APAC Currency Corner -Equity Markets Sour

Equity markets sour 

Equity markets have struggled badly over the last 24 hours, and you can easily pick your poison: a combination of lower oil prices, a stronger Yen and tepid economic data in the Eurozone. We also have Christine Lagarde to thank for severely dampening investor sentiment. The IMF boss stated that it will cut its global economic forecasts as the current pace of recovery is “ too slow, too fragile.”

There will be some interest in the event tonight, but with the Statement likely to reinforce Yellen’s dovish stance, and it will be more a case of trader deciding if the Fed is very Dovish or Extremely dovish so dealers will likely split hairs on this debate post release.

Asian currencies

YEN

USDJPY was the main focus for G-10 traders overnight as the pair moved below 110 levels. While the move has been fairly orderly, it came on the back of comments from Chief Cabinet Secretary Yoshihide Suga that the government would be watching FX markets with a “sense of urgency”. This comment came after a joint monetary policy meeting between the MoF, the BoJ and the FSA yesterday afternoon. Predictably the comments were received negatively as the market lacks confidence that the BoJ has any policy measures in its arsenal to prevent the double whammy of increased risk aversion and USD dollar weakness to prevent YEN appreciation . With the government nervous and backed into a corner, investor confidence has been severely rattled.

Also, comments from  Prime Minister Abe downplaying the likelihood of intervention likely exacerbated the move . However, traders must be very careful not to fall into a short-term bear trap without any top side protection if the BoJ decides to intervene.

YUAN

The market is taking cues from the USDJPY capitulation and the general unwind of JPY funded carry trade. Overall CNH volumes  continue to run quietly with an  overall USD buying skew

EM Asia continued to slide through overnight trading as risk appetite soured.The drop in WTI  continues to weigh negatively also in EM Asia

Volatility has picked up a touch, but it’s primarily around the fix as the new fixing regime is showing signs of greater flexibility and reflecting actual market sentiment. However the CNH has remained very stable this month, and this might account for traders lack of enthusiasm toward CNH trade.

Pboc sets today’s midpoint at 6.4754 vs. 6.4663 prior +91 as the Central Bank continues to allow the fix dictated by market trade as overnight weakness in both the Aussie dollar and Euro contributed to the YUAN piloted depreciation

The China March Caixin PMI services are printed 52.2 adding to the recent string on positive PMI.Should be a small boost to risk sentiment but likely a fleeting one

Malaysian Ringgit

USDMYR has been trading off 2016 lows as oil prices have continued to slide on the fallout from expectations that this month’s OPEC meeting will do little to curb supply.  While there is a very strong correlation between oil prices and the Ringgit, greater convexity appears to be taking hold with the Ringgit’s reaction to lower oil prices less dramatic than its reaction to higher oil prices.  I think the convexity is a result of foreign investors believing oil prices have bottomed, so they are willing to ignore the recent interday drops and sell into USDMYR upticks. However, the MYR is feeling the effect of the recent risk aversion where foreign investors seek the relative safety of 10-year USD treasuries as opposed to chasing EM yields. But I continue to expect the market to be better sellers of USDMYR over the short term

 

The Aussie dollar

The Aussie was a standout underperformer overnight testing the 0.7530 level as a combination of lower commodity price and risk-off sentiment weighed negatively on the currency. However, domestically the last two economic readings have been far from supportive.  With an underwhelming retail sales print fresh on traders’ minds, Australia’s trade deficit bulged $3.41 billion in February versus an expected decline of $2.5 billion. With key commodity prices such as iron ore heading south again, expanding trade deficits will likely continue to weigh negatively on the Aussie unless there’s a surprise increase in demand from China.

On the central bank watch, the RBA left its cash rate target unchanged at 2% as universally expected. Again ignoring the temptation to enter the “currency wars” by slashing rates, the RBA language was neither tough nor plentiful enough to talk the currency down. This guidance would suggest that the Aussie will remain a trader- friendly environment and should continue to benefit when the dollar downtrend resumes in full force.

It appears the RBA is willing to milk the solid performance of the labour market through 2016, and would prefer to keep the cash rate at 2%. However, the recent inflation data certainly gives the RBA plenty of reasons to ease. Specifically, if the Aussie trajectory continues moving higher and the CPI reading misses on the downside, it should mean a May RBA OCR is “live.”

In early APAC trade, the Aussie is trading off overnight night lows as WTI Oil futures are rebounding at this morning Futures Open.  Oil prices are moving higher that there may be a freeze agreed at next this months OPEC summit. The Kuwaiti governor for the OPEC, Nawal Al-Fuzaia, said overnight that there were “positive indications an agreement will be reached” during a producer meeting scheduled for April 17 in Qatar. But with so much back and forth on this topic, it’s difficult to place one’s chips on either side of the table