Please attribute the following market commentary to Stephen Innes, senior trader at OANDA Asia Pacific
Aussie rate cut wrong-foots traders
The Australian dollar was trounced in the wake of yesterday’s RBA unexpected 25 basis point rate cut, but it was more than just the rate cut that spooked traders.
Last week’s horrendous CPI print played a big part in the RBA’s decision and Governor Stevens also sounded alarm bells about global conditions. Heeven suggested that the domestic economy may be growing at a slower rate than anticipated. Once again the elephant in the room, China, was back on the radar.
The market was clearly wrong-footed, with consensus running for no rate change among economists and opinions split among dealers. The market was wrong in the days leading up the OCR and even the pre-rate decision positioning, which saw the AUD fill the post-CPI and trade above 0.7700, way off the mark.
Is a major policy shift on the cards?
In the wake of yesterday’s rate cut and accompanying statement, we could be in the midst of a structural RBA monetary policy change. This dynamic could see the RBA’s focus shift to inflation away from the reliance on employment metrics. Such a change will likely open the door for future rate cuts to commence as early as August, as the next quarterly CPI print in July could show declining inflation remains a significant issue.
The RBA has little option other than to let the exchange rate do the heavy lifting to get inflation back to the 2%-3% comfort band. It will likely take a depreciation of significant order to get back within that target band.
The dilemma for traders is that despite the RBA’s need for significant currency depreciation to realign inflation targets, the recent central bank’s policy adjustments have failed to translate into significant currency depreciation. If we consider that in both Japan and New Zealand, it has done the exact opposite. With that in mind, battle lines will likely take shape to form around this notion as many view the recent Australian dollar capitulation as temporary.
Oil adds to the woes
Adding to the negative vibes were across-the-board declines in commodity prices. Oil bears came alive on the first hint of inventory build-ups amid concerns about global growth after China’s weaker-than-expected PMI prints this week. Oil inventory builds were driven home when the American Petroleum Institute reported a 1.3m barrel rise in weekly crude inventories. Also, more reports are surfacing that Iran and Saudi Arabia are having issues agreeing on any long-term strategy for production freezes. The same scenario is playing out for iron ore, as price action remains heavy after stockpiles rise.
Kiwi feels the crunch
The Kiwi was not immune to the commodity crunch after the Fonterra milk auction came in at -1.4% while futures projected a 7% increase. However, the NZD has since recovered and shaken off the miss on the Global Dairy Auction after it was reported New Zealand employment rose 1.2%
Yen – beware the Golden Week liquidity trap
Frenetic overnight markets saw the USDJPY trade into the 105 handle (105.52) only to spike to 107.50 shortly after the NY close. Besides the obvious Golden Week liquidity trap, if you are trying to make sense of a USDJPY rally while risk-off sentiment prevails in the market, look no further than the massive short USD JPY position build-ups.
USDJPY short position is around $7.5bn, as per commitment of trader data. Given the proximity of what is potentially shaping up to be one of the most important NFPs this year, position adjustments should continue to dominate day trade for the remainder of the week. Another short squeeze on USDJPY could be probable given the current market positioning.
We've had the usual jawboning from Bank of Japan’s Kuroda throughout the day, yet as usual, it is having little impact on traders’ sentiment. Despite the chaotic inter-day swings, the Yen outlook has not changed.
Given the November US presidential election will likely keep the Fed on hold until at least November and, unless Kuroda responds with some spectacular stimulus package, USDJPY will likely continue falling in the near term.
USDCNH – a head-turning market
Fixing continues to come out in low, but spot remains bid, even in the face of yesterday’s USD slide and as the market has seen good USDCNH buying interest.
A well-bid market in the face of lower CNY fixes has some heads turning. With mainland economic recovery looking a bit shaky, as per the softer Caixin PMI report yesterday, we could see more short CNH speculative positions hitting the market. The weaker Australian dollar, post the RBA interest rate cut yesterday and an across-the-board bounce in the USD overnight will likely add to bullish USDCNH sentiment.
Today, the PBoC fix is 6.4943 vs 6.4565.
The basket is ratcheting higher at this morning’s open due to the USD jump on pre-NFP position adjustments. Also the massive downturn on the AUD is weighing negatively on regional sentiment.
MYR – bad cocktail for the Ringgit
The Ringgit’s sensitivity to oil prices this week is obvious and given the uncertainty in predicting the EM space pricing post-NFP, we could see some pullback in regional currencies. Oil price action seems to be associated, with news that OPEC is reported to be in disagreement over its long-term strategy, as Tehran and Saudi Arabia are unable to see eye-to-eye. Risk sentiment has taken a bit of a hit in recent days as investors are becoming disgruntled with central banks’ ineffectiveness to guide the global economy through these turbulent times.
And certainly, the ensuing yo-yo effect on risk sentiment is taking its toll. Add in more fears about a further slowdown in global economic growth and it makes for a bad cocktail for the Ringgit. The market has been grinding higher and we're now through what was previously active resistance levels at 3.95-96, opening at 3.98 with the next resistance level coming at 4.05.
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