Tag: APAC Market Corner

Another Turkish Lira flash crash

Another Turkish Lira flash crash  

A busy start to the session dealing with yet another mini TRY flash crash as the bad Lira news continues to compound. Otherwise, global Forex and fixed income markets remain in neutral  overnight and predictably focused on the upcoming FOMC minutes

The Turkish Lira meltdown. As far as I can tell was little more than a liquidity crunch reminding the Efx space again just how weak liquidity is during less than ideal times. As usual, the predictably fall out from the TRYJPY carry trade  has kept my desk hoping this morning

President Trump was keen to remind us overnight that trade war is not about to leave the stage anytime soon declaring he is  “not pleased” with the results of China trade but sees them as “a start.” Which then triggered a subtle risk reversal on US equities leaving investors rudderless and prone  heading into today’s Asia session

Oil Markets 

Oil prices had taken a respite although their far-reaching implications across asset classes most likely contributed to denting equity sentiment when Washington suggested oil prices have gone too far. With US gas prices jumping to 3 dollars per barrel in the states ahead of peak driving season, the political backlash not to mention the likelihood surging oil prices will sap some momentum from the US economy has caught the US administrations attention. Which of course puts more focus on Vienna Group’s decisions on whether and when to increase production in response to the latest supply shocks from Iran and Venezuela

Gold Markets
The US dollar continues to drive the Gold bus as a short covering US dollar rally has tentatively lifted the gold bulls spirits. But the market remains mired in no man’s land as the break fo 1300 did create enough of a fire sale to shock gold market into submission. The markets will not shift to the FOMC minutes for inflation updates as any suggestion that the Feds do see a pick up beyond their 2% target could be interpreted bullishly for Gold which should find support as an inflation hedge

Currencies

EUR: challenging to avoid the excessive noise around the Italian political scene but the focus remains on the FOMC and ECB statement.

JPY: USDJPY is coming off rather aggressively this morning as more disclosures have been noted from PM Abe stemming from the Kake school scandal. Attention remains focused on the Nikkei which is cratering this morning and triggering some interday USDJPY stop losses below 110.75 in this mini-meltdown. Liquidity has been thin post TRYJPY meltdown, so this could be exacerbating moves, but we should expect some ” bargain hunting below 110.50 to keep the movement contained at least for the short term

MYR: Profit taking on the broader USD with US bond yields remain stable has improved local sentiment however the market is in desperate need of fiscal clarity, and this fact alone will hold foreign investors at bay despite some desirable levels on both bond and currency markets. Despite foreign investors shying the local markets, domestic funds have been significant equity buyers which continues to underpin domestic sentiment.

Commodity currencies are beaming

 

Currency Markets 
The US dollar has given up some of its gains overnight as investors keenness for Greenbacks has temporarily abated. The shifting dynamics around trade and tariffs does give pause for thought as US dollar bulls are consolidating gains at a very tricky and treacherous junction for both the USD and US bond yields. After making some significant advances last week, USD profit taking was the name of the game in Monday NY session.

Commodity currencies are beaming on the back of surging Commodity Indexes as oil prices broke through last week high water mark. The de-escalation in the US -Sino tariff and trade has put to rest, temporarily albeit, some of the market biggest fears around a Global growth slowdown and commodity markets and prices are returning in vogue.

Also,  there’s the usual air of uncertainty with both May FOMC minutes and  April ECB minutes due this week. Trader’s will be more inclined not to get ahead of the curve before these releases.

EM currencies performed better overnight as stretched positions unwound and the bounce in oil prices provided some idiosyncratic benefits to petrol related currencies. However,  the common denominator in the EM space remains the stronger USD which could continue to run amok after the overnight profit taking inspired u-turn.

So far, the beginning of the week is  shaping up to be all about consolidating and gingerly contesting last week’s significant breakouts

Oil Markets

The markets positive take on “no trade war “and Venezuela political woes are driving Oil prices higher. The global condemnation surrounding the election of incumbent Venezuelan president Nicolas Maduro has as expected trigged the Trump administration to levee new sanctions on the debt-ridden country. Tightening the economic screws will severely cripple  Petróleos de Venezuela ability to export while making it virtually impossible for the country to acquire dollars.

Also, US secretary of state Mike Pompeo raised the Iran sanctions bar by promising to impose the “strongest sanctions in history” on Iran to bring it to the bargaining table for a new nuclear deal.

