OANDA Asia Pacific - FX Market Commentary

Please attribute the following commentary to Stephen Innes, senior trader at OANDA.

NFP Effect

Last week, the Non-Farm Payroll (NFP) print rose by 215,000, 10,000 above market consensus. While US ISM posted its largest gain in seven months, the March ISM was 51.8 versus 51.0 expected. Details showed a surge in new orders from 51.5 to 58.3. The University of Michigan Survey improved from 90.0 to 91.0 versus 90.5 expected in the final March survey. While Friday’s data releases beat analyst forecasts, the NFP bounce especially will likely have limited impact on monetary policy.

Improvement in the workforce figures was hardly surprising as policymakers appear more concerned with international matters following Fed Chair Janet Yellen’s implied comments that ongoing global economic headwinds and lower oil prices pose a significant risk to the US economy. The latest news is unlikely to sway either the Fed or traders sentiments.

The market is pricing in a 25 percent chance of a hike at the Fed's June policy meeting, a 50 percent chance of a comparable move in September and a 60 percent possibility at the December meeting, according to CME Fed Watch. With many FX traders even more bearish in their forward assessment, there is little solace for USD bulls. Renewed pressure on the USD this week is likely, along with a dovish Fed, which is expected to remain as status quo for the foreseeable future.

The US economic diary is relatively quiet this week with Durable Goods and non-manufacturing ISM leading the US releases. The March FOMC minutes will be made public on Thursday and in days before, there is a mass of FOMC Members hitting the wires, generating Fed-speak; which is likely to confuse rather than defuse the current Fed Policy debate. Traders are expecting a repeat of dovish Yellen redux from the FOMC minutes.

AUSTRALIA

While the AUD initially gapped lower after the better-than-expected NFP report, AUDUSD came roaring back to pre-payrolls levels, despite a worrisome sell-off in WTI and Brent markets as crosscurrents emerge.

On Friday, the oil markets gushed as traders dialled in on comments from Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman who said, “The country will only freeze output if Iran and other major producers do so.” These comments fuelled traders’ speculation that an anticipated boost to oil prices from this month's upcoming OPEC meeting may not be readily forthcoming.

This week the RBA could shake things up when on Tuesday, a significant RBA cash rate decision is expected. It is likely that the RBA will keep its policy on-hold, despite the fact that Governor Stevens is under increasing pressure to pull the trigger after the AUD rocketed above .7700 levels, as concerns rise that the AUD’s recent strength could affect the current economic recovery in Australia.

The ASX RBA Rate Indicator, which shows market expectations of a change in the Official Cash Rate (OCR) is pricing in a 7 percent likelihood of an RBA rate cut.

This year, the AUD has appreciated over 12%. Traders continue supporting the dollar on the back of improving economic fundamentals, while foreign investors flock to the AUD carry trade in 2016. In all, the AUD has been the beneficiary of the move from global Central Banks into negative interest rate territory, by weakening their currencies in an attempt to give both domestic economic activity and inflation a bounce.

Hard commodities

Iron ore is still moving lower from its March peak and there are signals that the latest copper rally is hitting the skids. Unlike the irrational exuberance expressed by investors chasing the recent commodity rally, it is worth noting that miners seem to get what investors have trouble grasping: that, in the words of Freeport-McMoRan, the world's biggest copper producer, "The market remains out of balance with too much supply." Structural supply imbalances will likely dictate a drop in price, especially if demand from China remains flat.

Aside from the possibility of an RBA surprise, there is a growing consensus among traders that we should expect renewed dollar weakness (AUD strength) in April. Bloc commodity traders need to be ever vigilant of a downturn in the WTI, as hopes of a production freeze remain in peril after the recent Saudi comments. If the rally in hard commodities fizzles, it will be equally important to keep an eye on iron ore and copper prices.

This morning, the markets opened in a mute fashion as AUD traders kept their positions ahead of the February retail sales reports. On the back of a weaker sales report of 0 versus the 0.4 expected, the AUD dropped 15 pips, but the data is unlikely to have any impact on RBA rate decision.

USD/JPY

USDJPY continued to struggle last week, to end the week near the 11.60 level; yet it had little to do with Yen strength, but rather haven appeal for USD weakness, which has as money managers reducing their bullish bets on the USD.

The most outlier speculative positioning in CME futures trade is JPY long, with long gross positioning at 82.8K contracts, as per the commitment of traders and published by the US commodity futures trading commission.

The Yen is up 7 percent versus the dollar this year, but traders need to be extremely cautious of the potential for a massive unwinding of speculative bets. Yen flows may not be justifying such extreme positioning as foreign investment in Japanese stock and bonds run negative, while local investors pile into foreign bonds.

Meanwhile, expect the JPY to remain supported on the back of Japan’s current account surplus, as haven flow drives the currency.

USD/CNH

China and Hong Kong are on holiday today, so a quiet trading day is expected. USDCNH will likely trade on the back of broader USD sentiment, given that there is still some overhang from Fed Chair Yellen’s reiteration of a dovish stance. Some traders have trimmed, and even abandoned, USDCNH exposure.

ASEAN Currencies

The Institute of International Finance reports that an estimated Emerging Market Flow jumped to a 21-month high in March of 36.8 billion, with an estimated tranche of 17+ billion flowing into Asian Bonds and Equities, making it the strongest showing since mid-2014.

MYR

Despite the better than expect NFP and a slide in oil prices, USD upticks were sold and foreign investors continued to show a healthy appetite for MYR. This morning, we've seen another leg lower to 3.8635 as investors continue to pile into Malaysia Bond and equity markets.

INR

India policy makers are meeting today and the market consensus is that a 0.25 percent rate cut is on the cards, although there is an outside chance of a .50 percent cut. Traders will be eyeing to what degree the RBI's forward guidance will indicate deeper price reductions in the future.

SGD

The Singapore dollar opened at 1.3485 in sea of reticent markets. We are unlikely to see too much interest the band ahead of MPC, but the market is still waiting for an announcement date. In the mean time expect the USDSGD to trade on broader USD moves within the 1.3400-1.3550 band.