Short on Themes Long on Dollars

Australian Dollar 

It was hard to ignore the Aussie surge post-CPI data with the headline beating (0.7% vs. 0.5%QoQ, 1.3% vs. 1.1%YoY). With the core print failing to provide a clear signal, the +70 pips move higher caught a few by surprise. I suspect the dramatic uptick had more to do with positioning, as the market may have been found long dollars, given the broader US dollar moves of late.

My view: “ exorcising the inflation demons will be a lot harder than what the market has currently priced in “

Heading into yesterday’s data print, the market was pricing in a minuscule risk for a rate cut through 2017, and since the RBA is certainly not about to hike rates, the veracity of the move was a bit surprising. However, the pair may have been caught up in the broader USD move as the greenback was trading slightly lower in Asia.

The AUDUSD once again gained little traction above AUDUSD 77  level with a risk reward of pressing higher in the face of an impending US rate hike, making little sense.  However, the headline data should confirm a positive tilt for Australia with better traction likely  on the long Aussie trade played out versus the EURO or even its crazy Commonwealth cousin, the Canadian Dollar where the interest policy appears divergent

Aussie is getting little support from Oil, which has continued to fall, with WTI trading just above $49 in early APAC as OPEC deal worries and US inventory data narratives keep resonating within the Oil Patch.This despite a relief rally on the better than expected DoE inventory report. However, the $50.00 per barrel level proved a tough nut to crack, and the move was quickly faded.

Also weighing on local sentiment, US economic data was generally USD supportive overnight, with the US Services PMI and hew home sales topping market expectation pointing to stronger Q3 growth.  Moreover, the overall US trade deficit came narrower than expected but with Exports higher than anticipated and Imports lower than anticipated, it suggests a buoyant Q3 GDP, but concerningly the  US consumer continues to tighten purse strings as reflected via lower import demand.

 

Japanese Yen

Continues to range trade but holding the 104.00 levels. With the markets ascribing  75 % probability of a rate hike by December, with only six weeks before the December FOMC, further dollar momentum from additional Fed repricing is likely limited.

The overnight currency movement was on the back of a new Florida poll showing Trump with a 2.0% lead over Clinton; USDJPY sold off to 104.05 then a ground higher on the positive US economic data.

Overall trade remains directionless and choppy on headline risk, likely a sign of thigs to come as trading themes other than the Fed and Election narrative are tough to source.

Normally the week before the BoJ the markets are on edge, but with the  BoJ Bazooka days apparently behind us, traders are quickly acclimatising to the BoJ’s  newly adopted patient approach to policy as the probability for any near term BoJ policy action is minimal.

 

Chinese Yaun

The most interesting takeaway is that during the recent Yuan depreciation, risk sentiment has held up remarkably well in a market that I believe is itching to sell risk given the proximity of the high-risk US election event and the multitude of Central Bank meeting next week.

The Feds continue to ease potential election risk by suggesting the path of interest rate normalisation will be gradual, thus supporting risk sentiment in the face both election risk and an imminent rate  hike. I fully expect the feds to reinforce this notion at next week FOMC and  expect the BoJ to remain on hold to maintain the current seemingly happy equilibrium.

However, with CFETS basket not depreciating the move appears strictly dollar related therefore the global apple carts remains upright.

 

EM Asia

Emerging Markets were the clear loser overnight vs. the USD as renews fears of higher global interest rates and a stronger USD continue weighing on investor sentiment. While the on the surface all is calm, the market is starting to get a bit nervous about further weakness in the Yuan with could lead to greater capital outflows and could negatively influence the regional basket, especially the low yielders.

Given the wave of speculative long USD Asia position betting for further Yaun weakness, risk reward is feeling a bit stretched at these levels, especially with + 75 % probability of a rate hike factored into the equation.

We saw a bit of this play out on the MYR yesterday as the USDMYR  traded to a low of 4.1440 – but Import hedgers were reported on the bid and pushed the market back above 4.16.