APAC Currency Corner – RBA's Turn
AUD We have a huge week ahead in Australia, highlighted by Tuesday’s RBA policy review and Federal Budget IN
the wake of last week’s tepid inflation report, Traders have been
increasingly pricing in the probability of an RBA rate cut, which now
stands at 58 percent as per short-term money market futures. With local
lenders now jumping on the band waggon for good measure. The issue
at hand is not so much the current economic conditions but rather the
across the board weakness in last week CPI reading which came in lower
than the RBA 2-3 % target band. Many are viewing the miss on CPI as an
ominous sign that even if the RBA does not cut this meeting, low
inflation levels may well stay below the RBA target through 2016, and
will ultimately lead the RBA to reconsider the current monetary policy.
At minimum, the low level of inflation affords the RBA to adopt a more
dovish tone in their Statement on Monetary Policy However, even
with a rate cut, it is debatable if this will lead to any major position
recalibrations on the Aussie dollar or will it only translate into a
kneejerk lower as the market is expecting broader USD dollar weakness in
the weeks to come. While much uncertainty swirls around the
announcement, what we can say for sure is we are likely set for another
volatile week on the Aussie dollar front following last week’s CPI and
BOJ surprises. Keep in mind; external drivers will likely be key
to the Aussie dollar long term fortunes regardless of a short-term
capitulation if a rate cut announcement holds true. While commodity
prices are looking very constructive and expected to remain firm, the
two-way risk going into the announcement is very higher as the RBA could
follow through on market expectations. While RBA rate decision is
the major domestic release, April’s US Employment will attract its
usual intense focus. With recent US economic data deteriorating versus
consensus forecasts, Friday’s employment report could be a key driver
for currency markets by either reaffirming the string of high employment
releases in the US or predicting more storm clouds on the horizon for
the USD. With that in mind, the Jobs data on Friday is should remain
robust with Nonfarm Payrolls expected to print 200k. Also, the expected
0.3% in a month on month earnings should bring the YoY number to 2.4%. Over
the weekend, China official PMIs for April disappointed market
expectations with the manufacturing index down 0.1pt to 50.1 and the
non-manufacturing index down 0.3pts to 53.5. In both instances, the new
orders index was a little weaker also. However, with high-risk events
due later in the week, the AUD has shown little reaction to the data. AS
for the budget, traders will be monitoring the Credit Rating Agencies
Reactions but the early thought is that the Budget will need to show
ongoing fiscal restraint to get an all clear from the agencies.
Therefore, we should not expect a sugar coated pre-election style budget
laden with tax sweetener designed to appease voters.
Strom Clouds for USD US
consumers speak through their pocketbooks as evidenced by Friday’s US
data. Personal income rose in March but personal spending fell. The Q1
GDP report already suggested this but income was one-tenth stronger than
forecasted and spending, one-tenth less. While the US presidential
election run-up is weighing on the consumer sentiment, it is more likely
consumers are disgruntled by the state of the economy and growing
increasing frustrated by the Federal Reserve Board, who appear more
confused about the economic direction than ever. Besides, there is the
ever-present conviction amongst investors that central banks cannot do
it alone. With consumer confidence running sour, the markets responded
accordingly. US equity markets went south, WTI prices retreated, gold
topped at 1297 and USDJPY touched 106.24
The USD is in need of a
lifeline with USD bulls pinning hopes on another robust Employment
report Friday. However will it be enough to tame the USD bears?.
JPY Traders
always remind themselves some days you are the windshield and other
day’s you are the bug, last Thursday and Friday was no exception. While
lingering Disappointment from the Bank of Japans inaction continues to
weigh in Japanese markets Negative sentiment started filtering through
to other global markets and this ripple effect should be closely
monitored as the negative impact from waning Global Risk sentiment could
add more fuel to an already overheated YEN. While The YEN has
incredible momentum and it is likely, we will see a deeper move lower in
USDJPY, keep in mind this week could be full of traps and gaps as
liquidity will be running at a premium during golden week holidays in
Japan. Market are relatively thin this morning and while we
bounced off early morning lows of 106.20 there has been little momentum
or incentive to take the pair above 106.75 in early trade.
BoJ
With a weekend to digest and judgement less clouded its worth rehashing. One of the biggest takeaways from last week was just how huge market expectation was for an of a BoJ easing despite falling only-only three months after last policy adjustment. The fact is, in BoJ terms, that would have been unprecedented, and likely why near 50 % of economists did not expect a move last week.
However, the lack of action by the BoJ should not imply that the BOJ has exhausted their means to adjust policy and investors should not err into believing the BoJ has run out of ammunition. I suspect Japanese Rates will go lower but with BoJ concerned about the systemic impact of negative rates on Domestic Banks, the central bank opted for a wait and saw approach before embarking on further policy easing.
When the BoJ eases again, it will likely include a negative lending facility to accommodate domestic banks.
CNH
The large fall in USDJPY had a significant an impact on the CNY fix, as JPY has a 14.7% weight in the CFETS basket. The JPY also clearly influenced other USD Asia pairs. The day on day fall in the USDCNY fix was the largest one-day decline since 2005, but even with such a significant fall, CNY lost approximately 18bps on a basket basis.
However, there is still a high demand on shore for USD below 6.5000 indicating the market is trading on USDCNY sentiment rather than the basket.
China PMI
The official Purchasing Managers’ Index (PMI) rose to 50.1 in April, easing from March’s 50.2 and barely clinging above the 50-point mark that defines expansion from contraction.
The market was expecting the reading would improve to 50.4 after upbeat March data raised hopes that Mainland extended economic slowdown was easing. While the results may have disappointed a print above, 50 is suggesting that the stimulus impacts have a positive effect in China. However, the slight drop and miss on consensus are still worrisome and not overly supportive not bode well as China seeks to rebalance economy
PBOC Fix
ASEAN
In general, we seem to have entered a new period of indifference in the USDASIA basket.
MYR
There has been no clear trend in USDMYR recently and despite strong oil prices, the price action has not been supportive so far. I suspect it is due to Risk aversion trickling back into the global FX markets coupled with some lingering concerns over 1MDB
With that in mind, the MYR may be more vulnerable to weaker OIL prices this week so traders will continue eyeing OIL Patch price movements
