With little in the way of fundamental drivers this week, the Aussie should be at the mercy of USD border moves and investor risk sentiment as the markets continue to churn on the heightened prospect of a US interest rate hike. Equity markets ended last week on a firmer note. The S&P500 rose 0.6% on Friday lending some patient support for risk currencies like the Aussie. Overall the risk-off sentiment following the increasing likelihood of a June Fed rate hike has been rather muted, and mildly actually Aussie supportive.
The market’s shifting expectation on the US rate hike will continue to drive sentiment but with shorts already in place, there has been a significant drop in downward momentum. However, with external drivers like commodity prices likely to fall on the back of slower growth in China, the path of least resistance remains lower.
Traders will now turn their focus to Thursday’s CAPEX surveys, as one of the key data points in the lead-up to next week’s highly anticipated Q1 GPD print. Overall, the Aussie dollar has zigzagged sideways with little in the way of significant macro drivers of late. We are opening Monday’s APAC session flat to New York closing levels.
After grinding higher most of the past week, USDJPY sold off towards the week’s end following a Nikkei article that had some thinking the Bank of Japan was preparing to taper Quantitative and Qualitative Monetary Easing (QQE) after it was announced the BoJ will be increasing its reserves.
“The Bank of Japan likely set aside funds for the first time to make for losses on its massive holdings of Japanese government bonds should the central bank end it’s monetary easing policy in the future,” quoted the article.
Nothing could be further from the truth as the Bank of Japan is likely in the midst of preparing for another easing on the back of stagnant inflation and low Q1 GDP. The fact the BoJ is setting aside funds could just as easily be interpreted that they are digging in for a longer run of QQE. In fact, it could be argued the market continues to underestimate the impact of further BoJ easing as Japanese policymakers have some unfinished business to take care off.
As for the G7, I think the market, as usual, expected more from the meeting than could be realistically accomplished. In particular, on the Yen front where both the US Treasury and Japanese policymakers remain at odds over competitive devaluations.
This morning Japan’s trade balance came in with a higher surplus than expected and the USDJPY has moved below 110. Japan’s April Merchandise Trade Balance was ¥823.5B (3rd straight surplus) versus ¥540 expected but with both imports and exports falling more than expected, risk aversion is creeping into the market, driving the Nikkei 225 and USDJPY lower. Exports year-on-year came in at -10.1% versus -9.9% expected (the 7th straight decline). Imports year-on-year were -23.3% versus -19.2% expected (the 16th straight decline). However, with the possible Fed rate hike, the prospect of BoJ easing and no groundbreaking deal on intervention at G7, I would expect downside moves on USDJPY to be well supported in the short term.However adding some intrigue to the debate was BoJ Governor Kuroda this morning stating that Monetary policy does not target FX rates. , we’ve seen JPY appreciate through 109.70 on these comments
The market continues to be positioned for the fallout from a possible Fed hike in June, none of which will be positive for the Mainland Chinese economy.
On top of the negative impact that rising U.S interest rates will have on capital outflows from China, the US dollar is expected to increase further in the weeks ahead. A quiet week is shaping up on the calendar with the only notable release being Wednesday’s Westpac-MNI consumer confidence reading and Friday’s industrial profit data. Time for traders to take a breather perhaps?
The Fed will continue to be the main focal point up until that all-important June rate decision meeting.
PBOC sets Yuan midpoint at 6.5455 vs. 6.5510 prior