- Last week's unorthodox Dollar slide and equity rally following the Fed hike has been fully flushed to start this week
- Trade relations were revisited to start the week with the G20 communique, US antagonizing and Brexit hard timeline
- Risk trends continue to casually shirk the uncertainties ahead as headlines cut down bulls' flimsy legitimacy
See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.
Compared to the high profile event risk of the previous few weeks (FOMC decision, NFPs, etc), this was looking to be a period of relative quiet. Yet, we have started the week off with a strong fundamental charge - though clear technical drive has yet to be established. Over the weekend and into Monday's session, we revived a theme that has recently taken a backseat to monetary policy - which has struggled with motivation - in trade policy. The G-20 meeting of finance ministers and central bank governors is traditionally a symbolic meeting with little tangible relevance, but that wasn't the case this go around. The new US Treasury Secretary was reportedly behind the omission of the seemingly ubiquitous vow to avoid protectionist agendas at all costs. The the world's largest economy seems to be at the center of many growing trade disputes with the likes of Germany, China and even NATO. This can be a driver in itself or the catalyst for something more systemic: like risk trends.
Progress on Brexit with a clear time frame for invoking Article 50 (March 29 according to the UK Prime Minister's spokesperson) did little to drive the Sterling one way or the other. That isn't to suggest that the focus will shift back to the Bank of England and conveniently leverage the upcoming UK inflation statistics. We just need more definitive progress on the country's planned divorce from the EU. As for the monetary policy motivation, the hold over of tepid FOMC momentum wouldn't carry through to the new week. Driving a strong sell off on event risk that merely failed to live up to expectations - rather than flip them - is not a progressive driver. That said, a long list of Fed speakers this week will work on the outlook for the curve (the number and timing of further hikes in 2017). Both Presidents Evans and Harker conformed to the hawkish view, with the former giving more drive for a faster clip. Dissenter Kashkari, however, draws the attention to the crux of the next true progression of monetary policy as a particular currency driver and thematic motivation for entire markets: balance sheet plans.
While competitive trade and monetary policies is where most of the immediate activity is still arising in the FX and capital markets, the greatest potential remains with risk trends. Equities merely wavered to start the week - not a surprise given the state of the G20 communique, Fed tightening and growing consistency of skeptical market headlines. The true risk lies not in the catalysts however, but rather the structure. Shifted exposure, concentration in market risk, leverage and a dramatic decline in hedges creates a troubled backdrop. That miss-aligned appreciation of risk was evidenced by the fully deflated volatility measures (VIX and its equivalents) alongside a record high SKEW index which gauges extreme conditions. We haven't seen anything dramatic transpire just yet, but the potential is there. If risk appetite prevails, range for EUR/USD, USD/JPY and USD/MXN look well positioned. Alternatively, a true turn towards risk aversion is likely to motivate momentum and thereby forge critical moves from the likes of GBP/JPY, AUD/USD and perhaps even EUR/USD. We weigh the active start to the new trading week in today's Trading Video.
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