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On one hand, the USD is broadly lower thanks to Trump breaking away with presidential tradition and talking down the USD. On the other, GBP has flown. In fact, when you combine the rampant short covering in GBP and the weakness in USD, you have the GBP/USD above $1.2400 and testing the 5 January swing high of $1.2432. A 2.92% move in a currency pair is a fairly big deal and we are staring at the biggest one-day gain in GBP/USD since October 2008 and before that 1993.
It’s no surprise that the FTSE 100, a market which has been predominantly led by the exchange rate, has fallen 1.5%. This was far worse than any of the European markets (the Eurostoxx 50 fell 0.3%), which had their own headwind of EUR/USD breaking out of the supply zone and looking as though it wants to head into $1.0800. Have we seen a top in the FTSE 100? I suspect that could be the case.
I mentioned the moves in the GBP were largely short positions closing out, and while much of what we have heard from May had been pushed through the media in the lead up to the announcement anyhow, traders have bought the fact.
The fact, though, is the UK does actually have some sort of a plan and Teresa May is rallying the troops in a bid that the government can create a truly global and outwardly-looking Britain. Both Houses of Parliament will have increased influence on the outcome once Article 50 is triggered, and once that time arrives, the ball will be firmly in the Europeans’ court and they will largely dictate the terms of a clean Brexit. It’s hard to envisage GBP rallying too strongly from here and the consensus is still that longer-term downside risks in the currency remain.
Looking further afield, it seems sentiment has soured somewhat and you can see some risk aversion. We can see fairly strong buying in the US fixed income market, largely as a result of comments from Trump. As I write, the US 10-year treasury is down seven basis points at 2.32% and this has taken the USD down 0.7%. Keep an eye on the USD index as sellers are driving price towards the December lows and the key 100.00 level. We can see the bond yield premium commanded over markets like Japan and Europe really coming in and this is driving the USD lower. It’s important to see moves in the USD (and fixed income) also really driving the likes of gold, with gold looking like it now wants to head into the $1250-$1254 area.
AUD/USD looks bullish on the daily chart and having tested (and rejected) strong horizontal resistance at $0.7500 of late, we can see price smashing through the ceiling within five bars from the last attempt (on 12 January). This simply highlights that the bulls are in firm control and probability would suggest a move into $0.7700 is on the cards. AUD/USD has traded in a range of $0.7649 to $0.7564 overnight and is currently sitting at the top of this range.
Keep an eye on US CPI (due at 00:30 AEDT). While core inflation is expected to remain at 2.1%, headline inflation is expected to jump 40 basis points to 2.1%, which would be the highest inflation read since May 2014. A weak read here and it could accelerate the USD selling. Of course, a strong number may suggest stability in the move lower.
US banks are under pressure, despite Morgan Stanley beating expectations in its Q4 earnings report. The KBE ETF (SPDR S&P Bank ETF) looks like a good short opportunity, assisted by a flattening US yield curve, with the difference between 2- and 10-year treasuries moving to 117bp. The fact the KBE looks set to close below the bottom of the recent trading range suggests banks will go lower, and as a result we have seen the S&P 500 and Dow under pressure too. Short positions in US markets are preferred, although I am not expecting a strong move lower.
Asian equities should open broadly lower, although China could be the outlier and this period of USD weakness could be very positive for all things emerging markets. The Nikkei 225 will likely find the biggest downside reaction given USD/JPY is trading sharply lower and destined for ¥112.00. The ASX 200 looks likely to open at 5684, with SPI futures lower by 12 points. BHP is expected to be down around 1.0%, although banks should hold in OK, despite US banks (as mentioned) having been sold off quite heavily – this may weigh locally. Oil plays should find support, with US crude some 1% higher than the ASX 200 close yesterday.
On the bulk commodity front, we have seen fairly mixed moves for our materials plays, with spot iron ore falling 2.5%, while iron ore and steel futures have closed up 0.3% and 0.7% respectively. Coking coal futures closed down 2.1%.