While my colleagues in New York managed much better than expected, as the city sidestepped the worst of the winter storm Stella, there was little inspiration during Tuesday’s North American session. Currency markets were constrained due to little more than position square dancing, ahead of a potentially wicked Wednesday (in NY). Traders' eyes are peeled on the Fed Dot Plots while remaining attuned for any political noise, which there certainly is no shortage of these days.
The collapse in oil prices were the big story overnight when WTI dropped from $48.80 level towards $47 zone. The catalyst was the release of the OPEC monthly report, as traders focused on headlines that Saudi Arabia increased their production in February by 263.3k barrels a day, to 10.011mn per day, as reported. However, given it’s still below 10.06mn agreed to in the production deal, the move looks to be little more than a momentum fast money reaction. After cooler heads had prevailed, the market had all but filled the headline gap, aided by the Weekly API inventories, which reported its first draw in 3 weeks coming in at -.5M vs. +11.6 M prior. Oil patch traders should take no solace as we are far from an endgame in this shale vs. production cut debate.
The slide in oil prices yanked down shares across the energy sector, but broader commodity weakness has also weighed on stocks. While other areas of the markets saw moderate losses as investors taper positions while in wait and hear mode ahead of the Federal Reserve, which has begun its two-day policy meeting on interest rates.
Australian Dollar
The AUD fell under moderate pressure after the NAB business conditions indicated signs of weakness, which seems to confirm the recent underwhelming string of economic data all the while the RBA continues to paint a rosy picture.
Commodity prices continued to sag, despite stronger-than-expected activity data in China which offered little support to the currency.
Headlines have materialised that the RBA assistant governor Bullock has announced there will be further macro-prudential measures to compensate for the rising housing market – while these tightening measures could imply the RBA has wiggle room to cut rates, I suspect Governor Low will opt for a lower for longer stance than a more drastic cut.
While the Aussie dollar has hardly budged from yesterday’s APAC levels, with concerns, the commodity complex outlook remains fragile. One could expect the AUD at some point to play catch up with the other commodity high betas that have been experiencing a broader correction lower. The longer we float in this mid-7500 no man’s land, the more likely USD support from USD yields will kick in, and if commodity prices are to roll over, it could make a compelling argument for a full correction lower on the AUD.
On the domestic data front, the Australia March Westpac consumer confidence index printed 99.7%, a four-month high vs. 99.6% prior, on a month to month basis 0.1% and the third consecutive increase. While AUD is off the interday lows, it will struggle to gain traction ahead of the deluge of central bank cacophony ahead.
Japanese Yen
There has been see-sawing between the US yield play and the minor risk reversal in equity markets due to falling oil prices.But I suspect the USDJPY remains the favourite trade if we get any glimmering hope from the Fed of a more hefty path of US interest rates through 2017, but the 115.60-75 level will be the first tricky area for the dollar bulls to challenge if Dr. Yellen signals a robust interest rate trajectory
Euro
The euro is pulling back, as EUR traders adopt a bit of risk aversion temperament, which is justifiable with the Dutch election looming. Some near term stops reported below 1.06 will likely come in play as the dealers play position chess with one another ahead of the FOMC.
EM Asia
USD Asia retraced in a big way yesterday with the market trading US dollars offered throughout the session, as dealers eagerly awaited the USDINR fix (open) which then turned into an INR feeding frenzy after stops were triggers below 66. While the market remains very bullish INR, dealers will sit tight and await better clarity on the Fed trajectory before doubling down on the post-election euphoria. While much of the move was driven onshore, offshore investors will take note of the record NSE Index highs so there could be another wave
As for the rest of Asia, we could be witnessing little more than the calm before the storm as USD selling across the region yesterday was supported on the back of adamant equity inflows.
Overnight the NY NDF market, USDKRW traded 1148.5-1150.5 and closed at 1149.0-1150.0. USDKRW has opened a touch 1148.0, but I suspect we will continue to drift in range. The technical edges of support and resistance will not come into play until further clarity on the Feds offered later tonight.