Focus on MAS – USDSGD
I do not expect the Monetary Authority of Singapore (MAS) to make any changes to its target band for the nominal effective exchange rate (NEER) at its bi-annual policy meeting. This likelihood comes despite dismal economic growth prospects and inflation running below target due to slumping oil prices. A few reasons are pointing in this direction.
The 2016 Budget added a hefty S$5 billion in government spending allowing little breathing room for MAS as Singapore’s central bank will likely monitor the knock on effects of the 7.3% increase in fiscal expenditures. Also, the shift in the Fed’s language suggests the MAS policy adjustment would be me more efficient at a later date. While growth is sluggish, it is not so much so that a policy change beckons at this time.
The MAS may view it prudent to wait until the Fed returns to the path on interest rate normalization, letting the USD do the heavy lifting as US rate hikes would weaken the SGD down the road. So MAS will likely opt for the sidelines and let both the Budget knock-on effect and USD Monetary policy theme play out before any aggressive shift in policy.
According to a recent Reuters poll, 12 of 18 analysts predicted MAS will keep its exchange-rate based policy on hold. However there is a slight chance the MAS could flatten the slope of the Sing Dollar suggesting the Central Bank does not want to see the SGD rise .
And let’s not forget the Q1 GDP figures are due to be released the same day. I think the GDP data will garner more trader attention than the MAS decision after virtually every analyst trimmed 2016 GDP forecasts. Consensus for this week’s figures is coming in at 1.6%.
In early trade, USDSGD is trading lower on the back of weaker USD and buoyant Oil prices. But it’s been a relatively quiet open as traders are sitting risk neutral awaiting this week’s high-risk events.
For today’s price action, traders will continue taking cues from regional and US equity markets. But given just how fragile current risk sentiment is there should be a broader preference for dealers to sell Aussie dollar upticks until equity markets turn clearly positive, and Yen strength abates.
Australian employment figures will be this week’s primary focus with median consensus expectations for the economy to add 20,000 jobs in March after a dismal February print. The tail risk is that the number misses on the downside as recent economic news has been less than supportive. While an important number for both the market and RBA, keep in mind that job figures are notoriously volatile, and the RBA tends to focus on the unemployment rate a the primary metric for the labour force’s health. But a miss on the downside will escalate rate cut rhetoric for the RBA’s May 3 policy meeting.
Kiwi in play
The Kiwi on the other has been lagging behind in the current minor risk recovery as traders turn their focus to RBNZ monetary policy, and start to build in the risk premium that it might surprise the market and ease policy at the April 28 meeting. Remember RBNZ did just that last month. Like its Tasman Sea neighbour ( the Aussie dollar), the Kiwi dollar has been on a tear since January on the back of yield-starved investors’ voracious appetite to bulldoze cash into New Zealand dollar-denominated assets.
On the US data front, all eyes will be on the March Producers Prices Index (PPI), and US retail sales numbers, both released on April 13. The consensus is for a rebound in PPI to 0.3% after PPI fell 0.2% in February, which was bearish for the USD while the core was unchanged versus the consensus for a 0.1% gain. Retail sales are expected to print a modest 0.1% increase after a -0.1 % print on the February data. Keep in mind; February retail sales were also bearish for the dollar, but it was the downward revision to the previous month that attracted the most trader focus.
China in focus
In China, we have substantial economic data this week, including inflation data (April 11), trade balance,( April 13) and growth data (GDP, April 15 ). As usual, the Aussie will be very susceptible to weaker than expected Chinese economic print. The market consensus is for GDP to fall to 6.6% (from 6.8% Q4 2015). On the trade front, rebounding official PMI in March would point to an increase in exports. While increases in commodity and food prices should lead to a higher CPI, with consensus estimates coming in at 2.5%.
This morning China inflation data, CPI missed in March coming in at 2.3% versus 2.4% expected while PPI surprised to the upside coming in at -4.3% versus -4.6 %, relatively muted reaction to the prints with the Aussie ticking ever so slightly higher
While traders have been placing a lot emphasis on the upcoming OPEC meeting, I expect them to focus more so on run rates and inventory data while viewing any positive price outcome from a production freeze as fleeting. With both Saudi Arabia and Russia are likely near maximum production levels, a freeze at the current output will have negligible short to medium term supply influence. In early trade, WTI is moving higher above $40.00 per barrel carrying over from Friday’s positive sentiments.
Copper prices could continue to fall further with risk off and weaker demand dominating the current market landscape. With that in mind, until firm evidence that China’s massive stimulus efforts are having a knock-on effect for copper demand, prices will likely remain under pressure.
On Friday, Fed Member Dudley hit the airwaves sounding ever so dovish stating “our limited ability to reduce the policy rate to respond to adverse development, recognizing that we could also use forward guidance and balance sheet strategies to provide addition accommodation if that proved warranted”. He certainly didn’t come across as too eager to raise interest rates at all. On Tuesday, Fed Members Williams, Harper and Laker will be speaking and as usual, the market will continue looking for hints of a shifting Fed sentiment.
Local, as opposed to regional stories, continue to shape the USD/ASIA basket.
Despite the fact investors are on intervention alert, it’s looking less likely ahead of May’s G7 in Tokyo. And with zero expectations the Fed will surprise and change their Dove jerseys to Hawk ones. One can only expect the Yen appreciation trend to continue. With PM Abe’s new stimulus plan slated for early May, event risk premium continues to build with each and every uptick in Yen appreciation in this extremely volatile currency pair. So I would expect Yen appreciation to slow in the coming weeks.
The risk rebound effect on USDJPY has been very shallow indicating there is more at play than just risk aversion dynamics at work. I think investors are losing confidence in the BoJ and losing faith in the divergent monetary policy theme, in the wake of the dovish Fed, which has supported the USDJPY for the past three years.
The Commitment of Traders (COT) report reveals the market increased long Yen 13.3K contracts establishing a new record high 98.1k contracts. But with the Bears speculating on the heightened risk of intervention, gross short Yen positions have risen by 7.6K contracts to 38.1K contracts (Net Long = 60.1K, a four-week high.)
In early trade, the UDDJPY is trading with a heavy tone breaching the 108.00 with last weeks 107.67 taken out , market focus may turn to 107.15 support
The currency war truce, especially versus the RMB, has been the key to stabilizing mainland risk sentiment, But this week’s Chinese economic data dump may trigger an upsurge in Yuan volatility.
Regionally were locked in on the not stop Yen appreciation which is dictating regional moves.
This morning China inflation data , CPI missed in March coming in at 2.3% versus 2.4% expected while PPI surprised to the upside coming in at -4.3% versus -4.6 % So far it’s been a relatively quiet open
Today’s PBOC official Yuan fix came in at 6.4649 vs 6.4733 lower than expected, and seen a little pressure on the USDCNH post-fix but well in line with weaker USD sentiment this morning .
A bit of tug of war as the fear of risk aversion weighs negatively on EM Asia and is dollar supportive. However, the end of week oil rally is providing support to MYR. I look for short consolidation until we see something more decisive on the other front. But investors still appear very content selling USD upticks with oil moving higher.