‘Rexit’ Roils Markets, Triggers Massive Dollar Turnover
President Trump showed Rex Tillerson the White House’ revolving door yesterday – notching the thirty-fifth departure of a senior official from the Trump Administration. Not sure this should be interpreted as a huge surprise given their tenuous relationship over foreign policy as Trump and Tillerson seldom saw eye to eye.
In fact, Tillerson’s impending removal has been feeding the Foggy Bottom rumor mill for some time, but the timing of the move along with his replacement, Mike Pompeo, current CIA Director, is what’s significant to markets. Predictably, there was not a considerable amount of follow-through regarding the markets’ initial reaction. But not to be underestimated, the significance of a shift to a global trade and foreign policy hawk with the US on course for a trade showdown with China and diplomatic negotiations with North Korea, is very significant suggesting the US is readying for hardball negotiations.
The “Rexit-Pompeo” headline was followed up with a goldilocks US CPI print which triggered a fall in the DXY with moves lower in equities, yields and oil. The dollar sell-off can be attributed to the combination of lower CPI and the White House revolving door syndrome that exudes little confidence in the administration. The moves in equities suggest investors are bracing for more worrying protectionist headlines.
Despite the tepid CPI inflation print, US equity markets closed lower. And while the game of revolving chairs in Washington plays on, there is more risk aversion creeping into play as geopolitical uncertainty ratchets higher with the more hawkish-foreign-policy-leaning Mike Pompeo, now the face of US foreign policy. Equity investors remain extremely cautious about trade war escalations.
The sell-off in oil markets is creating a lot of noise on the desk this morning. And while there was a bit of a reprieve as weaker short positions covered on yet another Libyan supply disruption, the broader macro conditions continue to weigh on prices. Also notable is that the April-May spread is in contango, dropping to -3c from +3c Monday for the first time since the March contract expiration on February 20. But price action was very choppy overnight while traders were immersed in numerous narratives
The market remains focused on EIA newsflow as the ever-expanding US supply continues to pose significant downside risk to oil prices. Also, the differing views on price targets between Saudia Arabia and Iran continue to highlight growing pision within OPEC compliance.
But the market’s turned incredibly choppy on the ” Rexit” headline and should remain so throughout today’s session. Tillerson was viewed as pro-oil given his tenure as a well-respected energy executive, which could be considered a small negative for the US industry. Nevertheless, more significantly on the geopolitical landscape, it brings some doubt into the Iran nuclear deal and the apparent escalation of US oil sanctions.
However, despite the evolving narratives, risk aversion is starting to factor into the equation as the market braces for possibly more market-unnerving protectionist headlines as the trade hawks now are in charge.
Gold has been a little more than a USD wager these days, and with a likely extension of USD dollar weakness as traders start to temper their expectations on the Fed rate hike curve after a soft CPI print, gold could make a move to recent, higher, $1336-41 levels.
However, there are growing reasons beyond the USD to increase safe haven hedges. The White House revolving door installs little confidence in US politics combined with a potentially hawkish shift on foreign policy that could accelerate global geopolitical tensions. Also, with a US protections rhetoric likely to ring equity market alarm bells, gold should continue to be an ideal hedge in this highly unpredictable environment.
The Tillerson/Pompeo combination and soft CPI report lead to broader US dollar losses on massive turnover.
The Japanese Yen
The USDJPY moved lower as risk turned lukewarm after the Tillerson/Pompeo announcement. While the dovish CPI should weigh on dollar sentiment, the possible hawkish escalation on trade war has investors playing their best defense in early Asia as risk wobbles once again. Volumes were massive as the markets dropped from 107.27 to 106.46.
ECB’s Lane suggested that current EURUSD levels are not too concerning which sparked the initial move to 1.2435-50, but the “Rexit” CPI headline dictated the pace of the flow bias into the EUR which was extremely heavy as the market peaked just above 1.2400.
View: In addition to the lack of confidence in the USD due to Washington’s political quagmire, the scope for more aggressive central bank tightening than the market has currently factored in will continue to support the JPY and EUR near-term.
The Malaysian Ringgit
The weaker US CPI, softer US yields and a robust 7-year MSG auction yesterday has seen favorable demand for the MYR overnight despite the fact Malaysia’s January industrial output came in below forecast. However, the softer US CPI and the negative implications on US yields suggest the MYR bond carry trade is alive and well.
While the escalation of trade war rhetoric could weigh on regional sentiment, Malaysia is less exposed to US trade risk than regional peers are. However, the warning signs developing in oil markets that could be of concern as news flow continues to point to burgeoning US supply amidst expanding fissures in OPEC compliance.