Uncertainty and Anxiety
No coronation for the US dollar just yet as investors spent a significant part of Monday analysing the latest edition of Fear and Loathing in Washington. To say that confusion reigned would be an understatement as waves of jittery headlines more than sullied investor sentiment. Special Prosecutor Mueller’s recent arrests reminded us that some stories just never go away while the journey down the yellow brick road to tax reform is still fraught with peril. And rounding out the headlines, Jerome Powell remains the odds-on favourite. The mash-up of all three headlines sent equities, yields, and USDJPY lower.
The Greenback was always the first player this week given the massive US economic data diary.But even without getting sideswiped by risk-averse headline there was an increasing air of reluctance to chase the dollar higher given that long dollar positions were a bit overextended. But even traders who like the USD story were playing the patience game given the plethora of economic data releases this week and are looking to buy the dollars at better levels.
The scope of Special Prosecutor Mueller’s investigation will likely widen. But at this stage, we have no idea if there’s a smoking gun or its all a tempest in a teapot.Regardless, look for this inquisition to remain in the headlines for the foreseeable future.
Tax reform took another detour after Bloomberg reported that “the House is said to be discussing phase-in of the corporate tax cut” implying no one-off haircut but instead it’s to adjust gradually.
Powell is 75-80 % priced in so we should only expect a more significant USD knee-jerk if Trump pulls a rabbit out of the hat.
The Japanese Yen
The markets spent the more significant part of last week buying USDJPY. But when it struggled to gain momentum after the buoyant 3 Q GDP and then fell victim to the Jerome Powell headlines; it has spent most of its time in recoil since. There remains a lot of events to get through this week including the BoJ, FOMC and of course Friday NFP, and while there remains is a valid argument to move higher, it’s challenging to trade USDJPY continually look over one’s shoulder for headline risk. At the moment the market is still tentatively buying the dip, but a break below 112.75 could lead to a cascade of stop-loss triggers and pricing could get very messy.
One can sense the level of angst and frustration brewing as dollar bulls like it higher, but given the Yen headline risk sensitivity, USDJPY will continue to march to its beat.
A willfully dovish ECB suggests the EURO should remain under pressure. The single currency received something of a reprieve from last weeks onslaught as the push for independence in Catalonia has taken several severe blows over the weekend. But the market momentum continues to lean lower
The Australian Dollar
Let’s see what the Aussie bears have to say about the China ban on Australia beef lifted. I suspect they’ll be hungry as the market approaches the .7700 level. But all eyes should remain on the USD side of the calculus with the deluge of economic data, FOMC and new FED chair announcement
In the meantime, the Aussie received a get out of jail card as US bond yields fell and US dollar bull’s retreated at the prospect of Trump Tax cuts getting phased in as opposed to an on-off haircut.