Sometimes the people who are most successful are the quiet ones who do the work in the background and don't cause a stir. The market can be the same way. The Premium Insights are considering opening a GBP trade ahead of Tuesday's speech by PM Theresa May due at 11:45 GMT.
The stories in 2017 so far have been Trump, bonds, oil, jobs and US dollar weakness. One spot where there has been almost no news or attention is the Australian dollar and yet it's the best performer so far this year, gaining more than 4% against the US dollar.
Why?Australia has certainly been quiet. It's Summer holiday season there and that's made for a quiet calendar, no politics and minimal RBA-speak.
Another reason is the level of risk aversion in the market. AUD tends to do best when risk appetite is high but there is also a sweetspot of moderate-to-high uncertainty where, far-away Australia acts as an island of stability. If it were to rise any further the risk aversion would kick in and AUD would sell off.
The final reason is that the Australian dollar selling in the latter-half of December was unjustified. It was caught up in year-end flows and that's slowly been unwinding. The result is gains in 8 of the 10 trading days so far this year.
The domestic calendar will remain quiet in the week ahead so for a sense of whether the gains can last, we look to the AUD/USD chart. With the pair closing at 0.7500 on Friday it's right up against an inflection point. Last week's high was 0.7519 and the December high was 0.7525. If those levels can break then the pair could add another 250 pips. If it holds, the it's likely a sign of higher risk aversion or a renewed focus on fundamentals.
But do watch out from the deteriorating technicals in the Shanghai Composite and this week's Aussie jobs figures.
Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -66K vs -70K prior JPY -80K vs -87K prior GBP -66K vs -65K prior CHF -14K vs -13K prior AUD -4K vs -2K prior CAD -8K vs -4K prior NZD -14K vs -11K prior
The moves this week in the CFTC report were modest in what might be a sign of resilience for US dollar bulls. Notably, the euro net short is now at the lowest since June. That signals a bit of extra ammunition for a retest of the 2016 lows.
|FOMC's Dudley Speaks|
|Jan 17 13:45|
|FOMC's Brainard Speaks|
|Jan 17 15:00|
|Treasury Sec Lew Speaks|
|Jan 17 15:00|
و ساعالج فرص تداول الإسترليني و اليورو في ندوة (وبينار) مساء يوم الثلاثاء. سجل للمشاركة هنا.
Members of the Federal Reserve have begun speaking about when and how to trim QE holdings for the first time. The US dollar was weak leading into New York trading. The kiwi led the way while the pound lagged. Yellen is speaking later but it's not likely to be market moving. The Premium Insights issued a new JPY trade.
Until now the debate at the Fed had largely been about when to hike interest rates and how much, while questions about the balance sheet were unaddressed. Three separate Fed members broached the subject this week in what was surely a coordinated communication shift.
For some background, the Fed purchased a whopping $4.5 trillion in Treasuries and mortgage-backed securities in QE programs in the aftermath of the crisis. That value remains steady because when bonds mature, they buy other bonds. The general FOMC exit plan to bring its balance sheet back to normal levels is to stop reinvesting maturing bonds and let the holdings slowly run off. Another option would be to sell holdings.
The central question revolves over the start of unwinding. The Fed has long indicated it would raise interest rates first but has never been specific about how high rates would need to go before halting reinvestment. On Thursday, Philly Fed President Harker said the FOMC should consider ending bond buys when the Fed funds rate hits 1%. That would be after 2-3 more hikes.
Earlier this week, Rosengren said the Fed should consider trimming its balance sheet and on Thursday Bullard suggested the Fed could stop reinvestment after one hike. Other debates include what portion of Treasuries and MBS to hold and the duration of the portfolio.
The debate muddies the Fed picture for 2017. What's more hawkish? Three hikes or two hikes and stopping reinvestment? That's not an easy question to answer but it's increasingly clear to us that the bond market is in charge at the moment. A strong Treasury auction Wednesday was followed by one that was very close to expectations Thursday. Dollar swings followed both.
Other notes from Thursday's trade- Whenever the market hears the word 'Brexit', the pound suffers. A report that Theresa May plans a major Brexit speech on Tuesday sent cable more than 100 pips lower Thursday.
-US economic data remains strong with initial jobless claims down to 247K versus 255K expected.
-But the dollar is an issue. Lockhart said the dollar was an issue for exporters and the export/import price indexes both missed estimates in a way that suggested a larger USD factor.
-The event to watch in Asia-Pacific hours is a scheduled speech from Yellen at 0000 GMT. Unfortunately, it could be a dud. The event is a town hall with teachers so expect talk about financial education. But she will take questions so there may be some notable headlines.
|Fed Chair Yellen Speaks|
|Jan 13 0:00|
|FOMC's Harker Speaks|
|Jan 13 14:30|
Volatility is on the menu for the next four years and it was kicked off by Trump's first press conference since July. The US dollar fell as he spoke and was the laggard on the day; the Australian dollar led the way as it continued its strong start to the year. Japanese current account data is later. As gold extends higher, we note the metals' stabilisation relative to non-USD pairs. Will metals survive another fresh run-up in bond yields as Fed speakers respond to higher inflation? Will Donald Trump's fiscal stimulus promises be offset by confrontational international trade policies? Does any of this matter if stocks rise and miners push along with them?
Trump set off a sharp round of US dollar selling for three reasons, some of them will last and some could quickly fade.
1) It always comes back to growthTrump's press conference was highly anticipated and that helped to stoke unrealistic expectations. People expected him to touch on everything but he was battered with questions on Russia and building a wall. US dollar bulls had hoped he would deliver something to shore up confidence that growth-inducing measures are coming. That could be fiscal stimulus, tax reform or regulatory reform but he left those areas untouched or didn't add anything new besides the regular hyperbole like saying he was going to be the greatest jobs creator in human history.
2) He singled out pharmaShares of pharmaceutical companies slumped after Trump singled out the industry as one that's leaving the US and overcharging Americans. He vowed to launch a bidding system for drugs. The pattern so far is for him to start with an industry and then begin attacking individual companies. That's what he did with automakers and if he begins to single out companies, expect more risk aversion.
3) You say you like volatilityThe markets will ultimately reflect the President. He's calculating in his unique way but he's also a loose cannon. The shots at pharma came out of nowhere. More broadly, the press conference was amazing viewing if only because you never knew what he would say next or how he would say it. He accosted CNN and showed that a cornerstone of his personality is defensiveness. That kind of personality can only add to volatility in the four years ahead and risk assets prefer less-stormy seas. The other dollar-negative factors will fade in the days and weeks ahead but his volatility personality won't change.
The final factor that undermined the dollar was a strong 10-year bond auction. The yield was two basis points lower than markets were anticipating and that cut the knees out of USD/JPY in a quick move to 114.25 from 115.15. That was a four week low in the pair and darkens the technical picture. We wrote about the crowded bond bear trade yesterday and it appears it was a bit too crowded, at least for the day.
Looking towards Asia-Pacific trading, we will be keeping a close eye on commodity FX. The Aussie is sparkling so far this year and a rebound in oil sent USD/CAD below the critical uptrend that started last May. The calendar is light but features Japanese current account data at 2350 GMT.