APAC Currency Corner -Chase for Yield

The post-Brexit rebound in sentiment continued on Friday as the Market prices in aggressive   Central Banks easing   Investors were spurred on by comments from BoE Governor Mark Carney saying “The economic outlook has deteriorated, and some monetary policy easing will likely be needed over the summer”.  With the market now speculating that the easing may come as early as July  Not to be outdone the ECB let it be known it is considering departing from the capital key rules that govern its QE Bond purchases. Such a move would open up the doors to buy back more peripheral bonds, and thus significantly increase their Bond Purchase. All in all,  Brexit fallout has considerably reduced the chances of Fed tightening while at the same time enhances the likelihood for consorted easing from BOE ,ECB and the BOJ.

Australian Dollar-Political Jockeying Begins. 

The Australian Dollar continues to trade well as effervescent equity markets continue to surge during the post-referendum setting, supporting the Australian Dollar. Also, with the USD dollar coming under some end of week pressure on falling  US bond yields, the Aussie dollar should be well supported and may continue to outperform in the short term.  Even weak China PMI did not derail the Australian Dollar bulls as traders remain squarely focused on Global Central Bank stimulus,  which should continue to support risk sentiment and investors chase for yield.  Also, given the Australian dollar resilience through the Brexit Tsunami, the currency should remain a favoured OASIS  especially versus GBP and EUR as the Brexit drama continues to unfold.

The Australian dollar was likely held back last week by the weekend elections and the RBA meeting tomorrow.

With that in mind, the AUD  opened sharply lower dropping close to half a cent after Saturday’s election pointed to a potential political bottleneck. The General Election failed to deliver a clear winner, and the likely hood of another minority government weighs on investor sentiment. Minority governments tend to be challenging when it comes tabling much needed economic or budget policy.  However, In reality,  it’s unlikely to create near-term credit rating concerns,  and as history suggests, election-related currency moves tend to be short lived so buying the   Australian Dollar dip on minority government outcome will likely pick up steam especially against the EURO and Pound.

A for the RBA, while some discussion centres on the Brexit fallout, but given that risk assets have responded well, it’s more likely the RBA will hold off on a  rate cut until at least August.  There appears to be no real urgency to cut at this point, and RBA will probably keep their options open despite the mounting political uncertainty. If anything a rate cut at this juncture will likely confuse the market.

Finally, with the US Federal Reserve Board likely to sit on the fence through 2016, it should be good news for commodities and the Australian dollar alikeJPY-Show Me the Money 

Pressure continues to mount on the Bank o0f Japan and last week’s economic data indicated  that every metric continues work counter to  BoJ expectations  With the CPI not responding to recent stimulus and inflation running at decade lows, expectations are extremely elevated the BoJ will provide additional stimulus. The Japanese economy is beyond stagnating, and extremely susceptible to any breakdown emanating from Brexit fallout. These headwinds should  continue to underscore market expectations for additional stimulus actions from Tokyo

The USDJPY feels tired in early trade. The pair has been battered back and forth from Brexit Fallout to threats of BoJ interventions   With that in mind, I anticipate, barring any unexpected shift in the  Brexit proceedings, USDJPY  should consolidate within near term ranges as the focus now turns back to US jobs market this week. We may see USD support, given weary JPY bulls, and as speculation mounts for a recovery in the US Jobs data after last month’s NFP fail.

Nikkei is opening slightly lower as the BOJ Tankan survey indicated Japanese companies expect consumer prices only to rise .7 percent a year, lower than the previous survey. Further magnifying the economic drag on Japans economy and just how cautious Japanese companies are.YUAN-More Weakness to Come. 

Speculation continues to mount that Mainland authorities will let the Yuan continue weakening as a higher level of Economic Uncertainty in the wake of Brexit weighs on policy makers as PBOC continues to pass through all of the USD moves up. So far I have been surprised by the relative calm surrounding the recent RMB depreciation, but I suspect it has more do with larger market musing that has distracted the attentions from this move. But also I think the PBOC has offered up greater transparency concerning policy objectives, and the market is not surprised. Given that China is likely to face additional economic headwinds from the Brexit Fallout, we should expect further Yuan weakness in through 2016.

There is still a risk of Further EUR weakness which from a trading perspective will continue to trigger USD demand.USD ASIA-Chase for Yield 

It’s all about the demand for yield –

Despite a few wobbles, investors are flooding back into $/Asia reversing pre-Brexit safe haven hedges in favour of underweighted riskier assets. Both the Ringgit and Rupiah are seeing support on the back of risk-on sentiment which has investor chasing for yield with both Malaysia and Indonesia bond yields hitting  a year to date lows last week.

There is the likelihood that Brexit will delay Fed tightening, and this is being viewed as supportive for commodity prices, which is providing a credible floor in USDASIA markets.  Also, with expectations of massive easing programs from the BoE, ECB and BoJ in the offing, this should also prove supportive for regional asset markets amidst extremely buoyant investor sentiment.

Leading up to Brexit   Global Investors positioned extremely defensively in Asia EM and now these underweight positioning is  moving to overweight as investors scurry for yield in both  Indonesia and Malaysia Capital market. Also, post-Brexit offshore bond flows are pointing to the further upside potential  on both the Ringgit and Rupiah currencies

Also, Indonesia Tax amnesty is helping investor sentiment as this will likely result in additional revenue to cover the widening Budget Gap.

Naturally, Brexit has created a higher level of uncertainty but from a regional perspective, Malaysia and Indonesia will be viewed very attractive since their economy, to a great extent,  is less dependent on mature global markets.

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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