The effect of OPEC -Non-OPEC supply compliance and the US abandonment of the JCPOA has created ultra-tight supply conditions to the point where any hint of supply disruption will send oil prices soaring. Supply-side dynamics are apparently in the driver’s seat suggesting prices should push higher near term.

Equity Markets

Equity investors revelled as trade war fears have temporarily abated suggesting the parties are heading on a far more appealing approach than feared. But hope springs eternal that both superpowers can iron out a market-friendly bilateral trade agreement and at the minimum maintain, stay at the negotiation table until the more contentious trade issues can be ironed out. The fear is that the “no trade war “announcement is little more than kicking the can down the road., but only time will tell.

Gold Markets
Gold price movements continue to be as much as anything a USD trade. Gold prices moved off overnight lows on the back of USD profit taking. But from both a fundamental and technical picture the Gold bears continue to have the upper hand as bullish signals are non-existent. Given the resurgent dollar, a reprieve on the trade war front, equity markets stabilising and evaporated geopolitical risk premiums, the balance of risks suggests gold prices move lower over the near term.

Currencies

EUR: A bit of a mixed bag overnight with ECB’s Nowotny erring dovish but Italian Political risk premiums eased after Conte is said to be the next Prime Minister. However, given the Italian affair has little chance of a spill over into other peripheral debt and with the ECB already leaning very dovish with the first hike not priced until September 2019, the Italian risk should be of little influence on ECB policy.

JPY: After falling to move above 111.40 overnight, the dollar bulls turned more conservative without the support from higher US yields as 10 Year UST’s were little changed from last weeks levels

AUD: Strong Beta currencies are benefiting from the conciliatory actions on the US-China trade front as global equity markets soared and Wall Street has followed suit starting the week on a robust note. But the bullish case for commodities on the back of surging oil prices is building which is underpinning AUD sentiment.

MYR: We would typically expect USAsia to trade lower as the US dollar has taken a bit of a detour overnight. However, the Riggit remains vulnerable to the lack of insight into fiscal planning.  But markets levels look attractive from both a Bond yield and currency perspective not to mention surging oil prices, so we are left to surmise that once fiscal clarity is offered, we could finally see the Ringgit sentiment improve. I the meantime   EM Asia FX will remain susceptible to the stronger USD

A test of the breakouts

A test of the breakouts 

This week should be all about contesting and consolidating last week’s significant breakouts in 10 year UST, EURUSD, USDJPY and Oil Prices. And despite weekend inspired short-covering in US fixed income, we’ve seen a weekly close in US 10y above 3.05 %. And with the Baker Hughes rig count holding steady, the tumultuous trifecta of USYields, US Dollar and OIl prices, should get set to resume their upward trajectory.

While significant economic data fixtures will be far and few this week, markets will be inundated with central bank speakers, including four central bank governors (Fed Chair Powell, RBA Governor Lowe, Riksbank Governor Ingves, and BoE Governor Carney). Also, traders will navigate the May FOMC minutes, April ECB minutes and Riksbank Financial Stability Report.

The May FOMC minutes will be of particular interest after the markets shaded the May 2 FOMC meeting dovish. But with the market now slightly leaning to the four rate hike camp this year, any hawkish glean would raise that conviction and should propel the dollar to new yearly highs.

The latest statement on the China-US trade suggests both parties are happy to avoid the dreaded tit for tat escalation while working towards a more market-friendly bilateral trade agreement. But the intentional vagueness delivered by both parties statements suggests a great divide, but there’s a hint of a consensus, none the less, to bridge that gap. So given the possible worst-case scenario was avoided the market should view the latest trade discussions as a favourable and equity market should be in that happy place, at least for today

Oil prices

The US and China agreeing to no trade war will be positive for Oil prices given that the possibility of a full-out trade war would have dealt a significant blow to global growth.

The well documented dual supply disruptions from Iran and Venezuela continue to drive current sentiment. But with the pipeline constraints in the Permian Basin in focus and continuing to factor, the supply side dynamics suggest prices will remain firm through 2018. And throw in a positive demand fillip from a de-escalation of trade wars and prices could run higher for longer.

