The euro initially fell on Thursday as Draghi brushed off inflation but we look at the reasons why it rebounded. The New Zealand dollar was the top performer while CAD lagged for the second day. A speech from Yellen ( 1 am GMT) and Chinese GDP ( 2am GMT) are due up next. There are 5 Premium trades currently in progress, 3 in profit and 2 at a loss.
The cover of German newspaper Bild on Thursday lamented rising inflation in a classic German worry but Draghi was having none of it at the ECB. He repeatedly dismissed the sharp rise in December prices by saying it was energy related. He emphasized the underlying inflation is subdued with no real threat of a near-term rise. He also recommitted to bond buying.
With that, the euro sank down to 1.0590 from 1.0660. There is no doubt he prefers a weak euro and that will also help German exporters but the market had different ideas. Late in the day, the euro decline was erased.
Mnuchin steps in
There was no headline to drive the turn in the euro; just the opposite. Incoming Treasury Secretary Stephen Mnuchin said the US needs the dollar to be strong in the long-term. He also backed away from a Trump promise to name China a currency manipulator, saying only that he will only make the move if China manipulates again.
The scaled back rhetoric removes the tail risks surrounding Mnuchin and shows that Trump's hardcore rhetoric probably won't turn into action. In a similar vein, Mnuchin said that a border tax would be very narrowly targeted only to a very small group of companies that moved jobs offshore.
On net, that's all good news for the US dollar and global markets but the US dollar sagged late in the day and the S&P 500 finished 8 points lower. What happened? The market is worried about Trump's inauguration speech. Specs are long US dollars and risk assets and the inclination is to take off trades ahead of his late-night speech on Friday.
Economic data also remains solid for the United States as the Philly Fed, housing starts and initial jobless claims all easily beat expectations.
To close out the week in Asia-Pacific trading, China and Yellen will be a the focus. The Q4 first look at GDP is due at 0200 GMT along with industrial production and retail sales. An hour earlier, Yellen speaks on the economic outlook and monetary policy in California in a speech that's sure to jar USD.
|Fed Chair Yellen Speaks|
|Jan 20 1:00|
|FOMC's Harker Speaks|
|Jan 20 14:00|
|Gross Domestic Product|
|6.7%||6.7%||Jan 20 2:00|
North American central bankers sent their currencies in opposite directions Wednesday as the market refocuses on fundamentals. The US dollar was the top performer while the Canadian dollar lagged. The Australian employment report is due up next. A new CAD trade has been issued. GBPJPY has been stopped out.
Yellen said the US economy is near maximum employment and inflation is rising, warranting gradual rate hikes. Waiting too long would risk a “nasty surprise. She added that the timing of the next hike will depend on data in the 'coming months'. That essentially rules out a February hike but leaves March and May on the table and raises the chance of a June hike, which is only 72% priced in.
The US dollar jumped, especially USD/JPY as it surged to 114.30 from 113.50. The rally entirely unwound USD/JPY selling on Wednesday. The dollar also made strong moves against the euro and sterling to mitigate some of the large moves a day earlier.
The biggest move was in USD/CAD as the pair rallied 225 pips after the Bank of Canada decision. The initial kneejerk was lower on the statement but it reversed 10 minutes later and then continued higher. A big reason for the jump was Poloz indicating that a rate cut was still on the table.
He said a cut would come if downside risks like protectionism or foreign weakness materialized but once the markets heard the words “cut on the table,” it was a one-way trade in USD/CAD. It was compounded by his lamenting of uncertainties on incoming US policy and worries about CAD strength.
Given that the BOC remains neutral and a large dose of fiscal stimulus is in the pipeline, the huge move might be an overreaction but technically, the outside reversal is impossible to ignore.
Another currency we're watching closely is AUD/USD. It jumped above the December high and the 200-day moving average yesterday but sank back below Thursday in a 55-pip dip. That leaves a more muddled picture but it may be resolved by the December employment report at 0030 GMT. There has been almost no economic data from Australia so far this year so look for a sizeable reaction. The consensus is for 5.7% unemployment and 10.0K new jobs but watch the full-time/part-time breakdown.
|10.2K||39.1K||Jan 19 0:30|
Cable shorts were squeezed from both sides on Tuesday as May laid out some Brexit details and Trump lamented the strong US dollar. Both politicians had their way as the pound led the way and the US dollar lagged. EURUSD is entering its 5th weekly gain, the longest since March 2014. Fed talk was also a factor. 2 new Premium trades were issued (an index and GBP), bringing the total number of open trades to 6, 3 of which are in the green. A Premium vide of the latest and existing trades will be released at the Tokyo Wednesday open.
