The Central Bank waiting game is taking hold of the G-10 complex as Investors nervously contemplate their pending decisions while mindfully scanning the geopolitical landscape.
Australian Dollar-Losing Yield Appeal
Fissures are appearing in the yield carry backstop that supported the Australian Dollar post-Brexit.
The Australian Dollar Yield appeal tarnished after the RBA left the door open to an August rate cut. Unlike how the market viewed the recent post –meeting statement, yesterday’s monetary policy meeting minutes referred to both the labour market and housing market with some degree of uncertainty. But not to oversimply the issue, it was the mention that inflation was expected to remain weak for some time which saw an immediate repricing of the Australian short-term interest rate curve which moved from 45 % to 62% probability of an August interest rate hike and paved the way for the overnight move below .7500.
Given the RBA bias, the market should continue to price in a rate cut Risk Premia through the Q2 CPI release on July 27; and should cap the Australian dollar upside in the near term
The RBA market watch is now in full swing with next week’s CPI print the likely key to open a cut rate door
Before the RBA Meeting minutes, the Austrian dollar was tracking its antipodean neighbour lower after the RBNZ moved to quash the domestic housing boom. Apparently uncomfortable with the accelerating pace of the country property market prices, the RBNZ has tightened up its macro-prudential measures by kerbing the amounts of money property investors can borrow by requiring a minimum 40 % deposit. With Australia housing market similarly frothing, speculation is mounting that the RBA may invoke some wide –ranging macro-prudential measures of their own
The Australian dollar is trading off its overnight lows as profit taking sets in after overextended shorts failed to take out the .7475 level which represents the 38.2% retracement level of the broader Australian dollar rally since late May.
Aussie bulls are not giving up so quickly despite the shifting RBA rhetoric, as momentum from the current risk rally, with US equities rising for the eighth consecutive session is still providing a buffer for risk-sensitive currencies like the Australian Dollar. But overall, the diminishing yield appeal will likely trump all.
YEN-Abenomics Redux
With the situation in Turkey tapering and expectations running high for Abenomics 2, the market was quick to reprice USDJPY after closing at 105 on Friday. USDJPY continues to power ahead on stimulus expectations and tailwind from GBPJPY buying in the wake of the Soft Bank deal.
An overwhelming percentage of investors are expecting Japanese Policy Makers to deliver which should make the topside on USDJPY the favoured short-term position , but shifting risk sentiment will add the element of surprise
ON the risk front the Post-Brexit speculation of easy money continues to support equity market, and while the market has changed slightly risk averse overnight, the skew is directed to European equities in the wake of a very tepid ZEW survey. With that said, with central bank printing presses apparently set in perpetual motion and the era of easy money showing little sign of abating, risk sentiment should remain buoyant for the foreseeable future.
.Looking forward, with the market so firmly entrenched it the Tokyo stimulus short YEN trade, any disappointment would lead to a market washout and return to a year to date lows on USDJPY. Without some heavy lifting from the Fed or ongoing support from the DYX, traders may start looking at the risk-reward trade of buying YEN anticipating that either the current wave of strong US economic data is unsustainable, or Tokyo policy marker will underdeliver. Should make for interesting markets
YUAN-Surprise
The Yuan was marching higher overnight as the DYX, the benchmark gauge of the dollar’s strength, rose to its strongest level since March 10.There’s certainly a growing crowd of investors that are warming up to the notion that the abundance of strong US economic data may light a fire under the Fed and lead to a surprise rate hike by year end. Overnight US housing starts reinforced the notion the rising 4.8% in June from the prior month. While the prospects of a shifting Fed policy has not created any great divide amongst traders, the US economic data will continue to be a primary focus for the market. Keep in mind; Fed Policy was the primary trigger of Chinas risk Cataclysm at the start of 2016.
Domestically, China’s slowing economy continues to weigh on traders sentiment, and it’s widely expected the Yuan will remain under pressure near term. Notwithstanding the potential meltdown emanating for the Credit and Asset bubbles that have been created on mainlands unbridled stimulus efforts.
Now enter the Fix !!
A PBOC fix of 6.6946 vs. 6.971, first firmer Yuan fix in 3 periods has caught near-term speculators long and wrong ( USD), and USDCNH has moved aggressively lower from 6.7110 to 6.7040.
There may be some intention here on the PBOC part of keeping the offshore market near or below the 6.70 level ahead of the G20 ministers meeting in Chengdu this weekend. This shift in policy should lessen the likely- hood of competitive devaluation acquisitions rearing its ugly head at the weekend meetings.Certainly, the market was caught wrong footed on this one.
Ringitt -Emerging Markets Unsettled
The USDASIA complex turned bid yesterday as a cautious tone amidst profit taking set in as the fallout from the turmoil in Turkey continues do divide Emerging Market sentiment.
Overnight the stronger US economic data has seen a positive bounce in the broader G-10 space, and this should likely weigh negatively on the regional basket.
As for the Ringitt, in addition to the stronger USD momentum, crude oil prices continue to fall weighing negatively on investor appetite for Malaysia. We’re going through a soft spot in overall regional risk appetite; whether we can attribute this shift to oil prices or Chinas flagging economy, which is weighing regionally, I suspect the truth lies in the middle of that equation.