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From the Floor: USD faltering as liquidity returns

#SaxoStrats
   • AUDUSD rises on dollar weakness, strong commodity prices
   • EUR drivers include ECB taper, March Italian elections, Catalonia
   • Chinese shares open 2018 on firm footing, financials lead
   • Late Q1 could see massive equities rally falter if data turn lower

SaxoStrats
By Michael McKenna

The US dollar shuffled lower over the holiday break, ending 2017 on what Saxo Bank head of FX strategy John J Hardy terms a "sour note" despite the passing of long-awaited tax reform bill.

Hardy reports that the move's key drivers remain unknown, but notes that investors may be looking at the US' messy post-tax cut fiscal picture. The key factor now is the return of volume and liquidity to FX markets with Friday seeing a raft of US data releases, most notably the December 2017 nonfarm payrolls report.

The soft dollar sees AUDUSD heading higher today as strong commodity prices, iron ore and copper in particular, drive strength in the Aussie. Looking at EURUSD, Hardy points to the European Central Bank's scheduled halving of its asset purchases this month, as well as the continued crisis in Catalonia and the Italian elections scheduled for March.

AUDUSD
Source: Saxo Bank

In stocks, Saxo Bank head of equity strategy Peter Garnry tells us that Chinese shares started 2018 on strong footing following the People's Bank of China cutting banks' reserve requirements ahead of the February holiday season.

The rally, led by financials, comes on top of a banner 2017 that saw the MSCI China index gain 52% on top of a yuan that rose 7% versus USD. "We remain positive on China into 2018," says Garnry.

Although stocks remain strong, Garnry's view is that late Q1 represents a major inflection point with a correction possible if data and surveys turn lower. At the moment, however, sentiment and indicators remain bullish with the latest Eurocoin data pointing to an estimated 3.7% GDP expansion rate (annualised) in the Eurozone, the highest such reading in 11.5 years.

Shanghai
Chinese shares opened the year with a PBoC-led rally. Photo: Shutterstock

Michael McKenna is senior editor at Saxo Bank

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