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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 hovers around nine-day EMA above 1.1800
EUR/USD remains in the positive territory after registering modest gains in the previous session, trading around 1.1820 during the Asian hours on Monday. The 14-day Relative Strength Index momentum indicator at 54 is edging higher, signaling improving momentum. RSI near mid-50s keeps momentum balanced. A sustained push above 60 would firm bullish control.
GBP/USD holds medium-term bullish bias above 1.3600
The GBP/USD pair trades on a softer note around 1.3605 during the early European session on Monday. Growing expectation of the Bank of England’s interest-rate cut weighs on the Pound Sterling against the Greenback.
USD/JPY drops back below 157.00 on Japan's verbal intervention
USD/JPY has come under moderate selling pressure below 157.00 in the Asian session on Monday. The Japanese Yen lost ground to near 157.70 following Japan’s ruling Liberal Democratic Party's outright majority win in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. However, JPY buyers jumped back and dragged the pair southward on FX verbal intervention by Japan’s Finance Minister Katayama.
Editors’ Picks
EUR/USD hovers around nine-day EMA above 1.1800
EUR/USD remains in the positive territory after registering modest gains in the previous session, trading around 1.1820 during the Asian hours on Monday. The 14-day Relative Strength Index momentum indicator at 54 is edging higher, signaling improving momentum. RSI near mid-50s keeps momentum balanced. A sustained push above 60 would firm bullish control.
Gold sticks to gains above $5,000 as China's buying and Fed rate-cut bets drive demand
Gold surges past the $5,000 psychological mark during the Asian session on Monday in reaction to the weekend data, showing that the People's Bank of China extended its buying spree for a 15th month in January. Moreover, dovish US Federal Reserve expectations and concerns about the central bank's independence drag the US Dollar lower for the second straight day, providing an additional boost to the non-yielding yellow metal.
GBP/USD holds medium-term bullish bias above 1.3600
The GBP/USD pair trades on a softer note around 1.3605 during the early European session on Monday. Growing expectation of the Bank of England’s interest-rate cut weighs on the Pound Sterling against the Greenback.
Bitcoin, Ethereum and Ripple consolidate after massive sell-off
Bitcoin, Ethereum, and Ripple prices consolidated on Monday after correcting by nearly 9%, 8%, and 10% in the previous week, respectively. BTC is hovering around $70,000, while ETH and XRP are facing rejection at key levels.
Weekly column: Saturn-Neptune and the end of the Dollar’s 15-year bull cycle
Tariffs are not only inflationary for a nation but also risk undermining the trust and credibility that go hand in hand with the responsibility of being the leading nation in the free world and controlling the world’s reserve currency.
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