APAC Currency Corner – The Great Central Bank Debate 

Over the past day, markets have mostly entered a holding pattern as investors await the outcome of the latest Fed and BoJ policy meetings.  Despite the Bank of Japan hogging the limelight, it’s the Fed that holds the cards and their presence as de facto World Central Banker will be front and centre. The Mighty Fed’s decision this week will likely lay the groundwork for USD fortunes through 2016.

Let’s not kid ourselves. The Fed is very cognizant that any interest rate-induced higher trajectory for the USD will have numerous implications. A stronger Greenback’s adverse effects on commodities and global stocks will weigh significantly in the Fed’s forward guidance.  With that in mind, I don’t think the Fed has any intentions of stifling the current risk rebound, and I continue to expect them to err on the side of caution. There’s lots of time to signal a June move if warranted if markets continue to improve. While there’s  no need to close the deal this week, the debate rages.

Aussie – traders sitting tight

Some supportive price action for the Aussie in early trade as WTI futures moved higher after the API data for last week included a supportive 1.1 million barrels decline in total commercial crude oil inventories. That was a decidedly bullish signal for oil prices, given we are now just entering the U.S summer driving season, which typically increases demand for gasoline. However, it has been another quiet overnight session with commodity currencies trending on broader USD moves.

Traders are sitting tight awaiting the release of Australian Q1 CPI today. With the overwhelming consensus that the RBA will remain soundly on hold over the short term, I  suspect external drivers will continue to push Aussie sentiment. While domestic data points will offer some short-term volatility, global risk sentiment and commodity prices should continue to see the way for Aussie dollar fortunes.

AUDUSD was trading at 0.7750 going into the Australia CPI, but this print came out much weaker than expected.  Australia Q1 CPI data comes at -0.2% (expected 0.2% QoQ, previous 0.4%) and YoY at 1.3% (expected and previous 1.7% YoY ) which has seen the Aussie collapse to .7670  level with souring sentiment expected as the session wears on. The tepid inflation print has increased the odds that the RBA will lower interest rates next week, with the market now pricing in a 50 % probability which has sent  Aussie reeling  . In fact, the Year vs. Year CPI print was the lowest ever recorded for Australia and more importantly below the 1.7 % RBA band.

However, China March Industrial production has shown marked improvement over last month’s data, rising to 11.1% versus -4.7% previously. This release continues the recent string of strong data coming out of Mainland.  I suspect  Aussie traders may view this as extremely constructive for risk sentiment


Obviously, the FOMC will be the primary driver but with a growing consensus that the Fed is unlikely to rock the boat, I suspect the ensuing continued broader risk rally anticipated post-FOMC will be Aussie supportive.

Kiwi all a fluster

I’m unable to divorce myself from the NZD negative fundamentals, as my outlook for a possible rate cut at tomorrow’s RBNZ meeting is running 50:50 versus the market consensus 35:65. While global growth sentiment has improved on the back of better economic data out of China, domestically the NZ economy continues to struggle.  Milk prices have not shown any signs of a sustainable rally and with business confidence ebbing, we should not rule out another “unexpected “rate cut from Graeme Wheeler. The base case scenario is for the RBNZ to maintain an aggressive easing bias, if for nothing else, due to unwelcome strength in the Kiwi of late. But on the build-up to tomorrow’s high-risk event we’ve seen persistent paring back of Kiwi short speculative bets after the RBNZ “shadow board “said the RBNZ  should hold its key interest rate at 2.25% at a policy meeting this week.


Yen – surprise on the cards?

Price action continues to move sideways in USDJPY as traders are very uncertain about what’s in store. The uncertainty is turning into a real contest of wills with traders’ nerves becoming increasing frayed as we near tomorrow’s conclusion of the Bank of Japan meeting. Still much can happen over the next 24 hours and dealers are becoming increasingly uneasy given the predominant view that the Yen should continue to strengthen. But given Bank of Japan’s Kuroda’s penchant for surprise and excess when it comes to policy decisions, a mother of all stimulus-style packages, including the rumoured negative lending facility, could potentially trigger a massive short squeeze on the heavily weighted short dollar-yen market positioning.

A robust package of 20 trillion yen in increased quantitative easing purchases has been circling trading floors.


Systemic issues are coming to the forefront

China’s plan to assist banks to bad loans could backfire, allowing debt-laden “zombie”  companies to stay afloat and creating conflicts of interest for bankers, noted the IMF

According to this report, “While such techniques can play a role in addressing these problems and have been used successfully by other countries, they are not comprehensive solutions by themselves. Unless they are carefully designed and part of a sound overall framework, they could worsen the problem

The note adds, “Debt should only be converted into equity for viable firms that have “operational” restructuring plans; debt should be converted at fair value, and banks should only hold equity for a limited period.”

CNH continues to trade on the back of Broader USD sentiment as the Key FOMC looms ominously

Today PBOC fix came in at 6.4837 vs. 6.4880

China March Industrial production has shown marked improvement over last month’s data, rising to 11.1% versus -4.7% previously. This data print adds to the encouraging consecutive run of strong data coming out of the Mainland.


USDASIA is being held hostage to impending FOMC


The 1MBD headlines weighed negatively as the ongoing tug of war and posturing between 1MDB and IPIC escalated with the Gulf fund claiming default by 1MDB. This should continue to weigh slightly negatively on MYR sentiment and is likely to be compounded by the anticipated reduction in speculative shorts ahead of the FOMC. But the reaction to the 1MBD headlines was taken in its stride and after all was said and done, we are opening at the 3.9150 level after yesterday’s 1 MBD headline caused a gap higher to the 3.95 level.

Singapore dollar – taking direction from Ringgit

Interest has been rather muted over the past 24 hours with little direction either way. If anything the Sing dollar is taking some direction from the recent MYR fortunes.

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