No change in US oil rig counts this week holding steady at 844 and about half of the heyday numbers of the Oct 2014 high, when oil was at $80. Suggesting no Monday morning downside test is in the offing

Gold Prices

Gold prices rebounded off weakly lows as the US dollar eased on the back of profit-taking ahead of the weekend. With geopolitical premiums getting exhausted, gold bulls are in search of the next significant catalyst. But, gold remains under pressure from the US dollar and utterly vulnerable to higher US bond yields which are showing signs of a strong topside breakout after the 10-year Treasury note yield hit 3.1 % overnight. The inflationary overtones from oil prices coupled with a strong US retail sales print have increased Fed rate hike expectations. This week FOMC minutes could be a key driver for near-term USD sentiment so we should expect Gold and the USD to remain relatively rangy head of the release

Currencies
The depth of USD appreciation in recent weeks has exceeded virtually everyone expectations. What started as a purge of long EURUSD positioning has manifest into a full USD bull. I think G-10 dealer will go AUD and JPY route to express stronger US dollar bias from a catch-up perspective. EURO could start to take cues from the USDJPY which could assert itself as the dominant driver near-term

JPY: With equities stabilised and 10y yields in the US breaking out of 3.05, USDJPY has arguably underperformed so we could see USDJPY lead the USD bulls to charge over the near term. Correlation with fixed income remains robust and UsdJpy touching 111.00 as US 10 year yields reached 3.125

MYR: Oil prices remain high but so too does political risk, particularly the discussion around GST and SST and how the Credit agencies will view the drop in budget finances
Also, the USD continues to firm against all Asian currencies, and this may be caused by US and China trade negations that will carry on tomorrow.

Outside of oil positivity, the negatives are building as   the USD could continue to grind higher near-term

The trend is your friend.

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.

 

Stephen Innes OANDA Head of Trading APAC

I’m a believer

I’m a believer

The promising US Retail sales data left a resound footprint on global markets as US consumers are loosening their purse strings, but perhaps more important from an investor perspective, the data speaks directly and plainly while providing a linear gauge of the trickle-down effects from fiscal stimulus. Indeed, green shoots start to emerge.

The UST 10Y closed above the critical and pivotal 3.05 % area which encouraged the dollar Bulls to hammer the EURUSD down to critical structural support levels. While the clearest dollar bull signal is from US 10y yields, but with trader humming the iconically cool ” I’m a Believer” this morning, there’s permanence building as waves of fresh dollar longs hit the books.

Oil Markets
Despite OPEC oil demand forecasts amidst China’s unquenching thirst for crude oil rising, bullish Asia sentiment seems to have gone off the boil after China reported weaker-than-expected investment and retail sales in April, muddying its economic outlook suggesting the domestic surge in refinery runs could be short-lived.

The stronger dollar typically causes a bit of indecision as investors usually back off from commodity risk when the US dollar strengthens.

The API reported a surprise inventory build for the week ending May 11 which caused some intraday long positions to cut risk.

But at the end of the day, Oil markets remain supported by the usual suspects, Iran and Venezuela and OPEC compliance suggesting Oil remains a buy on the dip.

Gold Markets

Gold finally succumbed to the $1300 level as the stronger USD dollar ran roughshod through COMEX gold overnight. But with Gold positioning on CFTC significantly reduced against much of the year, mirroring the money flows into the USD over the past month, there wasn’t a lot of market stress on the move from a flow perspective.

Shifting interest rate dynamics on the back of oil-driven inflation expectations with the stronger USD in tow suggests we could see an extension lower. But ultimately the longer term inflationary pressures, especially with real interest rates expected to stay historically low, gold should continue to find support. However.,logic suggests letting et the dust settle, as bullish signals have remained far and few between of late.
G-10 Currencies

EUR: The US retail sales number triggered a massive currency reaction on the back of UST 10 Y yields rocketing higher. While the market is tentatively finding support at the critical 1.1820-25 level, it’s hard to argue the current direction given the surging US yields which suggest we could print in the 1.17 handle sooner than later.

JPY: USDJPY soared as the US Treasury yield rally spotlight on the interest rate policy divergence between the Bank of Japan and the Fed. USDJPY rose from 109.91 at the NY open to 110.44. However, Yonhap reported North Korea is cancelling its meeting with South Korea for Wednesday and threatening to withdraw from its summit with Trump – all because of US-South Korea drills. Which has seemingly capped, at least for the time being, USDJPY upward momentum

Malaysia

The local markets are going through a period of inflexion. After navigating a potentially high-risk election, as investors are taking a well-deserved breather after coming out relatively unscathed.

But with the US dollar trading stronger across the EM Asia Basket and in G-10 space the Ringgit will struggle to make any inroads today Especially with the US 10 years UST surging to 3.08 overnight.

Investors are unlikely to flock back into the Ringgit end masse over the next week especially with the USD surging and US yields punching higher and oil prices off their latest high-water mark.