The much-anticipated speech from Theresa May was largely leaked before she delivered it but she had one surprise: Parliament will be given a vote. It's not a vote on whether to trigger Article 50 but a vote to ratify a new deal with the EU once it's negotiated.
That might not be for two years but it was seen as good news and the pound jumped. Another reason for gains was that May talked about a phased in approach for changes. Taking slower steps diminishes the risks of economic shocks and that's net positive. Overall, not much changed and May restated her commitment to leaving the EU by saying a bad deal – like the current one – was worse than no deal at all.
The climb in cable was the largest since 2008 at more than 330 pips but it wasn't entirely due to May. Arguably an equal share was due to jawboning from Trump. He told the WSJ the dollar was too strong and blamed Chinese manipulation. The comments so close to his inauguration suggest weakening USD is a high priority. We can't rule out that he will comment on policy in his Friday night speech; that may cause USD longs to cover ahead of the weekend.
We also heard from the Fed's Dudley and Brainard. They are two of the most dovish FOMC members and in typical fashion they brushed off inflation concerns. But they also talked about upside risks to the economy, especially from rising consumer confidence and potential fiscal stimulus.
The pound finished just below the January highs in a classic three-candle reversal. We will be watching closely to see if the Jan 5 high of 1.2432 breaks (and holds) in the day ahead. Also note US dollar weakness on other fronts. In particular, the suddenly-high-flying Australian dollar broke above the December highs and the 200-day moving average.
|FOMC's Kashkari Speaks|
|Jan 18 16:00|
|Fed Chair Yellen Speaks|
|Jan 18 20:00|
Sometimes the people who are most successful are the quiet ones who do the work in the background and don't cause a stir. The market can be the same way. The Premium Insights are considering opening a GBP trade ahead of Tuesday's speech by PM Theresa May due at 11:45 GMT.
The stories in 2017 so far have been Trump, bonds, oil, jobs and US dollar weakness. One spot where there has been almost no news or attention is the Australian dollar and yet it's the best performer so far this year, gaining more than 4% against the US dollar.
Why?Australia has certainly been quiet. It's Summer holiday season there and that's made for a quiet calendar, no politics and minimal RBA-speak.
Another reason is the level of risk aversion in the market. AUD tends to do best when risk appetite is high but there is also a sweetspot of moderate-to-high uncertainty where, far-away Australia acts as an island of stability. If it were to rise any further the risk aversion would kick in and AUD would sell off.
The final reason is that the Australian dollar selling in the latter-half of December was unjustified. It was caught up in year-end flows and that's slowly been unwinding. The result is gains in 8 of the 10 trading days so far this year.
The domestic calendar will remain quiet in the week ahead so for a sense of whether the gains can last, we look to the AUD/USD chart. With the pair closing at 0.7500 on Friday it's right up against an inflection point. Last week's high was 0.7519 and the December high was 0.7525. If those levels can break then the pair could add another 250 pips. If it holds, the it's likely a sign of higher risk aversion or a renewed focus on fundamentals.
But do watch out from the deteriorating technicals in the Shanghai Composite and this week's Aussie jobs figures.
Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -66K vs -70K prior JPY -80K vs -87K prior GBP -66K vs -65K prior CHF -14K vs -13K prior AUD -4K vs -2K prior CAD -8K vs -4K prior NZD -14K vs -11K prior
The moves this week in the CFTC report were modest in what might be a sign of resilience for US dollar bulls. Notably, the euro net short is now at the lowest since June. That signals a bit of extra ammunition for a retest of the 2016 lows.
|FOMC's Dudley Speaks|
|Jan 17 13:45|
|FOMC's Brainard Speaks|
|Jan 17 15:00|
|Treasury Sec Lew Speaks|
|Jan 17 15:00|