US Consumer Wallets Remain Closed
The US retail sales figures disappointed, raising doubts as to whether the Federal Reserve will increase interest rates this year.
The US consumer needs to start spending for the Fed to be satisfied the economy is firing on all cylinders. Consumer reluctance to open their wallets left many stumped and even with the stars apparently aligned, consumers are squirrelling away the extra cash earned from low gasoline prices and rising employment, instead of spending. It is little more than a fool’s errand trying to predict the economic leading indicators, let alone when the next Fed rate increase will occur.
USDJPY – Dwindling Expectations
The USDJPY pair is likely to get fleeting support from the US dollar. With few compelling arguments to support the threat of a Fed hike in 2016, it’s difficult to see USDJPY making ground above ¥102.50 resistance levels near term. With ‘risk on’ booming, the USDJPY dwindling around the ¥101 level, and without any meaningful FED hike expectations, based on the Fed narrative, the path for USDJPY is paved lower, with a possible push to ¥100 on the cards.
As US Dollar support wanes, the market is turning its focus to Japan’s domestic data to make a case for more BOJ stimulus. This morning’s preliminary GDP prints came in lower than expected. While relatively disappointing, GDP weakness supports building expectations for the BOJ to add further stimulus, but the markets are not having any of it so far, and USDJPY remains in seller mode. Keep in mind that preliminary GDP data is often subject to messy revisions.
YUAN – Rate Cut Chatter
Growth in bank loans (CNY463.6bn) and aggregate financing (CNY487.9bn) was only half that estimated in a Bloomberg survey, and M2 growth has slowed to 10.2% year on year, from 11..8% year on a year previously. Bloomberg’s estimate of monthly GDP ticked down to 6.94% from 7.13%. Such a tepid start to Q3 raises more questions than answers and expectations are high for some stimulus measure.
Now the markets are back to playing the PBOC rate cut game, but one has to wonder about the real effectiveness of additional monetary stimulus as China may be caught in a ‘liquidity trap’, with policy makers left to juggle some frangible concessions.
While China can buy some time by lowering interest rates, we need to be cognisant of recent reports that suggest the PBOC may have painted itself into a corner on the stimulus front, implying further easing could pressure an already bulging debt-fuelled asset bubble, which would likely lead to more capital outflows as the Yuan weakens.
Mounting credit risks are a fundamental fracture in the Chinese economy; so much so that these very concerns have been raised by the IMF time and time again. The IMF now views China’s Interest–Rate levels as appropriate. With SDR inclusion set for October, mainland policymakers unlikely to create any undue concerns.
Despite the heightened level of interest rate chatter, trading in the Yuan remains subdued. I suspect the proximity of Octobers SDR inclusion date has more to do with Traders anticipating the tight ranges, and they aim to hold until then.
Ringgit – Benefiting from Oil Market Short Covering
The price of oil remains the biggest driver of MYR sentiment and with oil prices showing little signs of plateauing, I remain cautiously bullish for the Ringgit this week.
I expect ASEAN currencies and the Ringgit to trade firm as US dollar strength abates, and the Fed appears to be sidelined for fear of tightening too soon.
Australian Dollar – The China Syndrome
China’s economic data has taken a back seat of late, but last week’s disappointing data appears to be weighing on Australian Dollar sentiment and will likely keep the top side in check short term. As more fissures appear in China’s economic data, it fuels concerns that China’s economy is again losing momentum, which could take some of the shine off the Australian dollar.
Base metals closed last week on a sour note and if not for the increasing chatter about the possibility of more stimulus from the PBOC, metal prices could have suffered a more precipitous decline.
On the domestic front, increasing noise about a possible RBA rate cut may weigh on sentiment building up to Tuesday’s RBA minutes. With few, if any, surprises expected, the G-3 Central Bank dovish storyline will remain intact. Weaker US Retail Sales and Consumer Sentiment reports are likely to power the USD narrative for the remainder of the month.
Expect the AUD to remain supported on dips, as markets stay in yield-seeking mode, especially so if the US dollar continues to flounder this week, as expected.
The Australian employment report is due this week, but given the data’s proclivity to surprise, there should be little-sustained impact on the AUD either way.