We should expect a bit of a bumpy ride over the next few weeks as soon as the government lays all their policy cards on the table. Yesterday Malaysia’s new Council of Eminent Persons briefed the public on its activities, but the main take away is that fiscal reforms will shade more towards cost cuts to offset GST removal at this stage and should be good enough to keep the prey Credit agencies eyes at bay for the time being.

Stephen Innes OANDA Head of Trading AOAC

China Data Flash

10:00*(CN) CHINA APR INDUSTRIAL PRODUCTION Y/Y: 7.0% V 6.4%E; YTD Y/Y: % V 6.7%E– Source TradeTheNews.com

10:00(CN) China Apr Fixed Assets Urban YTD y/y: 7.0% v 7.4%e– Source TradeTheNews.com

10:00*(CN) CHINA APR RETAIL SALES Y/Y: 9.4% V 10.0%E; YTD Y/Y: % V 9.9%E– Source TradeTheNews.com

A bit of a saw off on the critical CNY data dump with both Retail Sales and Fixed Asset spending missing the mark but Industrial Production surprising to the upside. Since Chin’s new wealth consumer will continue to spend, the IP increase suggests the economy remains steady. But the market was looking for more convincing data; and we’re seeing a bit of wobble on WTI/BCO and commodity markets in general.But given the Lunar New Year holiday effect, we shouldn’t get too much of a negative reaction

Yields in focus , again

Equity Markets

Equity markets clung on, at least for today, to the easing of trade tensions on the back of President Trumps ZTE reprieve from potentially crushing sanctions. But with US yields again moving higher and the key 10 Year UST nudging above 3 %, it indeed took the wind out of equity investor sails. None the less, the major US indices managed to eke out a positive close despite giving up earlier gains.

Look no further than then the far-reaching inflationary implication of higher oil prices underpinning US yields. Higher oil prices will continue to create the bumpy ride on equity markets, And while supportive of the enormous Oil conglomerate constituents, the cause and effect of higher US interest will most certainly weigh on valuations over a broader market.

While comments from US ambassador to China are on various newswires and he says, “ The United States and China are still “very far apart” on resolving trade frictions. He adds,”China agreed to do a lot of opening up when they joined the WTO, but a lot of the promises were not fulfilled. We want a timetable. We want to see these things happen sooner or later,” he said. Suggeting the divide remains wide

Currency Markets

US fixed income continues to trade offered. German Bunds had bettered those moves after the tepid CPI print which held the dollar bulls back from re-boarding the USD bandwagon. Last week’s weaker US inflation print caused investors to increase their curve flattening positions, where they favour longer-dated Treasuries over shorter-dated issues But with US 10y revisiting the 3 % level, the USD dollar is opening the Asia session with a bounce in its step. But, Traders are decidedly mixed in G-10 flipping positions on a dime as the market continues to trade hypersensitive to US yields. And of course, since no one seems to have a reasonable handle on the trajectory of US interest rates, therefore currency markets remain muddled.
Oil Markets
Oil markets turned bid again on geopolitics. Yemen’s backed Houthis launched missiles at a Saudi Aramco facility, but perhaps the most significant flashpoint is violence that broke out on the Gaza Strip in response to the US’s inauguration of its Jerusalem embassy.

Which has triggered much discussion about the WTI-Brent spread (CLCO1 Index), which has plumbed into deeper negative territory

The gain for U.S. benchmark oil prices wasn’t quite as impressive with traders wary of OPEC’s ability to offset crude supply declines and growing U.S. production. However, the wideners could be part and parcel with Oil traders going through the ritualistic Monday tendency of testing the markets downside resolve by overplaying the jump in Friday rig counts.

But adding the overall bullish narrative are signs that global oil market continues to tighten as the monthly OPEC report suggests a very balanced supply and demand dynamic with stockpiles running a small 9 million barrels above the five-year average.

But in general, the market is wholly focused on the hornet’s nest in the Middle that is an accident waiting to happen.

Gold Prices

Gold prices remain tethered to the hip of the USD which continues to be the most dominating factor driving sentiment. Also, investors are erring on the cautious side ahead of tomorrow Retail Sales, as history has a way of reminding us never to understatement the purchasing power of the US consumer. A better than expected print would give the Federal Reserve more cause to raise interest rates would naturally push the dollar higher. But with US yields testing the 3 % level in 10 Yeas UST, rates are also weighing on Gold sentiment, this despite slightly wobbly equity markets and the abundance of geopolitical headline risk.

