Weak US data has been the trigger for the selling and, in theory, it will force the Fed out of its new cycle.
The ISM numbers (particularly services), factory orders, three quarters of negative growth in earnings and employment showing signs of slowing have all finally created a fissure in the evergreen USD long.
Fed funds futures have now moved to a standpoint of ‘no change’ in 2016, yet the Fed still has four rate hikes factored into forecasts. Economists hold a consensus of 2.8 hikes (several majors have downgraded forecasts from four to three).
The 36% increase in the USD in 12 months is clearly putting a strain on US economic growth; US competitiveness has been squeezed and the Fed is isolated as the only central bank to be ‘normalising’ monetary policy.
Central bank differentials are at an interesting junction, particularly for the BoJ. Risk-off sentiment in the markets is driving trade to the JPY.
Negative rates have done nothing to slow the appreciation of the JPY since last week. Kuroda and Co.’s attempts to drive export competiveness and more investment diversification from Japan in the current environment is a tough ask.
There are carry trade hot spots for Japanese investors (Australia is clearly one). However, the carry trade to the US is not enough to override risk off moves – USD/JPY has fallen 230 points, or 2%, since the BoJ announcement. The charts suggest the short USD/JPY trade is still the advantageous trend trade, but with the non-farm payrolls tonight this data point may give a better entry point to sell strength in USD/JPY.
USD weakness is giving life to crude and adding a new layer of complexity; I still see strength as an opportunity to sell into. Oil in my view will average US$30 to US$31 a barrel in Q1; prices above $34.50 will be beaten down till the end of March.
ASX has again defended 4900 points – yield on the index is highly supportive below this level and ‘scorched earth’ scenarios are also baked in to several majors sub-4900.
The AUD is at 6 week highs versus USD – AUD versus EUR and JPY is weakening as expected.
Australian earnings season start in earnest on Monday. I see CBA as a trigger for the direction of trade on Wednesday. Expectations are for a cash earnings number of A$4.749 billion – it will be a typical ‘clean’ CBA number and may shift some of the bearish sentiment off the banking space.