Composition of market risks remains unchanged

With US market on holiday, price action went as expected.But the one exception is TRY which continues to labour on the escalation of tension between US and Turkey and has precipitated a sell-off across most EM carry trade.Speculators are in no mood for unpleasant news more so with the Catalonian consternations heading for more moments of middlement.

Outside of the Turkey tantrum, the composition of forex market risks remains unchanged as the dollar, for the most part, anchors at current levels.

Trader’s remain on geopolitical watch as North Korea celebrates the founding of the North Korean communist party on today.

Australian Dollar

With holidays in Japan and the US, it’s been a slow start to the week for the Australian dollar which remains mired in tight ranges. However, dealers continue to view the weak domestic retail sales as a huge negative. Given the record debt levels, how much more spending power can the average consumer add to the economy?. And with the markets still likely underpriced the inflationary fall out from US tax reform, the Aussie will likely remain a go-to short over the near term.

Factor in the slide and Iron ore prices as  China state mandates reducing steel production; iron ore demand could contiue to wilt.

The Australian economy looks little more than an asset bubble sitting on top of an iron ore mine. Both of which are the critical negatives in this weak Aussie dollar view.

Chinese Yuan

China returned from the Golden week with a bang as mainland equities soared to multi-year highs driven by last week RRR cuts. ON the FX market there was an aggressive culling of long USD. The liquidation appears guided to provide currency stability heading into the NPC on October 19.

Japanese Yen

Dollar-yen lacks in any momentum wedged between tracking US fixed income and a possible geopolitical flare up. However, the USDJPY continues to exhibit a higher acuteness to softening US rates so top side momentum should cap at 113.20 until this week’s critical US CPI reading.

The Euro

Despite the heightened political risk, robust EU economic data continues to attract EURUSD buyers ahead of the critical 1.1700.
ECB’s Sabine Lautenschlaeger was on the wires overnight; her hawkish comments also appear supportive for the EUR But with the Euro unchanged this week, the political overhang has taken the air out of the EUR ballon, and this ongoing political uncertainty will most certainly cap any near-term rallies.

The British Pound

The pound was undoubtedly the most energetic performer overnight After an error on Friday, the Office of National Statistics has confirmed that the UK unit labour costs have been revised up from 1.6% to 2.4% YoY. Predictably the inflation revision led to further pricing-in of a November BoE rate hike. But the sterling trade remains fraught with chaos with  lots of head scratching on both the political and monetary policy fronts

New Zealand Dollar

NZ$ stays on the back foot after the weekend shift in election results. But the markets continue to bid on dip mode expecting the election tumult and the broader uncertainties to dissipate which could provide a lift to the Kiwi near-term expectations

Asia EMfx

The volatility in both US rates and commodities has muddied the landscape as the market continues to drift in no man’s land. Geopolitical risks remain elevated which is not helping matters, but selective opportunities should stay in fashion. While the exclusive carry trades remains a tough grind  the economic fundamentals continue to look favourable  on the  THB, MYR despite the overnight purge in EM positions overnight

Positioning on the MYR remains very light and on the first sign from the sell-off in global fixed income abates ,I expect regional inflows to pick up again.

Turkish Lira

Where do we go from here.? The Carry trade should remain alive and well however over the near term there will likely remain a lack of confidence in the TRY institutional markets after fairweather liquidity providers baulked at providing streamable quotes and the one or two that did support electronic venues felt 2-4 % spread was appropriate for market conditions. If there’s any doubt what adds more unwarranted fuel to market unwinds, look no further than the risk-averse mindset that dominates today’s Top Tier bank trading rooms.  what investor appreciates his stop-loss triggered on a 4 % on a disproportionately widespread .What investor appreciates his stop-loss triggered on a disproportionately wide 4 % spread relative to the market breadth .