Current price action is suggesting that traders are positioning for a domino effect in the wake of last week’s BoJ action.
“The ECB has suggested a willingness to increase QE or even drop further into negative interest rate territory, so we may see a knock on effect as other global central banks adjust their policy measures though more aggressive stimulus measures,” says Stephen Innes, senior trader at OANDA. “Thereby weakening their currency in order to reignite inflation and in attempt to boost domestic economic activity.”
He added, “In the commodity bloc currencies, speculation over the Saudi Arabia - Russia agreement to cut supply will likely continue to be the main market catalyst this week and will drive short term risk sentiment. I expect the AUD and other commodity and risk sensitive currencies to swing in tandem with oil prices.”
For regional traders, don’t expect any slowdown. The China manufacturing PMI printed below expectations with Jan Manufacturing PMI printing 49.4 vs 49.6 Non-Manufacturing 53.4 vs 54.4.
“The indications are for ongoing contraction in China. While a small miss, it is the 6th consecutive month of contractions,” comments Innes. “Keep in mind it was horrible China data that sent the market into a tail spin in early January but this print was not too far off consensus, so I am not anticipating any huge negative reaction to risk.”
The China Caixin PMI manufacturing came in at 48.4 vs 48.1; which means it has been in contraction for the 11th consecutive month.
Australian traders are eagerly waiting for the Reserve Bank of Australia (RBA) interest rate and policy decision due Tuesday. “The market is expecting the RBA to remain on hold and should likely come across with a positive economic lean in the wake of last week’s surprising uptick in domestic CPI,” says Innes.
The AUD opened the week lower in the wake of last week’s BoJ move. Despite attempts to push higher, during late Friday in the NY session the USD made gains across the board, despite a small miss in the US GDP data.
“In mid-morning trade, the AUD traded with a positive lean in the wake of the higher than the expected print in Caixin PMI. Global risk sentiment is improving and there is anticipation of an upbeat monetary assessment from the RBA tomorrow.”
“While the BoJ was clearly a surprise to markets it shows how desperate the BOJ is to reignite inflation amidst tepid regional growth. There was a great deal of confusion as per market price action. Ultimately I think local traders will interpret this as a stark reminder just how dismal the regional economic conditions which forced the BoJ's hand.”
For Asia, the BOJ's surprise move improved overall risk-on sentiment and there was some appreciation of regional currencies.
The USDMYR made a huge move lower on Friday as oil prices continued to firm and EM Asia benefited from buoyant risk appetite after the BoJ cut. “However, the market has been extremely choppy this morning with oil prices mixed and uncertainty setting in about the possible knock-on effect on regional interest rates in the wake of the BoJ moving into negative interest rate territory,” added Innes.
USDCNH continues to trade in tight ranges ahead of Lunar New Year. This morning the BPOC set Yuan midpoint at 6.5539 v 6.5516 prior.
The big regional event in Asia this week will be RBI's MPC on Tuesday and it’s widely expected the central banks will keep rates on hold.
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