Malaysia

The political risk premium has tentatively evaporated after the markets opened and traded reasonably well yesterday on affirmative council appointments made at the weekend, the central bank backstop after BNM reaffirmed it would continue to ensure clean conditions prevail in onshore financial markets, and of course the tight MYR-BCO (WTI) correlation.

But investors are indeed not crashing the gates to increase economic MYR risk; instead, it was the placid open which caused bearish MYR bets along with pre-election hedges to unwind. But the positive Ringgit sentiment came on the back of the local supply where Malaysian dealers were comfortable selling dollars using the BNM as a stop-loss order. Even more telling were the local Pension funds which were on the bid (bond and equity markets) all day providing strong support levels.

At 3.95 the market continues to bake in ~.05 political premium on the back of the GST uncertainty and how the debt agencies perceived scrapping the unpopular tax. But in addition to the to the political risk, ultimately what does matter is the future direction of both the USD and US bond yields. Given the anticipated bumpy ride over the next few weeks, for some, there was not enough of a fire sale to comfortably re-engage the Ringgit, and it remains highly unlikely investors will chase the MYR higher until the all the government’s cards are on the table. Expect some consolidation today.

Currencies Views

EUR: The long and short of it. Interest rate differential continues to drive the bus. While the lower EUR does suggest the ECB would be more willing to raise interest rates sooner than later, members are very guarded with their language not wanting to ignite an EUR rally and traders starts tripping over themselves to get EURUSD topside exposure on a definitive policy shift.

JPY: Providing JPY colour for the past few weeks has been a copy and paste, so why change today. “While US fixed income remains, the primary driver suggesting USDJPY moves to 110 but without a spark on the US inflation front Please make me a believer!!

A crowded tale of the tape

A crowded tale of the tape

Global equity markets revelled in their most favourable showing since early March after clement CPI  figures led to hopes of a Goldilocks economy in the US. But as senescent as this view is becoming, with the Federal Reserve Board looking to remove emergency accommodation, it’s perhaps not the best narrative to hang one’s long-term investor cap.

The combination of a lower than anticipated inflation print and a less crowded long EURUSD positioning, saw the USD  backpedal into weeks end. However, interest rate differential still favours the USD, suggesting the recent dollar wave of appreciation while bruised, is not broken. Implying it’s far too early in the cycle for the USD to resume its more protracted downtrend. None the less, on the benign inflation print, traders might turn short-term agnostic on the USD ahead of the vital Retail Sales data, acknowledging we could be in for a period of consolidation.

However, before bringing out the ” Snooze Pillow”, there will be some conversations to engage in the global growth narrative as dealers pivot to US Retail Sales data. Also, FX markets will focus on  Fed speakers taking to the airwaves. Fed members perspective always increases in importance after any critical inflation metric. In this case, traders will be keen to hear their opinions on the tepid CPI print as US inflation remains  MIA.   The significant Fed event will be Tuesday’s Senate confirmation hearings of Richard Clarida and Michelle Bowman to join the Board of Governors as vice-chair and the community banker Governor seat respectively

Given that risk appetite along with movements in the USD is very much echoing the underlying developments in US yields. The US Retail Sales data and Fed speakers should provide reasonable signposts for global capital markets as the trading activity should remain intrinsically tethered to the trajectory  US interest rate policy and 10 Year UST yields over the near term.

AS well, look for oil prices will continue to have their far-reaching implication in inflation and US yields

On geopolitical font, US-China trade negotiations are expected to recommence this week with a potential visit from China Vice Premier Liu He. But the diffusing tension was the President took to Twitter overnight announcing he has instructed the Commerce Department to reverse its sanctions on China’s ZTE, which should be interpreted as a significant concession in the trade negotiations. However, a scheduled hearing on Section  301 of the trade act could keep the mood edgy.

Finally, the Middle East powder keg will remain a key focus with displays of aggressive warmongering between Israel and Iran on the rise.

Oil Markets

The Middle East geopolitical escalation and fragile supply-demand dynamics continue to tighten on the prospects of an ongoing collapse in Venezuelan output and the impact of US sanctions on Iran which will be realised toward the end of 2018. While the Iran curiosity should remain front and centre, Venezuelan production could nosedive further after ConocoPhillips clawed about US$650 million in assets belonging to PDVSA not only choking off their ability to export but also leaving Venezuela’s cash-strapped government in futile search of precious US  dollars.

