APAC Currency Corner - RBA's Turn

by: Dean Popplewell

By Stephen Innes


We have a huge week ahead in Australia, highlighted by Tuesday's RBA policy review and Federal Budget.

In the wake of last week's tepid inflation report, traders have been increasingly pricing in the probability of an RBA rate cut, which now stands at 58 percent as per short-term money market futures, with local lenders now jumping on the bandwagon for good measure.

The issue at hand is not so much the current economic conditions, but rather the across-the-board weakness in last week's CPI reading, which came in lower than the RBA 2-3% target band. Many are viewing the miss on CPI as an ominous sign that even if the RBA does not cut in this meeting, low inflation levels may well stay below the RBA target through 2016, and will ultimately lead the RBA to reconsider the current monetary policy. At minimum, the low level of inflation affords the RBA to adopt a more dovish tone in their Statement on Monetary Policy.

However, even with a rate cut, it is debatable if this will lead to any major position recalibrations on the Aussie dollar or will it only translate into a knee jerk lower as the market is expecting broader USD dollar weakness in the weeks to come. While much uncertainty swirls around the announcement, what we can say for sure is we are likely set for another volatile week on the Aussie dollar front following last week's CPI and BOJ surprises.

Keep in mind; external drivers will likely be key to the Aussie dollar long-term fortunes regardless of a short-term capitulation if a rate cut announcement holds true. While commodity prices are looking very constructive and expected to remain firm, the two-way risk going into the announcement is very high as the RBA could follow through on market rate cut expectations.

While RBA rate decision is the major domestic release, April's US Employment will attract its usual intense focus. With recent US economic data deteriorating versus consensus forecasts, Friday's employment report could be a key driver for currency markets by either reaffirming the string of high employment releases in the US or predicting more storm clouds on the horizon for the USD. With that in mind, the Jobs data on Friday should remain robust with Nonfarm Payrolls expected to print 200k. Also, the expected 0.3% in a month-on-month earnings should bring the YoY number to 2.4%.

Over the weekend, China official PMIs for April disappointed market expectations with the manufacturing index down 0.1pt to 50.1, and the non-manufacturing index down 0.3pts to 53.5. In both instances, the new orders index was a little weaker also. However, with high-risk events due later in the week, the AUD has shown little reaction to the data.

As for the budget, traders will be monitoring the credit rating agencies' reactions, but the early thought is that the budget will need to show ongoing fiscal restraint to get an all-clear from the agencies. Therefore, we should not expect a sugar-coated pre-election style budget laden with tax sweetener designed to appease voters.

Storm Clouds for USD

US consumers speak through their pocketbooks as evidenced by Friday's US data. Personal income rose in March, but personal spending fell. The Q1 GDP report already suggested this, but income was one-tenth stronger than forecasted, and spending, one-tenth less. While the US presidential election run-up is weighing on the consumer sentiment, it is more likely consumers are disgruntled by the state of the economy and growing increasingly frustrated by the Federal Reserve Board, that appear more confused about the economic direction than ever. Besides, there is the ever-present conviction amongst investors that central banks cannot do it alone. With consumer confidence running sour, the markets responded accordingly. US equity markets went south, WTI prices retreated, gold topped at 1297 and USDJPY touched 106.24.

The USD is in need of a lifeline, with USD bulls pinning hopes on another robust employment report Friday. However, will it be enough to tame the USD bears?


Traders always remind themselves some days you are the windshield and other days you are the bug - last Thursday and Friday was no exception.

While lingering disappointment from the Bank of Japan's inaction continues to weigh in Japanese markets, negative sentiment started filtering through to other global markets, and this ripple effect should be closely monitored as the negative impact from waning global risk sentiment could add more fuel to an already overheated yen.

While the yen has incredible momentum, and it is likely we will see a deeper move lower in USDJPY, keep in mind this week could be full of traps and gaps, as liquidity will be running at a premium during golden week holidays in Japan.

Markets are relatively thin this morning, and while we bounced off early morning lows of 106.20, there has been little momentum or incentive to take the pair above 106.75 in early trade.


With a weekend to digest and judgement less clouded, it's worth rehashing. One of the biggest takeaways from last week was just how huge market expectation was for a BoJ easing, despite falling only three months after last policy adjustment. The fact is, in BoJ terms, that would have been unprecedented, and likely why near 50% of economists did not expect a move last week.

However, the lack of action by the BoJ should not imply that it has exhausted its means to adjust policy, and investors should not err into believing it has run out of ammunition. I suspect Japanese rates will go lower, but with BoJ concerned about the systemic impact of negative rates on domestic banks, the central bank opted for a wait-and-see approach before embarking on further policy easing.

When the BoJ eases again, it will likely include a negative lending facility to accommodate domestic banks.


The large fall in USDJPY had a significant impact on the CNY fix, as JPY has a 14.7% weight in the CFETS basket. The JPY also clearly influenced other USD Asia pairs. The day-on-day fall in the USDCNY fix was the largest one-day decline since 2005, but even with such a significant fall, CNY lost approximately 18bps on a basket basis.

However, there is still a high demand on shore for USD below 6.5000, indicating the market is trading on USDCNY sentiment rather than the basket.

China PMI

The official Purchasing Managers' Index (PMI) rose to 50.1 in April, easing from March's 50.2 and barely clinging above the 50-point mark that defines expansion from contraction.

The market was expecting the reading would improve to 50.4 after upbeat March data raised hopes that Mainland extended economic slowdown was easing. While the results may have disappointed a print above, 50 is suggesting that the stimulus impacts have a positive effect in China. However, the slight drop and miss on consensus are still worrisome and not overly supportive and does not bode well as China seeks to rebalance economy.


In general, we seem to have entered a new period of indifference in the USDASIA basket.


There has been no clear trend in USDMYR recently and despite strong oil prices, the price action has not been supportive so far. I suspect it is due to risk aversion trickling back into the global FX markets, coupled with some lingering concerns over 1MDB.

With that in mind, the MYR may be more vulnerable to weaker oil prices this week, so traders will continue eyeing oil patch price movements.