APAC Currency Corner – Disappointment reigns

USDJPY remains the primary focus after the pair fell off a cliff on the back of yesterday’s Bank of Japan inactivity and while Yen buying dominated the stage, there was also subordinate interest in buying the Aussie in the BoJ aftermath.

However, in late New York trade risk assets, including the Aussie, took a turn for the worse when investors expressed their disappointment with over-reliance on central banks for guidance. This likely led to a hardened sell-off in US equities. The sell-off coincided with another “market wizard” as Carl Icahn added his name to the growing list of billionaire investors expressing concerns over China.

But, we can also blame the latest round of US economic data, which offered investors little encouragement as worrying signs continue to emerge. US GDP rose just 0.5%QoQ versus 0.7% expected, with tepid growth broad-based and consumer spending slowing from 2.4% to just 1.9%, in Q1. All in all, a bad day in the office for some.

The Aussie

The dust is still settling on yesterday’s BoJ damp squib. And despite the lingering effects from this week’s disastrous Australia CPI print, there are signs the Aussie is coming back to life, even ignoring the increased calls for an RBA rate cut.  External factors should continue to dominate the Aussie landscape. If risk sentiment can rebound convincingly, we could see Aussie traders quickly dismiss this week’s CPI-driven weakness. While every cloud has a silver lining, commodity prices remain quite buoyant. WTI rallied above 46.00 overnight while perking up EM FX markets., it barely got a glance from commodity bloc traders, likely due to central bank-induced trading fatigue. Nonetheless, firming commodity prices should continue to provide an attractive counterbalance to lower RBA rate rhetoric.

With the RBA back in focus, one thing we do know is RBA Governor Stevens is a reluctant rate cutter. And I think it’s far too early for any knee jerk reaction from the RBA. It is hard to imagine Governor Stevens, who sides with the view that monetary policy alone is not the “holy grail” for the economy’s ills, to do a complete about face. And while the inflation shocker has seen the outcry for policy easing reach fever pitch, we shouldn’t get too carried away given the RBA track record for cutting rates.

PPI came in below expectations but largely ignored as traders remain clearly focused on JPY movements

The Kiwi

The RBNZ, while keeping a June rate cut live, indeed came across less dovish than market positions. We’ve seen a clearout in one of the biggest monetary policy divergent trades, long AUDNZD, as less dovish leans from the RBNZ, coupled with Australia’s dismal CPI, sent traders running for the exit.

The eventful Yen

USDJPY fell off a cliff shredding through some significant levels before finally basing out around 108 after a massive 350 pip slide. The debate rages on whether the inaction is wait-and-see for current negative rates to filter through the economy or a BoJ admission that current policy measures are ineffectively dealing with both economic and currency woes.  But what we do know is the BoJ bar has been raised for monetary policy and delving deeper into negative rate territory  which  doesn’t  paint a convincing picture of a USDJPY rebound anytime soon.

I expect Japanese investors to move to the sidelines for Golden Week. While thinner liquidity will likely amplify USDJPY moves, I suspect the path of least resistance is a stronger Yen over the short term, and we could see a significant move lower compounded by less liquidity. The only concern for further Yen appreciation is just how rapid the move was. Not surprisingly,  the  previous support level of 107.65   gave way  in early trade triggering  massive stop losseson the break, eventually touching 107.075.   .Given   the current overwhelming sentiment for stronger Yen , clearly  105 comes into play unless Kuroda steps up to the plate and eases the tension.

CNH

It was all about the BoJ inaction and the subsequent disappointment which triggered a sell-off in USDCNH. With a strong Yen still driving sentiment USD/ASIA is trading on the back foot. Add in a dose of weak USD GDP data for good measure and we could see a deeper sell off especially if the Yen, as anticipated, continues to strengthen. But unlikely we will see the full pass-through of USD JPY weakness translating into stronger Yuan

Again Tokyo is providing a divergence from the ongoing systematic issues revolving around rising defaults, bad loans, liquidity, and capital outflows.

We have Chinese manufacturing PMI this weekend and next week which should provide more clues about the continued recovery in China’s economy. But this will likely play second fiddle to Yen sentiment.

PBoC Midpoint  6.4589 vs. 6.4589,

ASEAN

I think the market was small short USD/ASIA going into BoJ so we could see further moves into local units with Regional  Central Bankers will likely stand aside and accept  USD –ASIA moves lower careful not to be accused of competitive devaluation.

MYR

Higher WTI prices  BoJ fallout and a positive reaction to Muhammad Ibrahim appointment as new Central Bank Governer have USDMYR opening below 3.90 despite the overhang from 1 MDB default.  Market is anticipating Governor Ibrahim first MPC as Chair May 19, 2016

Oil prices remain the primary focus

SGD

The USDSGD sold the wake of the BoJ with some long positions getting stopped, but we’re still trading mid 1.34’s this morning, but I anticipate further regional USD capitulation in the wake of BoJ as YEN should continue to trade with a positive bias.

Stephen Innes

Stephen Innes

Senior Currency Trader and Analyst at OANDA
Stephen has over 25 years of experience in the financial markets and specializes in Asian currencies at OANDA. After having started his trading career with NatWest Bank, he is currently based in Singapore as a Senior Currency Trader and Analyst with OANDA, focusing on the movement of the Aussie Dollar and ASEAN Currencies. Stephen has an extensive trading experience in Interest Rate Futures, Money Markets and Precious Metals. Prior to joining OANDA, he worked with organizations like Cambridge Mercantile, Nat West, Garvin Guy Butler, Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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