APAC CURRENCY CORNER – Brexit “The Game of Craps”

With Brexit fears driving global market uncertainty, risk sentiment continues to sour. This has resulted in weaker asset markets with the G10 reacting as expected.  There’s certainly no dearth of opinion polls showing a lean towards a Brexit, and the outcome is on a razor’s edge. Overnight, European equity markets moved significantly lower with the FTSE100 down 2% while Sterling weakened. UK rates have rallied as the market anticipates an aggressive monetary policy reaction from the Bank of England in response to any possible financial market meltdown.

The Aussie – pressure on Down Under

Early in the week the Australian and New Zealand dollars traded surprisingly well given the overall backdrop in risk sentiment. But the AUD and NZD were primarily a sideshow to broader moves in GBP and JPY. Emerging Market weakness is starting to put downward pressure on the Antipodean currencies. Without a sudden shift in Brexit poll sentiment, EM assets are likely to remain weak with net outflows painting a very clear picture of investor sentiment, weighing negatively on the Aussie

For the Aussie, we broke below 0.7350 which opens the door for 0.7300 as the next support level to watch.  It’s a similar story for the New Zealand dollar as investors continue to eschew higher risk assets ahead of both the Fed interest rate decision and the British referendum on European Union membership.

Commodity markets are weaker with prices continuing to slump as warehouse stocks increase. Gold is the outlier as falling government yields continue to lend support to higher gold prices. Traders will continue to pick their spots around Brexit polls but should continue to tread lightly as it’s  turning into a game of craps.

On the data front, this morning  Australia June Westpac Consumer Confidence Index disappointed coming in at 102 vs. 103.2 prior.While not a huge miss , with the Aussie trading of its back foot amid Global  Risk concerns, this will do little to improve current sentiment.Fed – rate hike guessing game

As for a June hike by the Fed, it seemed doubtful before the dismal NFP report and is now completely out of the question, and the market priced this out long ago. The potential Brexit fallout overwhelmingly dictates that the FOMC should remain sidelined until July, if not longer. If the US employment landscape continues to deteriorate, then that will raise doubts of a 2016 rate hike at all.

But don’t think the June FOMC is a non-event as nothing could be further from the truth. The two key factors traders will zero in on is the FOMC statement and Yellen’s press conference for clues about a July hike. Despite the dismal 38k job increase in May’s NFP, the Fed might not be that dovish.

I continue to expect the USD to remain supported as foreign investors continue to take refuge in US bonds as European and Japanese bond yields move further into negative territory.

JPY – potential to surprise traders

The BoJ is widely expected to remain sidelined despite Japan’s ongoing weak growth. But the BoJ is still the most likely central bank to surprise this week. There is still some policy wiggle room for additional stimulus especially if the Fed sounds the alarm bell about the US economy. The BoJ has surprised the market under Kuroda’s leadership in the past, but in reality with Brexit looming the BoJ will keep their powder dry. As for any Brexit fallout, it’s difficult to see USDJPY picking up any significant support from the UK remaining in Europe whereas Brexit should lead to a massive sell-off.

This one-sided view may explain why, despite negative bond yields, money managers who cannot carry open currency positions have been steady buyers of JGBs of late.  They may be willing to forgo the negative yield carry on the bonds in favour of capital returns, as the path of least resistance for the Yen appears to be one of appreciation during these turbulent times.

For today , I expect a nervous trading session ahead of the Fed as uncertainty is never good for marketsCNH – share decision delayed

MSCI has decided to delay including Chinese domestic equities in its benchmark indices, for now. It cited the need for increased accessibility to the A-share market despite the improvements already made to date.

IN reality, the outcome was more about sentiment as about actual inflows. While  MSCI decision will be viewed  somewhat negatively,  did leave the door open  for interim reviews if and when mainland policymakers make the necessary concessions,It’s clear the MSCI are waiting for further improvements in the accessibility of China A shares fro Global Investors. By all accounts the MSCI wants to welcome China with open arm, the ball is back in mainland court to make it happen.

AS for the market reaction, since there was no aggressive run-up in  mainland equities prior to the announcement  while we should expect some disappointment I suspect the market overall reaction will be muted on the MSCI fallout. The inclusion or disclusion  likely did not catch investors by surprise

On the currency front given the bets were 50:50 heading into the announcement   I expect the USDCNH reaction to being neutral   after the initial spike higher in early morning illiquid markets and we should expect the CNH to continue  sliding  off broader USD moves and shifting Global Risk sentiment

The PBOC fix 6.6001 vs 6.5791 weakest setting since 2011.

About Stephen Innes

Senior Currency Trader and Analyst, Stephen has over 25 years of experience in the financial markets and specializes in Asian currencies at OANDA . After having started his trading career with NatWest Bank, he is currently based in Singapore as a Senior Currency Trader and Analyst with OANDA, focusing on the movement of the Aussie Dollar and ASEAN Currencies. Stephen has an extensive trading experience in Interest Rate Futures, Money Markets and Precious Metals. Prior to joining OANDA, he worked with organizations like Cambridge Mercantile, Nat West, Garvin Guy Butler, Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario. Follow on Twitter profile.

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