We start Wednesday with the dollar (where else, right?).
Trump’s protectionist rhetoric and the lingering effects of multiple “accidental” verbal interventions from the new administration are keeping a lid on things and overnight we saw further divergence between yields and the greenback while the yen is treading water.
“USDJPY is just being swung around by Trump’s first few days in office; as long as markets remain skeptical of his policies, dollar longs will not accumulate and there is limited scope to the downside in USD/JPY,” Brown Brothers Harriman said Wednesday.
The Bloomberg Dollar Spot Index fell as much as 0.2 percent to 1243.66, while the greenback dropped versus all its G-10 peers apart from the Aussie.
Meanwhile, the pound hit a six week high. Sterling “burst through stops during the London morning, and climbed to as high as $1.2598, the highest since Dec. 14, prompting short-term investors to take profit on their longs, with an abundance of offers within the $1.2600 to $1.2650 range,” traders told Bloomberg.
The peso fell sharply on Tuesday evening on a NY Times piece about Trump’s proposed “great wall of Mexico”, before paring some losses overnight.
The Mexican peso has fallen so much it has caused traders to rush to protect themselves against a trend reversal,” Bloomberg wrote earlier this morning. “As a result, USD/MXN put options are more pricey compared to peers even as risk reversals remain low for the year; meanwhile, at-the-money volatility has risen.”
Here’s SocGen’s take on the FX action:
Trump tweets continue to drive sentiment and the President’s most recent – “Big day planned fort NATIONAL SECURITY tomorrow. Among other things, we will build the wall!” — saw the Mexican peso reverse Monday/Tuesday gains. In G10, it’s kept USD/JPY flat despite the S&P500 hitting new highs and Treasury yields edging up a little. There’s no doubt that a major bout of protectionism-induced risk aversion would be yen-supportive, as well as negative for a bunch of currencies that depend on US trade (KRW is high on that list, by the way). However, given the equity market reaction to the promise of a wall (mostly, unconcerned) and my growing impression that US yields, both nominal and real, are in the process of building a base for another push higher, cautiously re-engaging with USD/JPY longs appeals to me here. Go long at with a 112.50 stop? A break above 114.50 would break the downward channel we’ve been in since the end of December and judging by my inbox, the bearish yen consensus has now been largely eradicated. If a weaker yen isn’t a sure thing anymore, maybe it can happen.
Stocks were green across Asia with the Nikkei getting a lift from a steady (i.e. not stronger) yen and exports data that beat estimates.
JAPAN DEC. EXPORTS RISE 5.4% Y/Y; EST. 1.1%
European equities got in on the party as well, riding Wall Street’s Tuesday gains. This despite the fact that Germany business confidence came in weaker than expected.
IFO JAN. GERMAN BUSINESS CONFIDENCE INDEX AT 109.8; EST. 111.3
IFO JAN. GERMAN CURRENT ASSESSMENT INDEX AT 116.9; EST. 117.0
IFO JAN. GERMAN EXPECTATIONS INDEX AT 103.2; EST. 105.8
Asia/Europe market wrap:
NIKKEI 19057.50 269.51 1.43%
HSI 23049.12 99.26 0.43%
S&P/ASX 200 5671.51 21.41 0.38%
Shanghai 3149.43 6.88 0.22%
KOSPI Index 2066.94 1.18 0.06%
FTSE 7168.85 18.51 0.26%
DAX 11745.73 150.79 1.30%
CAC 4877.96 47.93 0.99%
IBEX 35 9538.50 151.30 1.61%
As for crude all eyes are on inventory data as the tug of war between US production and OPEC cuts continues.
- OIL FUTURES: WTI drops as data show U.S. stockpile increase
- OIL BAROMETERS: WTI-Brent $2, parity bets rekindled
- OIL MKT DRIVERS: U.S. inventory data due; Kuwait on cuts
- U.S. INVENTORIES:
- U.S. crude supplies seen rising 2.5m bbl in survey
- API said to report crude inventories gained 2.93m bbl
- Cushing crude stocks fell 500k bbl last week: forecast
S&P futs are pointing to a continuation of the rally on Wall Street.
- S&P 500 futures up 0.3% to 2281.5
- Stoxx Europe 600 up 0.9% to 365.3
- US 10Yr yield up 2 bps to 2.49%
- WTI oil futures down 0.7% to $52.82/bbl
- Gold spot down 0.5% to $1203.23/oz