Please attribute the following commentary to Stephen Innes, Senior Trader at OANDA Asia Pacific.
Oil was the prime market driver overnight after WTI fell below the psychological 30.00 per barrel. Overnight it was widely reported that Saudi and Russia have agreed to “freeze output” at near record output levels, but far from the production cut traders were speculating on. Needless to say, the output freeze disappointed the bulls who were targeting a break out towards the 40.00 per barrel region. But we should not discount the fact that members are now open to discussion, and this might be a step forward to possible production cuts.
Commodity currencies and EM FX are especially sensitive to the oil move and which saw the Aussie move through 71 cents level in New York trade as traders remain vigilant as to whether the current positive shift in market risk sentiment is genuine or merely a lull before the storm market. Adding to the uncertainty, we had divergence in themes overnight, when the high equity vs. oil correlation started drifting apart as stock markets remained buoyant while oil prices slid. I think this may be temporary as if WTI extends losses it will further play into the risk aversion theme, and the stock market will feel the pressure
Regional equities were given a huge boost on the back of strong credit data out of China, which revealed domestic consumer loans grew at the fastest pace on record indicating that the government is opening up the lending steps in the attempt to revive the sagging economy. This positive tone carried throughout global markets but surprising it translate into a win for regional currencies.
Most Asian currencies weakened overnight primarily due to their sensitivity to oil prices as WTI prices fell after the Saudi and Russia " output freeze". None more so than the Malaysian Ringgit, which appeared to weaken well beyond expectations given the inter-day move on crude. However, EM FX traded poorly overnight on the back of Colombia downgrade, and this may have exaggerated some local currency woes.
Finally, Asian currencies were likely dragged lower by a stronger US dollar as pessimism about the US economy temporarily abates. When asked about the possibility of negative US interest rates, Fed members Harker and Kashkari, poured cold water on the idea by stating they would need to see a significant collapse in economic conditions to consider even such a drastic move.
To add more confusion to the ongoing policy debate, the PBoC set today's Yuan midpoint 6.5237 vs. 5.130 prior and well above the market close of 6.5180. By all accounts, it certainly appears the that PBoC are shifting to a weighted basket regime,albeit a relatively stable one.
Yesterday, the RBA released the minutes from the February policy meeting. While no major surprises, the Central Bank appears at ease with the current financial landscape in China. Despite raising concern about Non-Mining Investment and Domestic Capital Expenditures, they seem very content watching global events from the sidelines, and when it comes to monetary policy, they appear to prefer being a spectator as opposed to the player.
Despite Governor Stevens' relaxed attitude about China, external factors concerns will continue to drive the Aussie dollar's fortunes.
The Kiwi had a bad 24 hours that started off with yesterday's retail sales data which increased by only 1.2% QoQ in Q4 2015, well below the 1.5% expected. The horrible retail sales print followed by New Zealand 1 and 2-year inflation expectations which came in Q/Q 1.63. % vs. 1.85% expected. Given the market's sensitivity to stagnant inflation, the Kiwi was hammered 60 pips lower. While this will be a concern for RBNZ, not sure if it accelerates rate cut speculation as the miss was likely due to energy prices, and as RBNZ Wheeler stated last week, the Central Bank is monitoring inflation indicators factoring out oil price volatility to a degree. With traders looking for any ammunition to sell the Kiwi the back to back misses on retail sales and inflation outlook provided the bullets.
Overnight the Kiwi suffered more bad news as Fonterra Global Dairy Trade prices fell 2.8 % which just added to souring sentiment
We have a very limited domestic economic calendar today, so the focus now shifts to tomorrow's Australian Employment data. A weaker than consensus print would fuel speculation for rate cuts and would weigh negatively on the Aussie whereas consensus or above would mean status quo
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