To boldly go where no price has gone before

The words “boldly” and “no price has gone before” had best described the US stock markets lately while the US dollar touches fresh 14-year highs.

Tokyo Stock Exchange
Source: Bloomberg

US equity markets were closed on Thursday for Thanksgiving holiday while the USD index quietly broke above the 102.00 level. At 102.05, the dollar index had entered new space, frontiers seen in the likes of Dec 2002. This is approximately 0.5% higher compared to last week’s closing price, a tad slower than the 2.0% gains seen in the previous week. Correspondingly, Asian currencies softened with JPY and CNH as the worst hit currencies in the week in percentage terms.

Concerns had been focused on the correlation between reserve ratios and the pace at which emerging Asian currencies had declined. Recalling a year ago when the Fed was at the dawn of their first interest rate hike in nearly a decade, emerging Asian markets such as Malaysia and Indonesia had been put task to defend the sustained selling of their currencies.

Specifically, in defending the currency, Malaysia’s foreign reserves had dwindled below the US$100 billion mark last July. A year later, we are revisiting this with the market once again longing for USD/MYR longs, pushing the currency to fresh highs of $4.4675. In contrast, the USD/SGD remains comfortably within the 2.0% band based on our S$NEER model.

As the dollar index continues its voyage, exerting the pressure on Asian currencies, the impact on Asian stock indices remain mixed. The most prominent beneficiary of the currency channel, the Nikkei, rose 6.7% between Thursday and November 8, the day before US election results release. On the other hand, USD/JPY gained more than 7.7% in the same period. Other key Asian indices had been mixed, with STI up 0.8% and HSI down 1.3% since November 8, affected also via concerns of trade.

The trust and optimism had been built on the President-elect’s seeming mission to place economic growth as his prime directive. While the US assets are exploring strange new worlds, commodities, specifically crude oil and gold prices remained relatively flat into the end of the week. Consolidation ahead of major events are no surprise and we are expecting this with what could be reckoned as the most important event of the year for crude oil prices next week – the November 30 OPEC meeting.

Separately, Japan’s October core inflation rate came in at -0.4% YoY, in line with market expectations. Headline inflation was seen at 0.1% YoY, the highest since February’s 0.2% YoY. Once again, the figures are a distance from the BoJ’s 2% target which itself has been pushed back.

The day ahead will be lined with Malaysia’s October inflation data and Singapore’s industrial production, likely lower in line with the NODX print earlier. Taiwan’s Q3 GDP (final) figure will also be released in the afternoon. 

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