ConocoPhillips has won court orders allowing it to seize PDVSA assets on Caribbean islands, including Curacao, in efforts to collect on a $2 billion arbitration award linked to the 2007 nationalisation of Conoco assets under late leader Hugo Chavez.

Heading into the weekend a combination of position squaring ahead of weekend headline riks and the rise on rig count saw WTI Crude Oil prices fall 1.4 % from  the weekly high water mark

On the Baker Hughes tally not unexpectedly with WTI surging on the back of Iran sanctions, US shale producer added ten oil rigs in the week to May 11, bringing the total count to 844, the highest level since March 2015. But on the flip side,  frackers remain well off their heyday numbers suggesting drillers are in no rush to let loose a supply oil gusher while hoping for higher and more prolonged returns.

However, with the bulls clearly in charge and the price floor appearing well entrenched for the remainder of the year, best to be cognizant of downside risk as complacency in oil trading has been the downfall of many. The one possible concern is the developing indications that point Saudi Arabia alleviating the effect of the sanctions by increasing output to counter the Iran disruption. But that also raises the spectre that other OPEC countries will follow suit which could put the current OPEC supply deal in jeopardy.

Gold Markets

Gold continues to be driven by the US dollar and rates causing the markets continue to consolidate at the low end of the year range due to the stronger USD.But with US yields testing the 3 % level in 10 Yeas UST, rates are also weighing on on Gold sentiment, despite wobbly equity markets and the abundance of geopolitical headline risk. And predictably appetite has been dwindling on the futures markets with the laters  CFTC data running at about one-third of their all-time high level. The failure to see any significant top side momentum along with the resurgent dollar has seen hedgers pare back positions while putting their money to work on riskier bets.

But the combination of geopolitical headline risk and long-term negative outlook on the USD  continues to advocate the gradual build of position on dips. However, the market is overly cognizant of the Fed rate hike in June and the fear of the Fed could dents sentiment near-term and demand continues to consolidate.

Gold bulls will be left to grind it out over the next few weeks until the worm eventually y turns on the US dollar which could trigger a significant move higher on Gold if the long-term negative USD  trend emerges. Treat Gold trade as a marathon not a sprint over the near term.

 

Around the Currency Horn 

USD: The combination of a lower than expected CPI and less extend long EURUSD positioning has temporarily taken the wind out of the dollar sail.  The next USD trigger will be the US Retail Sales release, where the USD dollar downside could be exposed on weaker print but how far this could induce a dollar sell-off is not so clear-cut.  Given the dovish display by other central banks, the lonely Federal Reserve Board appears to be the last man standing as speculation about interest rate rises and policy normalisation in the eurozone, Japan and Britain get kicked down the road. Suggesting the dollar should remain rented at the minimum over the next few weeks, none the less the politically challenged greenback is building a convincing argument for some longer-term views. But overall it remains testing to see just how much the EURUSD can fall given the inflationary aspect of the weaker EUR not to mention the enormous rally in crude oil over the past two months which could reignite inflation on the continent.

EUR: Short-term views will continue to be driven by economic surprise indexes which continued to favour an extended bullish  USD position over the near-term. But just how much more juice can be extracted from the differential play remains a question. EURUSD YTD lows should form a significant base.

JPY: Which echoes  the broader market sentiment that continues to ebb and flows without any real conviction on the back of  equity  risk plays  and US Yields

GBP: BoE vote split was dovish. The sizeable down move could be viewed as overextended. The  BoE next policy move is higher, but as we say in the business, “its hard to argue the direction.”

NZD: This has been a favourite topic of discussion amongst my circle. New governor Orr was dovish noting symmetrical risks around next move but its unlikely they will cut rates so 69 should remain firm given that there was limited follow through after the initial knee-jerk last week.

AUD: Despite the short covering rally, with ongoing weak data and dovish RBA suggests the AUD remains prone. Aussie short positions are much cleaner, to dealers will be quick to re-engage Aussie shorts on USD dollar strength.

CAD:  USDCAD remains exceptionally volatile as confidence continues to decline and accelerate on NAFTA talks. But there may be too much  CAD bullishness baked into the May BoC meeting. The BoC is finding themselves in the same position faced by RBA where tapping the brakes to curb excessive borrowing can have serious adverse side effects with household debt skyrocketing.

TRY A fair bit of vol last week as the Lira recovered somewhat on speculation policy makers may take action to defend the Lira  But traders are all too knowing that such types of interventions seldom produce long-term effects and the market is back selling the Lira into weeks end. The TRY could continue to trade from a weak hand this week.

