APAC Currency Corner-Rollercoaster
Rollercoaster ride for Aussie A
sharp U-turn in WTI oil prices was all it took to send the Aussie
spiralling downwards after touching a 10-month peak. Oil prices swung
frantically overnight as oil traders played off bullish comments from
the International Energy Agency (IEA) which said non-OPEC production
would fall this year by the most in a generation. This headline was
later offset by the changing expectation on monetary policy after the
ECB was viewed more dovish than investors were expecting, sending the
USD higher. The stronger USD weighed negatively on commodity prices and
coupled with lower prices in the oil patch; the Aussie dollar sold off
in convincing fashion. Also, weighing negatively on the Aussie was
the big surprise on the US data front of an unexpected decline in
initial jobless claims last week to just 247k – the lowest since 1973.
This print suggests the market is in store for another strong Non-Farm
Payroll gain in April. The market was already shifting focus to next
week which brings a heavy central bank calendar with the FOMC, RBNZ, and
BoJ all in action. While there is little expectation for the Fed to
turn Hawkish, the surprising jobless claim print does intrigue. But with
the Fed likely to maintain its dovish tone it should accentuate a
further bounce in risk appetite. So I would expect Aussie to remain
supported on last night’s dip as traders are more likely to side with
this view.
Oil under spotlight again Oil
traders started getting itchy feet and nervous trigger fingers when WTI
approached the $44.50 levels. The closer the market moves to $45.00 the
more likelihood that US shale producers will ramp up production, adding
to the supply equation. Also, prices were already reeling when Genscape
data hit the market indicating a build of more than 840,000 barrels of
U.S. crude in the four days to April 19. Sentiment continued to sour
after the unexpected headline. However, I don’t think the oil
patch sentiment has shifted fundamentally, and price action is still
very constructive. From where I sit, the latest move looks primarily
driven by profit-taking as the market approached the 45.00 dollar
level. However, dealers will be glued to the news wires watching the
ever-changing oil supply headlines. There are lots of conflicting
headlines with reports that some OPEC members were calling for supply
freezes in June while other looking to ramp up production. The oil story
could dominate headlines for the rest of 2016.
Commodities on the up ON
the broader landscape, commodities are enjoying a recovery so far this
year, after five years of steady decline. Oil has hit its highest level
in five months; gold is up some 20% this year while the majority of
other commodities (iron ore, soya beans, etc.) are enjoying a
resurgence. All of which underscores improving risk sentiment and a huge
positive for commodity currencies.
USDJPY Safe-haven
flows overnight on the oil capitulation sent USDJPY lower but remained
firmly supported above the key 109.00 level. I expect oil market
gyrations will continue to drive sentiment for today’s session. Looking
toward next week, it’s conceivable a side-lined BoJ would see the
USDJPY trade at 108. However, given the very positive risk-on tone in
the market coupled with an inactive Fed likely stoking the risk
sentiment fires, it more likely we see a continuation of range trade
between 108 and 110. Of course, the Bank of Japan can still
surprise, but it will probably sit tight for another month to see how
much support USDJPY gets from recovering risk appetite. US equities
should continue to benefit from the dovish Fed, and the current risk
rally could have extended well into 2016. I suspect the BoJ will hold
off firing the much talked about third Bazooka, namely the combination
of JPY 1trillion increase of monthly JGB purchase and JPY 2trillion
increase of annual ETF purchases, which will bring the size of the asset
purchases close to highly significant JPY 100trillion mark.
USDCNH Headlines
from the State Administration for Foreign Exchange (SAFE) indicate that
progress continues and a push is on to open and transparent domestic
forex market is ongoing. The end goal is the promotion of a unified RMB,
reiterating their long-standing plans. Also, spokesperson Wang
Chunying stated that China would be able to cope with the impact from
the U.S. Federal Reserve’s rate-hiking policy normalisation when it
happens. However with the Fed unlikely to rock the boat anytime soon I
would expect the Yuan to continue trading very stable to its linked
basket of currencies through the better part of 2016. Look for
broader USD moves to dictate play today as Fed rates decision is the
main focus now, not that the Feds are expected to move next week but
more so for the forward guidance in the accompanying policy statement. Pboc sets the official rate at 6.4898 vs. 6.4803 in line with a firmer USD overnight.
USDMYR Broader
USD dollar strength and lower oil prices coupled with weaker risk
sentiment are weighing on the regional basket. Add in a minor shift in
traders’ sentiment where some now view June’s Fed meeting as a live
policy meeting, puts more emphasis on next week’s FOMC for forward
guidance. With three strikes up vs. the MYR today, we should expect some
minor pressure, but with risk sentiment still buoyant and little reason
for the Fed to turn off the taps, I would expect USDMYR sellers to
emerge on upticks to 3.93 -95 levels. But flows have tapered
dramatically so likely a quiet session in store