And just when you thought it was safe to head for Airport

The Euro trades lower by 0.5% amid Germany’s Sigmar Gabriel reportedly warning of minority government -, this will weigh on short-term  EUR sentiment even more so coming on the heels of the Catalan surprise.But as we ‘ve seen so often in the past, EU political risk makes for attractive opportunity to buy Euro, but it usually occurs Monday morning not entering an extended holiday break with the market long EUR . None the less dips are being bought.

Overnight 

The sell-off in global bond markets has paused for a sanity check overnight with ten year UST holding steadily at 2.48%. Q3 GDP growth was revised a whiff lower, and the overall markets inflexion is still very much favourable supported by the Philadelphia Fed’s Manufacturing Business Outlook Survey which  jumped to a reading of 26.2 in December

U.S. stocks resumed their rally as the US Treasury sell-off was held in check overnight and energy stocks underpinned primary index. A positive glean from US economic data and the house passing the stopgap funding bill, although just kicking the can down the road to January 19, added to investors confidence.
Pro-independence parties in Catalonia were on track to win an absolute majority of seats in regional elections on Thursday, which would deal a significant blow Spanish prime minister Mariano Rajoy that could potentially escalate, but so far ther is still no EUR response from Catalan curiosity.
Although APAC traders are all but done for the year.  There’s still a buzz on NY desk heading into tomorrows PCE data. Mind you the Global FX markets laboured overnight to find any enthusiasm.

CNBC also reports Larry Lindsey is in the running for Fed Vice Chair. Interesting enough Lindsey is famous identifying the emergence of the US. stock market bubble back in 1996 while a Governor of the Federal Reserve, Hopefully for stock investors this is not a foreshadowing of things to come

 

G-10

The Japanese Yen

The BoJ and subsequent dollar trade played out in the queue as expected

As widely expected, the BoJ left policy unchanged at today’s board meeting, keeping targets for the short-term rate and 10yr JGB yield at -0.1% and when Kuroda, as expected, played down the ” reversal rate. All in all a predictable bounce on the dollar which as then retraced through the course of London and NY trade

Australian and New Zealand Dollars

We’ve had a lot of interest for the Antipodeans after the robust GDP data out of New Zealand.

Given the slow unwind of political risk after Adrian Orr was appointed the new Reserve Bank governor last week, the Kiwi is better positioned to benefit from stronger domestic economic data.and firmer dairy prices

Commodity vs Aussie correlation is leading the charge into year end.
Given what’s expected to be a dovish Fed in 2018 there been far too much energy sapped paying too much attention to the dwindling differential trade as that only comprises one component in the 3 ‘C’s for trading the Aussie (Carry, Commodities and China)

Commodities are ending the year on a strong note with Oil prices firming while Copper is back at the highs for the year.

And while China economy could moderate next year as policies designed to reduce leverage unhurriedly unfold.  And sure deleveraging could lead to a drop in overall domestic investment, prudent monetary policies and greater liberalisation of mainland markets will be viewed favourably by international investors which should keep China’s economic engine well oiled in 2018.

 

Asia Fx

The Yuan 

CNH has remained very active on retail and interbank trading platforms this past week. Driven in part by long dollar position unwind.But the expectations of more prudent monetary policy from the Pboc and the anticipation of strong investment inflows in 2018 have the Yuan basking in the limelight at year end

Undoubtedly last weeks boost on both repo and MLF interest rates highlights the dogged determination of regulators to continue with a deleveraging campaign causing interest rates to move higher and luring bond investors in for the carry. Indeed, the Chase for Asia next big trade in 2018 has started earlier than expected

The Malaysian Ringgit

With global bond yields held in check overnight and firmer oil prices, it should bode well for the Ringgit as we close out this subdued trading week for the local note. Investors, however, continue to tread lightly in riskier assets.But given the improving domestic and external landscape not to mention a likely interest rate hike from the BNM in early 2018. Malaysia’s ringgit is emerging as one of Asia’s most-promising currencies entering 2018

 

Friday Morning Market Musings

Trading FX in 2018

I’ve been fielding a lot of question from clients on the shifting dollar narratives this. Identifying dollar trends will be a bit trickier next year as we’re already witnessing idiosyncratic storyline emerge, not only in Asia EM but G-10 and traditionally correlations may start to diverge. Some G-10 bankers will begin the arduous process of policy normalisation, but given that each country could have a different response to changes in their domestic inflation narrative, unquestionably trading will be a bit more complicated and relying on just a broader US dollar narrative could provide false clues.

Bond curve Bear Steepener

I don’t agree with the view that the Bond Curve is a reaction to the prospects of a stronger US economy although that seemed to be a prevailing narrative. But looking at Global Bond markets as a whole and in particular EU and US. I surmise the sell-off is more a function of anticipated supply.

IN the EU reports continue to circulate Germany will flood the market with Ultra Long Term Dept which is driving long yields higher.

In the US I think we’re about to enter the long-awaited reality check.First Tax Cuts, now keeping the government lights on and then pivoting to an infrastructure Bill? While infrastructure bill could struggle given, there could be midterm election swings based on Trumps poor showing in the polls, but the bottom line is who is going to pay for all this ?? The US will issue a massive amount of debt to fund these bills and could lead to a further steeper as ten-year yields could widen to 3% in early 2018.But the bear steepener is not based on an expected higher rate of policy normalisation from the Fed