Central Bank Hangover
Could be an exciting week as the market deals in the afterglow of a recognised global shift by central banks to withdraw emergency accommodation. But so far in the early trade market is tending to a bit of a hangover at the beginning of Asia after a pivotal week for G10 currencies.
Hawkishness is very contagious and while there may be a lull in price action due to the US holiday-shortened week and of course Presidents Trumps first G-20 around the corner. I expect the central bank theme to remain the primary focus as the markets start to gauge the intensity of this apparent policy shift as well as what other global central banks will join the party.
Top side fervour on the on the EUR and CAD has a abated as dealers turn cautious waiting to see if the central bank hawkish push continues or is challenged by incoming data.
Looking between the lines, for the Feds at least, it appears there’s a gradual transition afoot beyond data dependence to a greater concern about the adverse financial market impact from elevated asset prices.
Australian Dollar
With the RBA on tap, everyone is focused on hawkish prospects for Tuesday’s RBA meeting. There’s been a subtle bid in the Australian Dollar since the Bank of Canada hawkish surprise.But demand accelerated last Wednesday when the street started to price in concerted efforts by Global Central Banks to withdraw accommodations The seduction to catch a policy shift is far too high and predictable given the string of recent hawkish surprises But in reality, it’s difficult to see where this hawkish RBA shift is justified. Traders could be in for a reality check if the RBA sits neutral and would likely dent the official coordination narrative that the markets have been building on.
Japanese Yen
Japan Prime Minister Abe’s Liberal Democratic Party suffered an epic defeat in an election in Tokyo this weekend. Obviously, the market has bigger fish to fry as USDJPY remains very resilient trading slightly lower than Friday NY close.
Euro
The Euro is taking a breather in early APAC trade. But we ended the week on a cautious note as some thought the ECB might want to soften the rhetoric after the market’s initial reaction to the Draghi Taper announcement. Perhaps traders are putting more credibility behind that mysterious ECB source that reminded the market it ‘overreacted’ to a misunderstood Draghi,
Author
Stephen Innes
SPI Asset Management
With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.
