Not too surprisingly, we are back trading close to the 109 level ahead of a critical US retail sales release as USDJPY continued to grind higher overnight. The move is more about market positioning as it is about Bank of Japan rhetoric.
Bank of Japan (BoJ)’s Governor Kuroda was on the wires overnight trying to put out as many fires as possible while propping up BoJ credibility stating the economy continues its moderate recovery trend. He implied that current BoJ policy was working and the central bank was certainly not adverse to cutting rates further in June or July after the G7 summit. While the central bank offered little new insight, traders may have taken comfort in his confidence.
At the same time, Fed officials have escalated hawkish rhetoric of late suggesting the market positioning might be at odds with the Fed’s real intentions. Again, not new but with nothing else to hang their hats on, traders start reading between the lines. Lots of discussions have centred on the market’s short USDJPY positioning so profit-taking and dealers covering weaker short position from earlier in the week likely supported the overnight USDJPY rally.
I suspect the bar is very high for an actual BoJ response and unlikely to happen, if at all, until we near the 100 level. The most interesting aspect of the intervention debate is trying to decipher the political intrigue that is likely playing out behind the scenes. Not only referencing the well-published U.S. Treasury report which stated “persistent one-sided" intervention from countries like Japan now being classified as manipulators, but the ongoing political pressure from other TPP members is starting to escalate.
In early trade, the Nikkei is off 1.6 % but so far it is having only a marginal impact on USDJPY with the pair still supported above 108.80.
There seems to be a trend developing. The fix is coming in on expectations based on the CFETS. After the initial reactionary drop in USDCNH, the pair comes back aggressively bid and the onshore /offshore spread has now widened close to 300 pips. The offshore market remains well supported on a pullback with traders adopting a buy in dip mentality.
I guess the reality is, there is still an outside chance of both the Fed hiking rates and/or the PBOC allowing the Yuan to devalue given the shaky domestic economic recovery. The markets appear very anxious with growing concerns that China’s massive stimulus efforts now have long-lasting marginal effects while the unbridled mainland credit boom has increased the financial sector’s risks dynamically.
Pboc fixing 6.5246 vs 6.4959
Position flip flops on the oscillating USD dollar has been the general theme overnight
The Singapore dollar is trading at an eight-week high above 1.3744. However, I suspect this is more about the shadow cast by China’s struggling economy.
SGD is struggling and the economy is likely hampered with MAS sidelined, uncertain how to navigate these uncertain times. Overnight it was confirmed that Singapore Finance Minister Heng Swee Keat has suffered a stroke. Given this year's Budget has passed I am not expecting any significant market impact from this sad event.
Earlier in the week, the Bank of Thailand opted to keep rates static but expressed concerns about the Baht’s strength, stating their willingness to intervene if required. I suspect that they were sending a warning shot to trade competitors that they would not sit idle if others tried to engage in competitive devaluation to improve waning regional exports. Given the central bank’s overtly dovish lean, I would expect USDTHB to grind marginally higher in coming weeks. Even more so as the crescendo builds to the highly-anticipated US Fed June rate decision.
Confined to very narrow ranges of late with traders sitting tight and only prepared to trade on extreme ranges or oil patch driven momentum. Look for the USDMYR to move on the back of broader USD moves
On the Aussie dollar, a few themes have played out over the past 24 hours. Given the expectation of more aggressive monetary policy easing from the RBA, traders continue to fade commodity-inspired rallies on the AUS/USD. While the currency has been able to cushion the heightened probability of more rate cuts, it will not take much to topple the commodity house of cards built on the back of unbridled commodity speculation out of China.
Commodity prices have retreated in recent sessions, due in part to Chinese policy makers’ interventions. However, there is heightened concern among traders that the fragile state of global economic growth and renewed concerns about China’s economy could topple this house of cards. Not only would this create a run on the Aussie dollar but could do significant damage to the global economy as a whole.
The Aussie continued to underperform overnight as regional equity market futures continued to face pressure. Even a late afternoon rally on US equities failed to inspire the Aussie bulls. Yesterday consumer inflation expectations came in lower printing 3.2% versus 3.6% prior. As a result, traders are far more disposed to be short Aussie. Even the AUDNZD cross has come under the gun trading down to major support levels of 1.0725. Mind you, the Kiwi has found some legs after rebounding on a less dovish Financial Stability Report and a surprisingly strong New Zealand manufacturing PMI. The pair has faced less selling pressure than its Tasman Sea neighbour over recent sessions as the NZ economy appears fairly resilient despite sour dairy prices.
In early trade, the AUDUSD is precariously perched above the .7300 level, which earlier in the week proved to be a strong support line. However, through that level, I would expect a big pickup in downward momentum as traders scurry for downside exposure, anticipating a test of the significant 200-day moving average at .7261
Keep an eye on regional equity market for clues.