Please attribute the following commentary to Stephen Innes, Senior Trader at OANDA Asia Pacific.
Amid the doom and gloom
Last week was an extremely hectic one as doom-and-gloom sentiment gripped investors as financial institutional risk spread across markets. Analysts and traders alike have been questioning the effectiveness of the market guardians such as the Fed, ECB and BOJ to expertly guide the global economy back to equilibrium. The jury is still out.
As for the Fed, its credibility is under the spotlight concerning its monetary policy as the market continues to be on a reversal following December’s rate hike.
USD in ASIA
There is a sigh of relief as the Nikkei trades +4.5% in early trade. And while we’re certainly not out of the woods yet, the USDJPY has opened up positively, reflecting the risk mood at the market’s open. This is being supported primarily by firming oil prices and also last week's US retails sales which came in better than expected. Also, general risk assets in both Europe and the US ended a very tumultuous week with an impressive recovery.
Malaysia’s Ringgit closed the week on a positive note vs. the U.S. dollar on Friday, supported by WTI's massive 12% rally from Wednesday’s 12-year low. Higher oil prices benefit the Ringgit due to the positive effect on Malaysia’s oil export industry, which is a boon for the country’s trade balance.
Regardless of Friday's bounce, the Ringgit has been showing more resilience to the drop in commodity prices, and oil in particular, which was responsible for the Ringgit weaknesses last year. Despite the ongoing trend of lower oil prices, the Ringgit has climbed 2.5% in 2016, the second-best performance after the Yen among the region's 11 most-traded currencies. Certainly, attractive bond yields were likely to have been responsible for that as the close-to-4% yield was driving foreign institutional demand for the Ringgit. Also from a trade-weighted perspective, the MYR is looking well undervalued as the overhang from political scandal continues to weigh negatively on the local currency.
In an interview published in the Chinese press (Caixin), PBOC Governor Zhou has played down concerns about volatility in the domestic currency and that the trend is to move toward a market-oriented currency with greater flexibility in the foreign exchange rates.
This is good timing for such verbal guidance after last week’s USD capitulation as the markets opened up very calm in China. The Yuan midpoint came in at 6.5118 vs. 6.5314, but USDCNH rebounded higher through 6.53 only to have locals leading the spot back through 6.52.
Traders returned today after the Lunar New Year holiday to be greeted with a shaky open, with the Shanghai Composite falling more than 2% this morning. However, in Hong Kong, the Hang Seng opened up 1.9% higher on the back of improving global equity sentiment. It could be one of those days!
AUD - China back in focus
China returns from its week-long Lunar New Year holiday today so there will be a great deal of local focus on how the Chinese markets react after last week’s financial market turmoil.
Aussie stocks opened higher after the rally in US and European stocks on Friday, but ASX futures have been under early pressure as traders react to news of Newcrest Mining profits plummeting amid lower copper and gold prices.
So far the Australian dollar has ignored local futures moves. Instead traders are focusing on the positive risk-on tone in global equity futures which is lending support to commodity currencies at this week’s market open.
Also, the positive tone in commodity prices this morning is giving support to the domestic currency. It’s difficult to trade the Aussies as it’s stuck in neutral as risk aversion weighs negatively while current monetary policy remains supportive. We’re seeing this theme play on the Commitment of Traders report in the week ending February 9.
Aussie longs are sitting at 64,000 contracts compared to shorts coming in at 69,000 contacts. This relatively neutral positioning may indicate short-term range trade. However, over the medium term, I continue to see the Aussie edging lower as headwinds from China continue to weigh it down.
Local traders are sitting tight waiting for China trade data in which exports are expected to have declined 1.8% y/y and imports at -3.6% y/y. Anything other than a negative print will raise more than a few eyebrows that the numbers are being fudged.
On the domestic front, minutes from February’s RBA policy meeting and January’s employment report are in focus. The minutes usually echo the RBA comments at rate decision. However, Thursday’s Australia Employment change will be this week primary focus for local traders.
Locally, eyes will also be on the Shanghai Composite Index – a regional bellwether – as China traders return from their Lunar New Year break.
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