Week In FX Asia - Central Banks Dictate Their Domestic Currency Moves

Includes: CYB, FXA, INR
by: Dean Popplewell

"Make hay while the sun shines" – that's what investors should be focusing on. The block of Asian currencies are no different as they end the week broadly stronger (MYR, INR and KWN are a few examples). Some of the "lost" risk appetite being restored is contributing to their climb. A surprise to the market was perhaps the initial "breadth and depth" of the flight to safety rally after China's disappointing preliminary manufacturing release earlier this week. The lack of overall price movement has probably more to do with domestic data doing little – the global investor already knew about the world's second largest economy's misfiring from last month's weaker data prints. This week's releases were not a surprise.

The JPY is opening stateside modestly weaker across the board - USD/JPY hit session highs above 102.55 after comments from BoJ's Kuroda that it is too early to discuss an exit strategy from QE. It was only a few days ago that the market was questioning whether Abenomics was actually working, especially with more fundamental data remaining on the softer side.

In contrast, China's own currency has been "guided" lower for a fourth consecutive session outright. The PBoC has set this week's closing dollar/yuan central parity rate at 6.1176 – very much in line with the dollars move higher overseas. Chinese policy makers have been focusing on a weaker currency, aiming to curb heavy capital inflows that are "betting on the yuan's appreciation this year." The market has already set its sight on the Yuan to appreciate through or above the psychological 6.00 handle in the coming months. Year-to-date, the Yuan has fallen -0. 6%, and this after the currency appreciated +2.9% last year.

Yesterday, with the US flash-manufacturing PMI coming in at a four-year high was able to put a spring back into the dollars step. Other investors have been more cautious, preferring to unwind some "long" yuan positions ahead of the G20 shindig in Sydney this weekend.

Overnight, the BoJ minutes from last month's meeting reveal policy makers concern that CPI may slow once the yen stops weakening. BoJ members do not seem to be worried over the impact of April's higher sales tax, but they do express the need for greater transparency on a wider scope for policy if they are to achieve the +2% inflation target. The Japanese government's slowness to implement meaningful structural changes as a part of their "three arrow" approach is hindering Japan's progress. Coupled with the reluctance among company managers to boost base salaries does not help consumer demand, inflation or growth objectives. Less than 20% of Japanese corporations plan to hike base salaries and only about 11% of those companies would hike by enough to cover expenditures from the higher sales tax – where is the stimulus coming from?