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FX market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,
One week after “US exceptionalism” became the trade of the week, “USD weakness” has seemingly regained its pre-eminence.
For a few days last week, the US dollar move higher alongside US equities, fostering a misguided belief that both could remain, compatible bedfellows amid a global growth synchronised storyline with the EU in vaccination catch up mode.
The so-called “risk-on” imposter the British Pound is looking stellar in this environment.
The Pound (GBP) has remained very well bid even against US dollar strength last week mostly due to the Bank of England meeting, though it’s not very hard to explain.
The negative rates buzz was always a GBP bears fool’s dream. The MPC finally made it clear that it’s effectively an administrative exercise with very little or no policy implications.
But for the Pound, the critical argument has been that the UK will come out of lockdown earlier. Real money is arguably still underinvested and the scope for more positioning catch up is colossal.
I would expect the US dollar sell-off to diminish somewhat today as one potential hurdle for USD bears is tonight’s US CPI. It’s a well-known fact that economist forecasts are worst at turning points because complex models need time to be tuned to handle regime.
I think it’s safe to assume we are on the cusp if not already entered a more prominent inflationary global macro regime than we have seen in many years. Australia, Germany, and New Zealand inflation all came in higher than expected recently, and I would assume the USA will do the same.
If US inflation comes in hot, many will argue it doesn’t matter because the Fed will look through it. But at some point, the Fed will blink, sooner or later. Still, it might be hard for dollar bears to wantonly sell the buck as if the CPI prints hot tonight today, logic says the earlier the Fed blink.
ASIA FX: Malaysian ringgit
The ringgit traded well overnight in line with other petrol dollar peer currencies and got a double whammy boost from the stronger Yuan on robust credit demand expectations in China of January.
Higher oil prices are also a boon for Malaysian fiscal position USD60/bbl; this compares with government’s 2021 budget assumption of USD42/bbl for 2021, USD45-55 for 2021-2.
It could also provide the government with a meaningful wiggle room to pump prime and fund some of the large infrastructure projects that have been a topic of ongoing discussion in Kuala Lumpur. Indeed, this should eventually see the ringgit trade much stronger this year.
The People’s Bank of China (PBoC) offers up a little obstacle for stronger Yuan. The Yuan bulls continue to set sights on 6.25 on the confluence of positive flow dynamics.
The ongoing shift to liberalize the currency and lighter positioning after last weeks’ short dollar position clear out. Although the authorities have taken some steps to slow the pace of RMB appreciation, these measures are soft and not intervention aggressive styled push back and should not affect RMB’s travel direction.
