APAC Currency Corner – Asia USD basket looking bullish

CNY
We hit a new year-to-date low on the China CFETS basket yesterday, down 2.9% year to date and the PBoC seems to be a happy camper with the pressure off the Yuan. Yesterdays’ extreme interest gap lower in CNH funding was a result of quarter end influences, and an unwind of forward hedges used to fund short CNH positions appears to be normalizing today.

China Non-Manufacturing PMI was at 53.8 in March (52.7 previous) and China March manufacturing PMI comes at 50.2 versus 49.4 expected.

PBoC sets Yuan midpoint at 6.4585 vs 6.4612 prior
The PBoC reported data on its derivatives holdings positions in forwards and futures in foreign currencies versus the CNY for the first time on Thursday. It should be viewed as a big positive as it should address some transparency concerns from both investors and the IMF, who recently requested additional information about the PBoC derivative holding. The move is expected to address appeals from investors and the IMF that the Central Bank has cast more light on its derivatives.

The data shows that the Central Bank holds a nominal short position of USD28.9bn and USD2.438bn worth of total long positions.

According to a note by the Central Bank: “The nominal short position … mainly reflects PBC’s FX forward position with commercial banks to meet the demand of enterprises to hedge their liabilities denominated in foreign currencies. The PBoC will continue providing forward hedging products based on real needs, to help enterprises hedge exchange rate risk properly. Therefore, these forward FX operations will have little effect on the size of FX reserves in the future.”

Asia–USD basket looking bullish
As the day wears on, pre-NFP activities should translate into a day of consolidation.

USD/JPY
Japan Q1 Tankan Large Manufacturing Index came in at six vs. eight, the lowest level since June 2013 which does nothing but highlight the deteriorating economic fundamentals in Japan. This report came in below even the most pessimistic report. Predictably, the Nikkei has reacted poorly to the print and is dragging USD/JPY lower in its wake. It signals a disturbingly large drop in business confidence.

MYR
Active interest from foreign investors coupled with local exporters hitting the panic button has seen the USD/MYR break below the significant 3.90 level. Today, we’re opening around 3.885, touching a 7th month low. The USD/MYR is trading heavily this morning, disregarding potential political hot spots as well as temporarily divorcing from the WTI correlation. Foreign investors have a big appetite for MYR today, and I would expect momentum to continue especially with exporters jumping into the mix.

AUD
Further consolidation and profit taking at the New York session have the AUD trading off 24-hour highs, which saw the pair trade through .7700 resistance topping at .7725 as the USD dollar continued edging lower.

While the dovish Fed continues to be the primary driver in Forex, a mix of month end and pre-NFP activity has seen the Aussie come off the overnight highs as profit taking and consolidation has been the name of the game. I would expect the pre-NFP focus to dominate today’s proceedings.

The AUD is back in a big way as traders heard towards the Antipodean Carry Yield with the US Federal Reserve all but holding the door wide open for further USD weakness over the short term.

Needless to say, the recent onslaught of Aussie buying will be a primary focus for Governor Stevens at next Tuesday’s policy meeting but what course will the RBA take?? . Stevens has been far from trigger happy when it comes to lower rates as the benchmark has remained unchanged since last May. But with other Global Central Bankers continuing to pursue expansionary monetary policy, a rate cut may be a viable option for the Central Bank in the near term.

There’s lots of chatter that the RBA may embark on another round of aggressive jawboning but with US criticism of this tactic surfacing last week, and the given the fact it will likely have muted impact. I think the only tool in the RBA arsenal is an interest rate cut, and this may ultimately lead the RBA to pull the trigger.

However, if we look at the ineffectiveness of Central Bank’s Easying Monetary Policy to transpose into a weaker currency, especially in the face of a barrage of USD selling, it certainly leaves the RBA in a delicate spot as the AUD continues marching higher.

One reprieve for the AUD may be on the commodity front as the market looks past investor positioning and starts to refocus on demand for the base commodities. It is unlikely the recent revival in China real estate would increase construction demands. However, with the market so concentered on interest rate divergence, the impact may be limited.

China PMI
China Non-Manufacturing PMI at 53.8 in March ( 52.7 previous) and China March manufacturing PMI comes at 50.2 versus 49.4 expected.The AUD has popped higher above .77 on the uptick in China Data, but in post-trade trade, the AUD has slipped back to the pre-news levels with the Nikkei down 2.5 %. There’s a fair bit of pressure on the AUD/JPY risk off trade.