Asia Morning: USD on Solid Footing as Trading Volumes Begin to Thin

Market Analysis /
Stephen Innes / 19 Dec 2019

Although there were some sporadic activities, cross-asset exchange volumes fell precipitously yesterday. Equity market activity also remains light, with the main flows focused on the equity index rolls. But the investors did muster enough bravado to test the rarefied air above the S&P 3200 level, despite the impeachment process being underway. 

S&P M15 Chart, Source: AxiTrader
S&P M15 Chart, Source: AxiTrader

This could be a sign of things to come in the New Year. The trade deal relief rally looks set to take on a fundamental shift as the global growth rally trade of 2020 starts to build momentum on the back of the decisive run of comprehensive economic data to end the year. 

While investor activity has slowed down, there was one major theme worth highlighting: The USD came back to life.

The Federal Reserve's dot plots and official communication points to unchanged Fed Funds through all of 2020 and, with the US economic data improving, traders are starting to whittle away at the 20 basis points of cuts priced in for end-December 2020.


Oil markets 

Oil markets recouped their bearish API inventory-driven losses after the more widely followed EIA reported a bullish crude inventory decline for the week to December 13 – an optimistic read on the cusp when inventory builds usually start in early 1Q, in the gap between peak winter demand and the US driving season.

WTI M15 Chart, Source: AxiTrader
WTI M15 Chart, Source: AxiTrader

Still, the post-OPEC strength persists, bolstered by more optimistic views of the global economy.

OPEC+ cuts should continue to support oil prices through year-end. However, I still think positioning is skewed a tad long. So, in the absence of definitive macro catalysts over a typically quiet holiday period, this could leave sentiment vulnerable to news flow. As such, the oil rally is showing signs of petering out as traders heed caution by de-risking and banking some hard-earned profits. 

That was my official line, but unofficially it's time to kick back as its Christmas time!!


Gold markets

Gold slipped on higher USD and real yields but remained supported by lingering trade and persistent geopolitical risks. I look for gold to range trade as the holiday season closes in. And gold struggled in the face of the strong US dollar, which was driven by higher US bond yields where US Treasury yields jumped to 1.93% from 1.88% previous. Also, the S&P 500 peeked above the critical 3200 levels, which further damped flows into gold.

Germany's IFO came in better than expected in December, which supports the notions of a global growth rebound and a rise in real interest rates globally, which would be a massive negative for gold. 


Currency markets

US dollar

The buck is bucking up into year-end.

The USD was strong despite decent economic data from Europe, which conspicuously did not cause the EUR to strengthen. But looking at the business climate by sector diffusion, the pick-up seems to be driven almost entirely by services, which rose to 21 from 17.4. Manufacturing improved a bit but is still in negative territory at -5. 

Here’s the problem for the supposed FX trade of January 2020 (Short USD): Fed officials' comments reduce the likelihood of near-term rate cuts, which is suitable for the dollar. Supporting this view is improving US economic data, which sent US 10-year Treasury yields rising to 1.93% from 1.88% previously, triggering the US dollar rally from a carry trade perspective.  

For the dollar to fall there needs to be significant gains on the Euro and the RMB, which remains a challenging prospect at best. The RMB is getting neutralized by uncertainty over when the next level of tariff rollback will occur – or even if they will occur.

While a stuttering German economic engine hobbles the EUR, I think we're seeing the weaker dollar views getting pushed back from Q1 2020 to H2 2020 as there's little sign so far of the current level of tariffs weaving their way into the US economy. So, there's little chance for the Fed policy reaction. All in all, the dollar looks to be on solid footing heading into the new year, much to the dollar bears chagrins. 


The Pound 


The cable is still struggling with a myriad of Brexit related issues. The next litmus test will be the Bank of England's MPC official bank rate votes and monetary policy summary today, where the market is ill-prepared for dovish BoE retort although they’re much better off than they were earlier in the week – around 1.3350.

Asia FX

The resilient US economy and higher US yields have weighed on local currency sentiment. So, the broader USD strength has triggered a bit of profit-taking /consolidating ahead of year-end.


The Malaysia Ringgit 

The Phase One trade deal continues to resonate favorably, but with year-end approaching, the market appetite for ASEAN risk is waning. However, the Ringgit sentiment improved, defying its month-long correlation to the Yuan as oil prices look favorable. But flows into the KLCI, triggered by a revival of the Bandar Malaysia project, closed on a very upbeat note and was equally supportive. Absent the tail risk from trade, there’s significant scope for export and equity flow-sensitive currencies like the Ringgit to perform well in the new year, especially with cheap valuations on offer at the KLCI. With the arrival of government infrastructure projects, these cheap valuations could get snapped up quickly.


You can catch me on Bloomberg Radio at 9:05 AM Hong Kong.


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