EM Asia :Let the chips fall where they may

EM Asia: Let the chips fall where they may

Malaysia 

Attention will be focused on the Malaysian onshore markets this morning after PM Mahathir coalition triggered the circuit breakers and imposed a cooling off period for cash markets by declaring the two-day public holiday. Without cash markets and critical Malaysian pension fund support, it’s difficult to take to much away from the post-election   USD dominated arbitrage flows on the iShares MSCI Malaysia ETF (EWM). Or for that matter, the hostile moves on the fragmented and thinly supported USDMYR one-month NDF. The reaction on MYR  proxy trades, including the USDSGD, were far too splintered and inconsistent exhibiting hallmarks of extremely confused markets.

While conventional logic suggests, there could be equity outflows today, however, the degree to which local Pension Fund buying supplants these moves will be the key. Not to mention the possibility of BNM intervention on the unlikely scenario the market goes completely sideways.

But the tale of the tape will likely focus on PM Mahathir pledge to scrap the GST within 100 days. As well, the market’s reaction to PM Mahathir cabinet with the inclusion of former BNM governor Zeti. But the dramatic drop in the inner cabinet number is what telling from nearly 35 during Najib era to only ten so far. And by all appearance, the new appointments are apparently based on merit, not patronage

USDMYR: Lets the chips fall where they may, and we could see traders on a cash market knee-jerk look to position long term views based on Malaysia’s the solid domestic economic performance, high external factors and of course higher oil prices. The wild card in the deck remains the GST and how  the debt agencies react to PM  Mahathir pledge to scrap the unpopular tax  within 100 days

USDSGD: Of course the market looks to trade the tight correlation with the CNH, but in the meantime, we could see some Proxy interest regarding the MYR elections fall out take place.

China 

MSCI is expected to announce the results of its semi-annual index review at 5 am HKT on Tuesday morning. China A-shares will be added to the Emerging Markets index for the first time, and the list of names to be added to the index will be confirmed. Given that most of the likely constituents have underperformed this year, the market reaction to the anticipated announcement will be crucial for short-term sentiment.

USDCNH: Short-term CNH  sentiment could take its cue from the key markers retail sales and industrial production data due out later this morning. But the ongoing malaise around trade and tariffs have turned traders jaded which is being exacerbated by  PBoc steering the currency ship as steady as can be.

India 

Indian markets could be hit again this week as local stock exchanges could feel the repercussions from a potential MSCI de-classification of the Indian equity market from the Emerging Markets index after the Indian Finance Ministry and the Indian Exchanges where previously scolded about pulling licensing deals with foreign bourses.

USDINR: The beleaguered Rupee, hampered mostly by surging oil prices and  to a lesser degree the stronger USD, could be on the offs again this week  from a potential MSCI de-classification of the Indian equity market from the Emerging Markets index

Indonesia

The  Bank of Indonesia on Thursday after the Central Bank Governor hinted yet again that interest rates would be raised to defend the currency and stabilise the market.

USDIDR: With the central bank putting stability ahead of growth, it suggests that any short-term IDR appreciation could be meet with cynical dollar buyers.

Philippines

The USD  losses at weeks end were a welcome relief to Asian equity markets, especially twin deficit countries like  The Philippines, that has been one of the weakest links in the EM Asia chain.

However, on the currency markets, the midweek reprieve should not be interpreted as a trend reversal but rather a  squeeze from overbought USD  positioning.

While local PSEi investors welcomed the BSP  dovish rate hike, but profoundly pessimistic  currency traders quickly re-engaged the long USDPHP trade who are all too knowing that one-off interest rate hike band-aids seldom produce any positive long-term currency effects

USDPHP: Some stops losses were triggered through the 52.25  after currency traders viewed the BSP  one and done interest rate hike as distinctly dovish. While sentiment remains weak heading into the pivotal US retail sales print, the PHP should trade with a high level of sensitivity to the USD, but traders could look for dip buying opportunities over the near term given the dovish rate hike.

US CPI takes the dollar off the boil

US CPI takes the dollar off the boil

Currency Markets

U.S. Consumer Price Index increased 0.2 percent in April, less than the 0.3 percent rise projected. Naturally, there was a bit of disappointment from the Dollar Bulls after the critical index fell a notch short of quenching bullish views on the US inflation outlook.

