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Wayne Ko Heng Whye
Fullerton Markets Ltd
Fed made it clear that more tightening is coming, long USD/JPY?
Any MSCI’s A-share inclusion may give Aussie a major boost
China’s growing acceptance into international capital markets faces an important moment as MSCI is going to make a decision to include the first batch of stocks listed on its $7tn domestic equity markets into the world’s dominant emerging markets stock index. MSCI will announce whether it would include China’s domestic A-shares in its global indices after U.S. stocks closed this Wednesday, HK time.
Inclusion into the index would be a major step forward for China as it attempts to open up their financial markets and attract foreign capital. It will also confer an unprecedented recognition upon China’s domestic capital markets and obligate funds from all over the world to pour billions into the country’s stocks.
Having in the past cited regulatory worries and accessibility for global investors, there are signs that MSCI is ready to say yes this time. Such a decision has big repercussions for global investors, as it will obligate investment funds to pump billions into China’s stocks. MSCI has markedly altered the inclusion proposal to make it more palatable to clients. The list of A-share companies to be included in the benchmark index will be just 169, down from 448 previously. If A-shares are included, they will account for only 0.5% of the MSCI EM Index and not a heavy 5% under MSCI’s previous proposal.
In our opinion, if there is a successful inclusion, it could drive the Shanghai composite index towards 3,300 this month. Chart below shows any rally in shanghai stocks is likely to give AUD/USD a major boost.
Fed to shrink balance sheet is positive for U.S. dollar
Fed chair Janet Yellen and her colleagues raised the federal funds rate from 1% to 1.25% overnight, and reiterated they expect inflation to return to target in a few years. At the same time, they stressed they are watching low inflation numbers “closely” after a series of disappointing readings.
Most importantly, Fed officially discussed its plan to reduce their $4.5 trillion balance sheet. FOMC will reduce reinvestment of principal payments received on maturing securities in its portfolio. Payments will only be reinvested to the extent they exceed a set of gradually rising caps, according to the statement. For Fed’s holdings of Treasuries, FOMC anticipated the cap will start at $6bn per month, and increase in steps of $6bn at three-month intervals over 12 months until it reaches $30bn a month. For incoming payments on mortgage-backed securities, caps will start at $4bn per month and increase in steps of $4bn at three-month intervals over 12 months until they reach $20bn per month.
Balance sheet shrinking plan is very new to the market at this stage. It is difficult to assess its impact at this moment. However, uncertainties may drive dollar higher in coming weeks.
Official Brexit talk kicks off, pound may be under pressure
Brexit secretary David Davis is set to meet Michel Barnier, EU’s chief negotiator, in Brussels today to begin formal talks on the process of untangling the UK from the bloc. EU will focus on issues of citizens’ rights and Brexit bill for the next few months, a sequence to which UK had previously objected.
Now that the British election has thrown a wrench into an already complicated and unpredictable proceeding, investors will be watching closely to see the reactions from both camps.
Our Picks
EUR/USD – Slightly bearish. The uptrend is showing a bit exhausted in near term after FOMC meeting. This pair may move towards 1.1140 in coming days.
GBP/USD – Slightly bearish. Price will fall further towards 1.2636 as Brexit talk is kicking off.
XAU/USD (Gold) – Slightly bearish. Potential dollar strength may pressure gold towards 1240.
Top News This Week (GMT+8 time zone)
New Zealand: RBNZ rate decision. Thursday 22nd June, 5am.
We expect figures to remain unchanged at 1.75%.
Euro Zone: Flash manufacturing PMI. Friday 23rd June, 4pm.
We expect figures to come in at 56.5 (previous figure was 57.0).
Fullerton Markets Research Team
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Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates
Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Editors’ Picks
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Gold: Volatility persists in commodity space
After losing more than 8% to end the previous week, Gold remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000. The US economic calendar will feature Nonfarm Payrolls and Consumer Price Index data for January, which could influence the market pricing of the Federal Reserve’s policy outlook and impact Gold’s performance.
AUD/USD eyes 0.7050 hurdle amid supportive fundamental backdrop
AUD/USD builds on Friday's goodish rebound from sub-0.6900 levels and kicks off the new week on a positive note, with bulls awaiting a sustained move and acceptance above mid-0.7000s before placing fresh bets. The widening RBA-Fed divergence, along with the upbeat market mood, acts as a tailwind for the risk-sensitive Aussie amid some follow-through US Dollar selling for the second straight day.
Week ahead: US NFP and CPI data to shake Fed cut bets, Japan election looms
US NFP and CPI data awaited after Warsh’s nomination as Fed chief. Yen traders lock gaze on Sunday’s snap election. UK and Eurozone Q4 GDP data also on the agenda. China CPI and PPI could reveal more weakness in domestic demand.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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