ore inspired losses, as the free-falling greenback has supported the commodity block of currencies en masse.
But the next catalyst may come from a build-up of RBA ” rate hike fever’ that seems to be making the rounds these days. While the market base case is for the RBA to remain neutral, any bullish shift higher in a measly price in May hike probability could push the Aussie to 82 level.
Traders are starting to take notice of the recent string of economic data which has been particularly boisterous led by strong employment print supported by an uptick in consumer sentiment.
However, with the Aussie dollar soaring these days, there's a higher likelihood the RBA will remain faithful to current expectations as opposed to moving in front of them.
The Chinese Yuan
The market has come a long way in a few days primarily driven on the heels of the broader USD malaise as fast money speculators have piled into both sides of the ledger. However, there is chatter circulating of some sizable stops that are cluttering the landscape near the 6.34 level that could prove an attractive target and test the PBoC's resolve. Either way, recent price discovery is telling us heaps about the PBoC’s current currency policy which appears much more investor-friendly than ever before.
The Malaysian Ringgit
Overnight price action was more a reflection of a struggling US dollar rather than pre-Marathon Petroleum Corporation (NYSE:MPC) market positioning.
Nonetheless, the Ringgit was supported by surging crude prices and the sagging dollar. But today is the day of reckoning for Riggit bulls and the BNM could make or break many of our top line views.
Pre BNM banter
Straw polls suggest that 65% of the market has long Malaysian exposure in either short USD/MYR or long short dated Malaysia Bonds.
But the massive lifting will be left to Bank Negara to express a strong currency bias by raising interest rates at today’s meeting.
Our base case scenario is for slightly more aggressive action from Bank Negara Malaysia (BNM) than the market’s consensus of one hike and done. So if the BNM signal one additional rate hike for 2018 this would trigger an immediate downside test of 3.70, whereas if the BNM signals only one single rate hike for 2018, the market will test 3.80
The most unlikely scenario: if the BNM take a dovish tack, suggesting no imminent rate hike, then USD/MYR could gap above 4.00 USD/MYR in a heartbeat.
As far as yesterday CPI data. While coming in at 3.5% for Dec 3.7% for the full year 2017 and within the central bank's 3-4% inflation target. The BNM is still expected to hike interest rates later today since firmer oil prices will translate into high headline inflation in 2018.