Mind you, the markets had already moved off the EURUSD YTD low point on profit taking before the inflation print, so the USD setback was quite tame given the breadth of the recent dollar rally, and dollar buyers are far from being knocked for six.

Understandably, the road to inflation has been a directionless and frustrating one, and while short-term market views become all too consumed by the headline print, but the NY Feds underlying inflation gauge as measured by many disaggregated price series in the CPI index is punching higher. Suggesting the elusive US inflation is not too far away from taking the stage. Certainly, the CPI miss is not casue enought to  shift the Fed outlook, but inherently, the markets will be more cognizant for Fed speak and US retail sales to provide the next USD guidepost.

Given the dovish display by other central banks, the lonely Federal Reserve Board appears to be the last man standing as speculation about interest rate rises and policy normalisation in the eurozone, Japan and Britain get kicked down the road. Suggesting the dollar should remain rented at the minimum over the next few weeks, none the less the politically challenged greenback is building a convincing argument for some longer-term views. But overall it remains challenging to see just how much the EURUSD can fall given the inflationary aspect of the weaker EUR not to mention the staggering rally in crude oil over the past two months which could reignite inflation on the continent.

Oil Markets

Oil prices are here to stay, and that is a tame view. Besides the fillip from the middle east geopolitical flare-ups, the fragile supply and demand dynamics continue to tighten on the prospects of an ongoing collapse in Venezuelan output and impact of US sanctions on Iran which will be felt toward the end of 2018. The 2018 price floor it is well entrenched, so now the real work begins on 2019 forecasts. From a geopolitical perspective, it’s highly unlikely there will be a melding of minds from Syria, Israel, Saudi Arabia and Iran. And with US oil supply is being soaked up by the foreign marketplace as quickly as it can get pumped out of the ground when combined with continued OPEC compliance, the path of least resistance looks higher.

Gold Markets

A slightly weaker US dollar and heightened geopolitical risk have pumped gold higher overnight. Pick your Middle East hotspots, whether it’s s the tremors on the Iran front or the latest Israel – Syrian flare-up, the middle east powder keg is set to ignite once again. Also, the US CPI headlines suggest that the Federal Reserve Board will maintain a very gradual pace of interest rate normalisation, which is provided with some much need shine to gold market overnight.

Equity Markets

US equity markets raced to a seven-week high as traders reprice lower the more hawkish expectation from the Fed. Risk continues to trade symmetrical with US interest rates, so Asia shares should open slightly higher on the back the Wall Street gains. The market singularly focused on this CPI prion which could have been a critical signpost for Fed policy if it came in above expectations. With Wall Street breathing a sigh of relief and investor were gingerly bargain hunting as the 10-Year US Treasury fell to 2.96 percent

 

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Around the currency horn:

G-10

EURUSD: Short-term views will continue to be driven by economic surprise indexes which continued to favour a long USD position over the near-term. But just how much more juice can be extracted from the differential play remains a question. EURUSD YTD lows should form a significant base.

NZDUSD: dovish outcome from RBNZ’s Governor Orr’s inauguration has increased the spectre of NZDUSD weakness especially on a charged-up greenback

USDJPY failure to crack the 110 level has again frustrated the dollar bulls after being undermined by the CPI disappointment. General desk housekeeping will dominate session today as traders get recharged for next week.

USDASIA

USDMYR: The Market remains closed Friday, but the bellicose move yesterday on the sparsely traded one-month NDF to 4.255 + had everyone frantically searching for that USD bid. But this move was more about fragmented liquidly than anything else which has been a huge part of the Ringgit experience since BNM banned the collaboration of offshore markets vis a vis NDF’s. I think Monday open, however, locals will respect the implied one-month NDF which is predicated on foreign money risk transfer expectations. And despite my rather overly optimistic 4.05 USDMYR Monday open view, I still maintain this will be much closer to the plot than some of the outrageous 4.50 calls.  But the resurgent USD and higher US yields remain the biggest headwinds for the local sentiment and should keep investors on the defensive over the near to medium term.

Korean Won: On the first sign of dollar weakness continues to be the go-to regional currency. Very difficult to ignore the communal benefits from  Panmunjom Declaration by the two Koreas. Also, Trump -Kim meeting in Singapore Jun 12 is taking on very congenial swag.

Indian Rupee: Beside the strong USD dollar and higher US yields the bulk of the stress is coming from the oil patch. And it certainly looks like Oil is here to stay if not push higher in coming months based dwindling supply narrative. Suggesting more pain for the Rupee.