Post-FOMC FX reaction fades

Asian markets overnight are not sending a coherent message. We have a speculative frenzy in Singapore-listed iron ore futures, perhaps linked to hopes for stimulus or supply disruption fears out of Brazil (our commodities strategist Ole Hansen assures me this is minor stuff in a global perspective), and China’s equity market rallied strongly, even as the private sector focused Caixin Manufacturing PMI came in at a multi-year low at 48.3 for January.

The CNY, meanwhile, dipped rather sharply versus the US dollar, erasing most of the prior three days’ gains. All of this unfolds ahead of next week’s Chinese New Year holiday with the market there closed the entire week. It appears trade deal hopes are high, given the market action, and Trump is doing everything he can to provide positive PR as well. Still, the onslaught of news on various charges of industrial espionage provides a disquieting backdrop for the longer term risks. As we build towards some sort of announcement, the risk of a “sell the fact” scenario is rising, given how far sentiment has swung back to the positive.

Today’s trading thoughts

EURUSD – prefer short side back well below 1.1400 for an opportunistic trade within the range if the US jobs and earnings data don’t provide negative surprises for the USD today. 1.1500 is the pain level if the US jobs data doesn’t cooperate.

USDJPY – interested to watch reactivity to US data today and whether positive data sees a rally back well above 109.00 – looking to establish a tactical long for a go above 110.00 next week if we close today above 109.25.

EURGBP – like downside long put spreads – for expiry in April – will sharpen our thoughts on specifics next week.

AUDCAD – interested in downside, but entry difficult given significant two-day headline risk through next week on US-China trade deal, the Reserve Bank of Australia meeting next Tuesday and a number of Australian data releases next week. We have it on our radar.
One thing I noted on today’s morning call was the simultaneous rally in bonds and equities on the back of the more dovish than expected Federal Open Market Committee meeting.

But given the massive US treasury issuance this year on top of the heavy supply from the Fed’s QT and given that foreign buyers are net sellers of treasuries, this leaves it up to the US private sector to absorb the treasury supply. And in doing so, there will be increasingly lower funds available for buying other assets, including equities. So one of these markets is wrong as bonds and equities both rallying in unison can’t sustain for long. Which market sells off will have important implications for currencies, with risk currencies within EM at most risk on fresh equity market weakness. 

Chart: EURUSD

The euro weakness is rather profound when the loud dovish pivot from the FOMC has seen the local price action settle back to the status quo before the Fed’s meeting. The euro’s relative strength in other crosses could improve if we lurch into a fresh bout of weak risk appetite, but we are really struggling to build any positive narrative to drive upside in EURUSD, so traders may look to fade this latest rally back toward the bottom of the range is US jobs data is sufficiently strong to keep USD weakness from overwhelming EUR weakness.