Stephen Innes
SPI Asset Management
The markets opened right on expectations, and so far in early APAC trade the headline risk from this weekends Catalonian perplexity is not posing a significant threat to risk or the Euro which is only trading marginally lower with investors single-mindedly focused on the critical ECB meeting Oct 26
USDJPY has bounced higher on Abe’s resounding election victory. Traders remain bulled up on USDJPY as Abe policies should remain accommodative and point to a weaker Yen over time. And while the JPY is expected to weaken medium-term, uncertainty over the Fed chair nomination could weigh on crowded near-term positions. None the less, Abe’s landslide victory should pave the way for an extension of Japan’s stock market rally, which could underpin USDJPY sentiment
So far risk sentiment remains buoyant after a strong US equity futures open on an extension of last weeks US tax reform euphoria.But its early days and with a deluge of headline risk expected this week, I surmise upside follow-through will remain tentative, but indeed, USDJPY bulls are smiling this morning.
The House Republican’s return from recess this week so we should expect the usual bipartisan banter to hit the wires as the House will take up debate on the budget resolution. The discourse should provide the street with a decent heat map to gauge overall US political sentiment. Currently, the market is buying into Trump’s comments that the GOP has enough seats to pass the administrations economic aspirations.
Let’s not overlook the Feds Chair game of thrones.Currently, the markets are giving the nod to either Powell or Taylor; however, a Yellen appointment should present some significant headwinds for the USD but good for US equities on the assumption of a very very gradual pace of policy normalisation. Not to mention continuity is always a good thing for equity markets.
The Euro
Very much cemented in current ranges but eyes will be on US treasuries as the EURO will take its cues from USD momentum early in the week. However, dealers will keep a close eye on the current EURUSD dip to gauge market lean going into the critical ECB meeting.
After the summer run up on the EURUSD, the ECB veered dovish with timely leaks designed to temper the markets bullish view. Given the ECB sensitivity to Euro strength, it may be wise to ascribe to the ECB source leaks that that monthly purchases will be extended for nine months at a pace of 25-40bn per month which should imply currency neutrality.
The Japanese Yen
Indeed, an excellent opener for the USDJPY bulls on Abe’s resounding victory.But from here the next significant extension will likely be triggered by House resolution headlines so all eyes will be on the headline heat map. The Nikkie futures look happy in early trade, so this alone could push the USDJPY above the phycological 114.00 for a test of the key 114.30-50 region.
The Australian Dollar
With no deviation from Friday’s view, the Australian Dollar is one of the G-10 currencies with most to lose from a stronger dollar and a more hawkish Fed. The US dollar appears to be on solid footings into the weekend., but next weeks focus will be the US bond curve. Any aggressive move higher in US yields, especially if President Trump gives Taylor the nod, will put the Aussie at exceptional risk.
So far it appears the Typhoon Lan, which hit Tokyo this morning, is not dampening investor spirits.
SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.
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