A crowded tale of the tape

A crowded tale of the tape

Global equity markets revelled in their most favourable showing since early March after clement CPI  figures led to hopes of a Goldilocks economy in the US. But as senescent as this view is becoming, with the Federal Reserve Board looking to remove emergency accommodation, it’s perhaps not the best narrative to hang one’s long-term investor cap.

The combination of a lower than anticipated inflation print and a less crowded long EURUSD positioning, saw the USD  backpedal into weeks end. However, interest rate differential still favours the USD, suggesting the recent dollar wave of appreciation while bruised, is not broken. Implying it’s far too early in the cycle for the USD to resume its more protracted downtrend. None the less, on the benign inflation print, traders might turn short-term agnostic on the USD ahead of the vital Retail Sales data, acknowledging we could be in for a period of consolidation.

However, before bringing out the ” Snooze Pillow”, there will be some conversations to engage in the global growth narrative as dealers pivot to US Retail Sales data. Also, FX markets will focus on  Fed speakers taking to the airwaves. Fed members perspective always increases in importance after any critical inflation metric. In this case, traders will be keen to hear their opinions on the tepid CPI print as US inflation remains  MIA.   The significant Fed event will be Tuesday’s Senate confirmation hearings of Richard Clarida and Michelle Bowman to join the Board of Governors as vice-chair and the community banker Governor seat respectively

Given that risk appetite along with movements in the USD is very much echoing the underlying developments in US yields. The US Retail Sales data and Fed speakers should provide reasonable signposts for global capital markets as the trading activity should remain intrinsically tethered to the trajectory  US interest rate policy and 10 Year UST yields over the near term.

AS well, look for oil prices will continue to have their far-reaching implication in inflation and US yields

On geopolitical font, US-China trade negotiations are expected to recommence this week with a potential visit from China Vice Premier Liu He. But the diffusing tension was the President took to Twitter overnight announcing he has instructed the Commerce Department to reverse its sanctions on China’s ZTE, which should be interpreted as a significant concession in the trade negotiations. However, a scheduled hearing on Section  301 of the trade act could keep the mood edgy.

Finally, the Middle East powder keg will remain a key focus with displays of aggressive warmongering between Israel and Iran on the rise.

Oil Markets

The Middle East geopolitical escalation and fragile supply-demand dynamics continue to tighten on the prospects of an ongoing collapse in Venezuelan output and the impact of US sanctions on Iran which will be realised toward the end of 2018. While the Iran curiosity should remain front and centre, Venezuelan production could nosedive further after ConocoPhillips clawed about US$650 million in assets belonging to PDVSA not only choking off their ability to export but also leaving Venezuela’s cash-strapped government in futile search of precious US  dollars.

ConocoPhillips has won court orders allowing it to seize PDVSA assets on Caribbean islands, including Curacao, in efforts to collect on a $2 billion arbitration award linked to the 2007 nationalisation of Conoco assets under late leader Hugo Chavez.

Heading into the weekend a combination of position squaring ahead of weekend headline riks and the rise on rig count saw WTI Crude Oil prices fall 1.4 % from  the weekly high water mark

On the Baker Hughes tally not unexpectedly with WTI surging on the back of Iran sanctions, US shale producer added ten oil rigs in the week to May 11, bringing the total count to 844, the highest level since March 2015. But on the flip side,  frackers remain well off their heyday numbers suggesting drillers are in no rush to let loose a supply oil gusher while hoping for higher and more prolonged returns.

However, with the bulls clearly in charge and the price floor appearing well entrenched for the remainder of the year, best to be cognizant of downside risk as complacency in oil trading has been the downfall of many. The one possible concern is the developing indications that point Saudi Arabia alleviating the effect of the sanctions by increasing output to counter the Iran disruption. But that also raises the spectre that other OPEC countries will follow suit which could put the current OPEC supply deal in jeopardy.

Gold Markets

Gold continues to be driven by the US dollar and rates causing the markets continue to consolidate at the low end of the year range due to the stronger USD.But with US yields testing the 3 % level in 10 Yeas UST, rates are also weighing on on Gold sentiment, despite wobbly equity markets and the abundance of geopolitical headline risk. And predictably appetite has been dwindling on the futures markets with the laters  CFTC data running at about one-third of their all-time high level. The failure to see any significant top side momentum along with the resurgent dollar has seen hedgers pare back positions while putting their money to work on riskier bets.

But the combination of geopolitical headline risk and long-term negative outlook on the USD  continues to advocate the gradual build of position on dips. However, the market is overly cognizant of the Fed rate hike in June and the fear of the Fed could dents sentiment near-term and demand continues to consolidate.

Gold bulls will be left to grind it out over the next few weeks until the worm eventually y turns on the US dollar which could trigger a significant move higher on Gold if the long-term negative USD  trend emerges. Treat Gold trade as a marathon not a sprint over the near term.

 

Around the Currency Horn 

USD: The combination of a lower than expected CPI and less extend long EURUSD positioning has temporarily taken the wind out of the dollar sail.  The next USD trigger will be the US Retail Sales release, where the USD dollar downside could be exposed on weaker print but how far this could induce a dollar sell-off is not so clear-cut.  Given the dovish display by other central banks, the lonely Federal Reserve Board appears to be the last man standing as speculation about interest rate rises and policy normalisation in the eurozone, Japan and Britain get kicked down the road. Suggesting the dollar should remain rented at the minimum over the next few weeks, none the less the politically challenged greenback is building a convincing argument for some longer-term views. But overall it remains testing to see just how much the EURUSD can fall given the inflationary aspect of the weaker EUR not to mention the enormous rally in crude oil over the past two months which could reignite inflation on the continent.

EUR: Short-term views will continue to be driven by economic surprise indexes which continued to favour an extended bullish  USD position over the near-term. But just how much more juice can be extracted from the differential play remains a question. EURUSD YTD lows should form a significant base.

JPY: Which echoes  the broader market sentiment that continues to ebb and flows without any real conviction on the back of  equity  risk plays  and US Yields

GBP: BoE vote split was dovish. The sizeable down move could be viewed as overextended. The  BoE next policy move is higher, but as we say in the business, “its hard to argue the direction.”

NZD: This has been a favourite topic of discussion amongst my circle. New governor Orr was dovish noting symmetrical risks around next move but its unlikely they will cut rates so 69 should remain firm given that there was limited follow through after the initial knee-jerk last week.

AUD: Despite the short covering rally, with ongoing weak data and dovish RBA suggests the AUD remains prone. Aussie short positions are much cleaner, to dealers will be quick to re-engage Aussie shorts on USD dollar strength.

CAD:  USDCAD remains exceptionally volatile as confidence continues to decline and accelerate on NAFTA talks. But there may be too much  CAD bullishness baked into the May BoC meeting. The BoC is finding themselves in the same position faced by RBA where tapping the brakes to curb excessive borrowing can have serious adverse side effects with household debt skyrocketing.

TRY A fair bit of vol last week as the Lira recovered somewhat on speculation policy makers may take action to defend the Lira  But traders are all too knowing that such types of interventions seldom produce long-term effects and the market is back selling the Lira into weeks end. The TRY could continue to trade from a weak hand this week.