Aussie Dollar Minefield

APAC Currency Corner

Year-end repatriation flows could cap the current USDJPY move higher. In early APAC trade, the USDJPY pair is moving higher, as Nikkei futures have opened in positive territory. The OANDA JAPAN 225 CFD is trading 150 + points higher in pre-cash market trade, so early signs of positive risk sentiment are countering the anticipated seasonal USD selling from exporters.

The wires are reporting that Governor Kuroda will attend parliament later today. Traders will seek any hints of additional BoJ easing or dovish forward guidance. USDJPY has moved to the 113.50 level, with the Nikkei extending this morning gains.

Also, reports are surfacing that Prime Minister ABE has decided to push back the sales tax increase slated for April 2017 and will make the announcement at May’s G–8 summit. This further highlights issues while dealing with deflation, and that the wile Japan economy is struggling on the heels of global economic slowdown.

Last week’s budget saw an expansion of Singapore’s economic programs which is likely to see the Central Bank hold off adding monetary stimulus or adjusting the currency trading band during the MAS April meeting, despite the economy moving closer to a recession. Before last week’s budget, traders had widely expected MAS to ease interest rate policy after analysts slashed their 2016 gross domestic product (GDP) growth expectations to 1.9 percent. With the government increasing its fiscal stimulus, it takes pressure off MAS to react to the ongoing economic slide.

Another blow to Singapore’s economy is that the financial press is reporting that several oil-service multinational firms are in the process of moving their operations from Singapore to Malaysia to slash overall costs and streamline operations. Several factors including cheaper real-estate, no oppressive certificate of entitlement (COE) to own cars and, coupled with last year’s slumping Ringgit, highlight the bottom line differential in operating costs between Singapore and Malaysia. Such moves will certainly be a feather in Malaysia’s cap.

MYR trade went out with a whimper last week as little interbank trading, or investor flows, occurred towards the end the week. The Ringgit closed the week out at 4.04, the middle of the current near-term range.

News that Singapore’s oil servicing firms were considering relocating to Johor should positively impact on the MYR. Underscoring the fact foreign MNCs view Malaysia as a viable hub to conduct regional business.

USDMYR trade has opened with a whimper today in directionless trade.

Late this week, China’s PMI statistics will be released on Friday. Over the weekend, China’s industrial profits grew in the face of slowing economic growth. Profits by Chinese industrial firms in January and February combined rose 4.8 percent from a year earlier despite the positive turn in the data and ignored by Forex markets at the open.

USDCNH continues to trade lightly, symptomatic of low liquidity conditions as Hong Kong celebrates Easter Monday. Month end flow and corporate hedging activities will likely dominate flows, but expect a relatively tight trading range today.

USD rebound set to continue
The AUD, which printed an 8-month high after the March FOMC statement, reversed lower to fill the post-FOMC gap last week, after Fed members Lockhart and Bullard gave very hawkish guidance in comments made to the wires. Despite Bullard following up with more balanced comments later in the week, traders were apparently convinced that the Federal Reserve will go ‘live’ with an April FOMC decision and the USD rebounded, strengthening to counter an early 2016 trend of weakening.

On Friday, the U.S. Department of Commerce announced that the Gross Domestic Product (GDP) printed at a 1.4 percent annual rate, versus 1.1 expected. After beating consensus estimates, some follow through may occur this week and Fed-speak will likely talk up this data point.

An Aussie Dollar Minefield
Fundamentally, the early 2016 economic landscape has proved supportive for the Australian dollar. Storm clouds are forming on the horizon, however, as local traders position for a flurry of high-risk news events later this week.

The closely watched Chinese PMI’s are slated for release this week. On the Manufacturing PMI, the reading will likely point to further contraction highlighting softness in the sector due to China’s economic slowdown. Last month the Index collapsed to 49 and analysts are looking for another low number with current estimates around the 49.3. The Caixin manufacturing index has not seen any expansion since early 2015, and it is unlikely we see a turnaround in March. Current estimates are coming in at 48.3. Soft PMI prints will likely keep ASEAN currencies on the defensive this week.
A PMI miss on the downside should weigh negatively on the AUD as a drop in the manufacturing index will have negative consequences for commodity prices.

Lately, AUD currency traders had brushed aside economic concerns in China, playing off higher yields on offer in Australia, as Central Banks globally eased their monetary policies and especially when the Federal Reserve, post-FOMC signalled lower for longer interest rates.

A wave of hawkish statements from numerous ranking Fed Members last week suggests the opposite. On Tuesday, Fed Chairwoman Janet Yellen, who signalled in mid-March that the Fed was reluctant to raise short-term interest rates quickly, will address the Economic Club of New York. An event that AUD Traders will be extremely focused on, to see whether she leaves the door open to April rate hike, or sticks to her post FOMC mantra.

It is doubtful she will contradict last week’s Fed-speak; so if that plays out, we could see additional pressure on the AUD Dollar carry trade after Yellen comments on Tuesday.
Lastly, on Friday, due out is very high-risk US non-farm data. Non-farm payrolls growth has been averaging a solid 228k over the past three months and while wages capitulated last month, the participation rate has been steady. With the recent chatter giving an emphasis on payrolls data, any significant delta deviation from the expected 205, such as a fall towards the 150k level, should send the USD into a tailspin. We could be in for a wild ride this week.

In early APAC trade this morning the AUD broke below the .7500 level, but with markets closed as Australia observes Easter Monday, coupled with thinly manned trading desks it is likely we will see the AUD trend on the back of broader US dollar sentiment.

Commodity Prices

Iron ore
Commodity Prices posted sharp declines last week as ongoing global economic conditions continue to sour, which has resulted in reduced demand for Australia’s chief export, iron ore. After prices drifted sharply lower last week on concerns that China economy and has shown little sign of real recovery, traders will be keenly focused on iron ore prices this week. While there is an air of optimism among traders regarding China’s economy, they need some concrete evidence things are turning positive.

In early APAC trading, the WTI has opened higher with a rebound in prices likely due to slightly positive investor sentiment. The Baker Hughes rig count released Thursday showed a drop of 15 oil rigs active in the US for the week ending Mar 25.

Topside momentum for the WTI appeared to be stalling out last week, and after the tremendous upside run this year, there may be at a point in which commodities could turn lower. Longer term trends are still pointing higher on products in 2016, and there is a risk of a correction in the WTI after a recent rally stalled out last week below November 2015’s high, when the US “Durable Goods” data missed its mark last week.

Gold fell 3% last week on the back of hawkish Fed comments. The post-Brussels event rally was very short lived, and Gold pointed lower in early trade, which may see the $1200 threshold tested this week on the back stronger USD sentiment.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and 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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