Asia Wrap: Wuhan virus fully priced in ?? It remains the be seen if that is really the case

Asia Wrap

The SGD selloff has dragged the broader USD/Asia complex weaker. However, the positive risk tone set by US equities rally overnight has buttressed APAC sentiment more broadly, while providing a fillip to local equities it also supported copper and oil prices through the Asia session.

In G-10 FX, the AUD is the latest apple of the market eye picking up more topside momentum following yesterday's relative sanguine RBA statement.

 

China

Chinese stock market, however, saw over CNY3 bn outflows this morning, which kept USDCNH firm and "swaps" offered. But a defensive bid continues guide USDCNH higher as the coronavirus situation isn't close to peaking locally, suggesting the regional risk markets could struggle in days ahead and could trigger more capital outflows leading to the currency driven outflow snowballing effect.

USDCNH could nudge towards 7.05 + as the market begins to fully gauge the enormity of the virus impact on China consumption and supply chains so any upcoming data that includes virus impact period should ultimately send oil much lower and gold higher as more central bank policy easing should follow, This could weaken local currencies precipitously over the short term as the market self-correcting mechanism takes hold, when economies weaken currencies tend to follow suit.

Speaking of policy easing

 

Thailand

The Bank of Thailand cuts its policy rate by 25bp to 1.00%, against expectations for no change. But with trader already positioning for an inevitable rate cut, the gap has been limited to 31.25. Also, the rate cut is probably a one and done in an attempt to offset the tourist trade demise due to the virus.

 

Singapore Dollar

I don't often get involved in the Sing dollar, but there was too juicy of trade to ignore today.

USDSGD traded up to 1.3820 from 1.37 after the MAS said it has sufficient room within the band to accommodate SGD NEER easing.

So while the MAS signaling that it is prepared to ease harmful to the SGD, but adds to the global narrative that central banks have investors backs. (Good for Gold)

But it set up some excellent options for SGD as a funding currency across carry trade and China sensitive currencies for the future mainland pent up demand on the transitory flu rebound trade. The great thing about shorting the SGD for a month or two is that it's a problematic currency to fade since MAS only meets bi-annually. So short SGD vs. KRW, IDR, INR (one growth and 2 carries) ON G-10, with the RBA out of the way I like long Aussie vs. SGD from a technical perspective

 

Oil Trade update (SARS Blueprint)

Crude prices fell sharply last few weeks. With major cities quarantined in China, an impact on oil demand may be inevitable. That was the signal for the demand devastation trade.

Although drawing comparison from the peak of the SARS crisis in 2003, which also triggered a tumultuous drop in oil prices, is beyond tricky. Still, they collapsed nearly 30% from peak to trough that year. But I recall that oil prices were soaring at that time due to the middle east risk just before the start of the Iraq War. But current market dynamics are quite bearish, with non-OPEC oversupply conditions continuing to weigh on sentiment. Crude oil prices have fallen >20% from its peak YTD with CO1, indicating US$54.60/bbl. I'm assuming that current levels are factoring in the knowns, but it's the unknowns around the weaker data that should see Oil prices match if not exceed the - 30% SARS impact, and that would put the price floor somewhere between $47-50 CO1.

In relative terms, the bulk of the move has happened, but with another 10 % move lower possible, I don't think you are late to the game. However, the move below $50 will be more of a grind as opposed to the rather unencumbered slice through $60.