The US Dollar bounced back convincingly after being on the ropes last week, as Federal officials continued to lend support to the Greenback. US employment markets don’t look too bad after the JOLTS report came in higher than expected and the initial jobless claims surprised. Also, the USD was also boosted by safe-haven demand as dealers took shelter in USD bonds while storm clouds gather ahead of the June 23 UK referendum. Brexit fears will continue to dominate sentiment as this crunch date looms.
YEN – welcoming safe haven flows
The BoJ will convene on June 15-16 and will likely delay a rate cut in the meeting favouring a coordinated event when the government releases its fiscal stimulus package in Autumn. Policy makers will hope a combined fiscal and monetary package will have a greater impact on market fundamentals rather than a one-off attempt by the BoJ this week. This delay will likely appreciate the YEN over the short term if the BoJ remains sidelined. As for the BoJ policy, the writing has been on the wall for some time after Prime Minister Abe declared at the G7 Summit, that fiscal measures would not start before autumn.
Traders will be actively tracking Brexit polls this week as current expectations are for the Pound to underperform significantly. At the same time, the Yen should outperform due to safe haven flows if exit fears mount. In fact, Sterling Yen is trading 150+ points lower, in early trade plummeting below the 151 level.
Investors were quick off the mark digesting the current Macro and Risk profile this morning as the Nikkei 225 slumped 1.7 % at Today’s open and now trading -2.5 % at the time of publication. Given the current market outlook, risk sentiment is likely to get worse before it gets any better. It is looking ugly.
Yuan – keeping a close eye on the Yen
USDCNH has touched the 6.60 level as risk continues to sour. The risk in Chinese equity markets is also expected to increase which may lead to increased sell-offs in the days ahead. For anyone looking for a reprieve, the MSCI decision to include Chinese A shares in its emerging market indices will be announced tomorrow (June 14). All in all, we could be in for a bumpy ride. Expect the BoJ policy decision to be in Yuan dealers crosshairs. If the BoJ surprises the markets this month with a rate cut and the Yen does depreciate, it is expected the PBOC will then guide the Yuan lower too.
A key driver will in today’s session is Industrial Production which will be released at 10:00 AM SGT
Over the weekend, the IMF published a paper, “Rebalancing China: International Lessons in Corporate Debt”, as China’s spiralling debt has accelerated to 225% of gross domestic product in the first quarter. This lending frenzy is an attempt by policy makers to reignite the economy. Even more telling, a fact about the actual returns, “By IMF calculations, state-owned enterprises account for about 55 percent of the corporate debt.” That is far greater than their 22 percent share of economic output.
The PBOC set today’s midpoint at 6.5805 vs 6.5593, well below the market expectations of above 6.59.
OIL – looking for stability
Oil prices are moving lower after the number of shale oil figures rose by three last week, the second straight weekly increase according to Baker Hughes. The thought is that an oil price above 50.00 will stabilise domestic US production and at a minimum support level. On the flip side, the black stuff is expected to remain supported on the back of supply disruptions in Canada and Nigeria so we should see oil prices continue to consolidate within new short term ranges.
A weaker Yuan, sour risk sentiment, lower oil prices and greater appeal for USD should weigh negatively on the MYR today. We could see USD demand accelerate in line with broader USD moves on heightened Brexit risk aversion.
The Aussie – volatility ahead of Brexit vote
It’s a public holiday today in Australia for the Queen’s birthday in what is a relatively light week on the economic calendar. Thursday’s employment report is the main highlight, although it is hard to see this print making any significant shift on the currency given the labour market have been buoyant this year. A one-off feeble impression is likely to see limited action as the Aussie markets are currently driven by external developments. Global risk sentiment will continue to be the primary driver with volatility picking up, driven by Brexit fears.
Traders remain on guard for potential fallout from Brexit-related headline while maintaining a close an eye on the US equity markets. Expectations are running high for further declines, and it would not surprise to see a substantial decrease in the US equity markets leading up the UK referendum. The AUD looked extremely susceptible heading into the weekend and failing a real turnaround in risk sentiment we will likely see further short-term weakness
Also on this week’s radar is the FOMC guidance. Specifically, traders will look for clues if the Feds back off their plans for two interest rate hikes, deferring to a late 2016 if not early 2017.
For the RBA, we are entering a period of event-driven and extremely unpredictable markets. But one thing is for sure – when the RBA convenes next month, the market profile will look much different than it does today making its next interest rate decision an incredibly challenging one.
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