Last week was a monumental week in the currency markets as the US Bond yields soared, weighing on Emerging Markets sentiment. After a lively week in the equity markets, equities retraced on Friday because oil prices collapsed, burdened by the prospect that OPEC cannot cap supply. Precious metals also plummeted, as safe haven appeal diminishes and the weight of higher expectations for a Fed rate hike rising.
It will be an eventful day across APAC as the market digests the fallout from yesterday’s New Zealand earthquake and the release of China's monthly key activity metrics of October. As per the latest Bloomberg Surveys, the market expects to see a small bounce in IP growth (to 6.2% from 6.1% in September), Fixed asset investment (FAI (8.2%) and retail sales steady (10.7%)
There are expectations that US Yields will move higher and along with them, USDJPY, as risk sentiment continues rocketing. The market is focussed on US fiscal spend, which is being well received by investors, who continue to express their optimism. In early trade, the S&P futures are looking to recoup Friday’s energy sector swoon. The USD remains King.
It is expected that the US President Elect’s policies will convert to higher US rates, which will not be helpful to the Yuan. Notwithstanding the mounting pressure from capital outflows, the market is most likely underpriced for a tumultuous emerging market dump. We may only be on the cusp of structural repricing of China market risk.
Are we in the midst of “Trump Slump” or a “Trump Dump”? Therein lies the question for the recent APAC taper tantrum. Local currency markets are reacting negatively as investors seek currency hedges versus the stronger USD prospects. These actions are expressed through illiquid NDF markets in both IDR and MYR, which has caused regional central banks to take intervention actions.
Bank Negara was quick to the call, instructing onshore banks to refrain from speculative FX activities, which are being perceived as a form of capital outflow. Given the fragile state of the central bank reserves, the direct intervention was unlikely. On shore is trading 4.2950-3050 this morning and we will need to see the onshore developments which should help with the sentiment.
The Indonesia Central Bank's reserves are better positioned opted for direct currency intervention to halt the slide. Asset rotation, along with a mad dash for currency hedges for those willing to stick it out, one should expect the USDIDR to remain firm on dips.
The depth of market in regional currencies is fragile this morning and will likely amplify currency moves.
Overall, I expect EM bonds to remain under pressure with low yielders and those currencies sensitive to Fixed Income differential more at risk. We are witnessing an enormous turnaround from the secular stagnation of US re-inflation, which will continue to weigh on APAC capital markets.
The Australian dollar remains pressured on the backdrop of broader US strength, but more so associated with a sharp rise in US yields, which is putting a strain on APAC emerging markets and by proxy the AUD.
The AUD was slammed when copper futures came crashing lower on Friday after Chinese regulators placed new limits on retail copper positions. In concert, Rebar prices fell below 3000 after trading to a high of 3200, further dampening sentiment. Fears that the current market froth is based on a flimsy house of cards sent the market toppling.
While there is little domestic cause for the recent Aussie swoon, the mounting pressure in the local EM space, along with China’s underpriced financial risk, should continue to exert local pressure as the US dollar remains king.
Industrial metals have benefited from the prospects of increased infrastructure builds in both the US and China. Much of the latest move has been driven by speculative money, as mainlanders are caught up in the recent commodity frenzy, which caught the eye of China regulators.
New Zealand Dollar
The NZD earthquake will likely dwarf any domestic economic news until the completion of the damage assessment. The currency market’s reaction was muted, as traders are focused on G-10 and EM macro developments, but the earthquake will certainly provide considerable headwinds for any near term reversals of current market view.
by Stephen Innes