Week in FX Asia – Asia Looks to the EU, U.S. Markets for Direction

During the first half of this year geopolitical events have had a relatively short lifespan. With the news that a Malaysian jetliner was blasted out of the sky by a ground-to-air missile in Ukrainian airspace, investors predictably reacted by flocking to safe-haven assets. But will the risk-averse sentiment be sustaining this time around? To date, markets have been somewhat indifferent to any grim news coming to the fore in the ongoing Russia-Ukraine conflict. Despite most global markets inching toward ending the week on a down note, Asia in particular is keen to see the reaction from Europe and America before wholly committing to the next step.

It’s not surprising that investors’ first move predictably was of risk rejection in the Asian market after digesting the jetliner downing and Israel’s military incursion into the Gaza Strip. Investors’ initial reaction was a swift charge toward sanctuary. This saw equities on the back foot, a bid for bonds and gold, and a demand for safe-haven currencies like the CHF and JPY. The Aussie once again looked soft at the lows AUD$0.9320/25, but like a rising phoenix, the currency remains brimming with support at lower levels, allowing the Antipodean currencies to begin to retrace their steps (AUD$0.9390 and NZD$0.8682). Perhaps the strongest catalyst for Asian retracement was to see the ¥101.10 level impenetrable; in fact, it has since been able to push USD/JPY higher.

The first-half investor play was all about the yen’s strength against the crosses, but since the European trading crossover, the market story has been one of recovery. Investors will want to see how this theme will unfold during the North American session, especially between the U.S. and Russia and after yesterday’s terrorist developments before committing to any ‘lemming’ trading strategy.

Closing Asian session to date:

The Chinese Ripple Effect

Making small waves but certainly contained was the chatter of a looming default in China’s domestic bond market after a private construction company may be unable to repay short-term debt maturing on July 23. Huatong Road and Bridge Group owes +$64.5M in one-year commercial paper. A default would be China’s first in commercial paper. The investment is considered small, and with investors’ mindset changing — believing that small is unavoidable while the larger companies are financially sound — the news has done little to disrupt the offshore bond market that is laser-focused on geopolitical events.

With the release of property price data for June, the Chinese property sector was very much in focus last night. Average new home prices across China’s 70 major cities fell, month-over-month, for the second consecutive month, down -0.5% versus -0.2% previously. Year-over-year price growth slowed to +4.2% from +5.4%. Digging deeper, new home prices rose in just eight cities versus 15 in the prior month, and fell in 52 cities versus 35 prior. Existing home sales’ price declines were pronounced even in the top-tier cities, with 1.3% month-over-month declines in Beijing, and -0.7% in Shanghai. Top property names continue to trade higher on the indication of more relaxed sentiment toward easing property curbs.

Bank of Japan Stays the Course

There was nothing out of the blue in the Bank of Japan’s (BoJ) policy meeting minutes for June. The minutes reiterated that Japanese policymakers agree on continued easing until +2% inflation is stable. The BoJ also agreed to monitor risks and adjust policy if needed, while some members saw the easing effects intensifying.

Greenback Claws Back Lost Ground

The dollar’s recovery from Friday’s Asian session low (¥101.09) is going to find it tough making much headway, especially while resistance at ¥101.44-50 caps the topside. A clean break is warranted to change momentum and bring into play additional upside risk to ¥101.79-85 level. Otherwise, the market is back to playing the tightly contained range game.

What to Expect Next Week

Next week is a relatively quiet one for fundamental yen data. However, the Aussies have consumer-price index and trade data to contend with at the beginning and the end of the week, along with a few Reserve Bank of Australia speeches in tow. On Wednesday, the Reserve Bank of New Zealand will make its rate announcement. No change is expected (+3.25%). In China, the HSBC flash manufacturing purchasing managers’ index will be presented midweek.

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