The trend is your friend

Currency Markets

There was an intense focus on Italy Wednesday thanks to speculation that its new coalition government would request that the ECB write-off the bank’s QE-acquired debt of EUR250bn. Panic ensued with the EURUSD plunging to 1.1760 before recovering after the report was denied.

But the Italian political noise proved to be little more than a distraction from the markets complete focus on US 10-year yields as investors continue to challenge their conviction on both the USD and the trajectory of US bond yields. But, what’s new with this picture as the market has been second-guessing the emerging bullish dollar narrative since Mid-April and missing out on 550 pips EURUSD  downside move

If the market continues to trade off US yields and diverging economic data between the US and EU, it’s hard to argue against the current direction in yields or the dollar. Forget the VIX the DXY is the new fear index if we consider the number of market cracks the dollar has exposed on its recent move.

On the US economic data front, the consumer remains the economy’s backbone, and if this robust trend in the retail space continues to build, factor in a bit of wage growth pressure and the US dollar will continue to move higher on the back of higher yields.

However, the Pound has firmed considerably on Brexit news breaking news from The Telegraph explains. “Britain will tell Brussels it is prepared to stay in the customs union beyond 2021 as ministers remain deadlocked over a future deal with the EU, the Telegraph has learned.” which has towed the EURUSD gingerly higher in early APAC trade

EUR:  With the EURUSD back above 1.1800, we’re at a make or break point for judging near term trader sentiment. Over the next 48 hours will be telling, as the bulls and bears jostled for position but provided the EURUSD can finish the week below 1.1850, that would suggest the bullish USD story remains intact. But a close below 1.1775 would be even more convincing

JPY: Similarly, a weekly market close above 110 indicates the near term USD rally continues. The correlation between rates feels right, and the USDJPY could be the best bet to express the USD dollar bullish bias near-term

AUD: It remains to confuse by not trading in line with US fixed income. And even more frustrating for the Aussie bears is the copper continues to sell poorly. After yesterday miss on the wage price index, a lot of buying emerged. Far much more than usual, suggesting some real cash interest on the dip possible from resting orders. ( Exporters??)

Oil Markets

Oil prices resumed their climb Wednesday after shrugging off Tuesday’s API data as investors turned focuses on the key Energy Information Administration report which highlighted an unexpected draw of 1.4 million barrels for the week to May 11. Of course, more attention will fall on EIA given that the API is a voluntary metric and, at times entirely off the wall, whereas EIA reporting is a mandatory industry regulation and the preferred metric for short-term investors. None the less, divergence in the reports will leave some investors scratching their heads as this week’s API data provided traders with more questions than answers.

With the dual supply shortcomings from Iran and Venezuela providing substantial support and given we’re not even in peak July driving season, at least for the short term, it’s hard to imagine Oil prices giving up too much ground especially on bearish inference from one of highly unpredictable US Oil inventory reports. Dips continue to look attractive in this environment.

Gold Markets

Gold remains under pressure from the US dollar and utterly vulnerable to higher US bond yields which are showing signs of a significant topside breakout after the 10-year Treasury note yield hit 3.1 % overnight. The inflationary overtones from oil prices coupled with a substantial US retail sales print have increased Fed rate hike expectations. As the trickle-down effects from US fiscal stimulus continue to show in the data, bond yields will move higher, but ultimately the positive data prints will leave a larger than life footprint on Fed members interest rate views and challenge the current dot plot scenario.

Malaysia Markets

Not unexpected the political noise, stronger USD and higher US Treasury yields continue to dent sentiment in local markets.  But given the higher US Bond Yields, I expect the USDMYR to grind higher over the short term in line with the broader USDASia basket.