The US dollar continues to trade softer on the back of last week’s non-farm payroll data as the report’s mixed details reinforce the US Fed’s holding pattern.

And concerning their communications, the recent run of economic data has likely done little to move the needle in terms of Fed officials’ views on the timeline for when they can begin the process of removing monetary stimulus.

However, with inflationary storm clouds building on the summer horizon courtesy of an all but rubber-stamped stimulus deluge, you would have to expect the market to test the Fed’s AIT resolve.

The reflation trade is alive and well if you look at rates (bear steepening), commodities (Oil and copper at the highs), stocks, bitcoin, or inflation expectations.

Mind you, I’m still looking for company on my EURUSD lower trade as the market’s euphoria on former ECB President Draghi getting handed the mandate to form a government in Italy has pushed BTP spreads to multi-year lows, but it hasn’t seemed to support the euro.

But going against any bullish USD view, a good chunk of the market still views the current FX narrative as a positioning story with trader caught emotionally long gold far too over their skis at $2000 while the street was left marked to market at very awkward levels in the USD trade at the turn of the year as US rates shot higher and put upward pressure on the greenback.

Petro currencies

The surge in Brent oil prices back above US$ 60bbl may shine a light on commodity currencies, but the more significant driver may be risk appetite.

A combination of supply constraints and rising demand (both current and anticipated) has helped to extend the rally in oil prices from the depths of April 2020. Since that odd descent into negative territory for oil prices, the best performing currency in G10 has been the NOK.

However, it is unclear how much of this has been a function of oil or risk appetite, given both are interwoven with global growth expectations. The AUD, NZD and SEK come in 2nd, 3rd and 4th respectively suggest RORO rather than Oil might have been dominant. The CAD, a more loyal oil play, trails even behind GBP.

ASIA FX

In Asia expect the pre-Lunar New Year liquidity drain to start impacting trading decisions. But local currency traders still need to stay sharp and focus on China money supply and TSF, which will stand as an important signpost for Mainland growth momentum beyond the lunar new year.

China’s new bank loans are expected to surge to a record high in January on a seasonal boost. A Reuters poll showed that while some marginal tightening of monetary policy may constrain credit growth, the central bank focuses on preventing risks. Anything other could be an ominous sign.

Typically, Chinese banks tend to front-load loans at the beginning of the year to get higher-quality customers and win market share.

The Malaysian Ringgit

While the ringgit typically enjoys all the same benefits of Petro currency peers when oil prices surge higher the ringgit, its more decisive this week but it is not precisely ringing in chart-topper type actions likely still getting held back by higher US yields, where EM sensitivity is more pronounced than other risk assets, and even more so with currencies whose countries are struggling to recover while still in the throws of mobility restrictions.

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi