USD/JPY – Yen hits the gas
Fed chairperson Janet Yellen’s Harvard speech on Friday yielded a significant response from USD/JPY traders. The pair moved to the 110.50 near-term resistance level after being mired in very tight ranges most of Friday’s session.
On the back of improving risk sentiment, increasing bets on a Fed rate rise after the Yellen-inspired speech on Friday, along with weaker Japanese data keeping domestic stimulus on the front burner, we should expect USD/JPY to remain firm through the early part of the week as 111.00 comes into focus.
Weekend reports suggest a delay to the tax hike by two-and-a-half-years to October 2019, which is past the 2019 Upper House election and just ahead of Tokyo 2020 Olympics when the Japanese economy should be firmer. We should also take note of shifting IMM commitment of traders’ sentiment which indicated a sizable reduction in JPY longs last week after the Fed minutes.
At the beginning of APAC trade, the market is accelerating higher through 110.75. However, keep in mind G-3 traders at this time of the month usually shift their focus to Friday’s US employment report. This month the US labor data will be critical for the Fed rate path so gains could also be limited. The consensus is for another robust Non-Farm Payroll reading in May at 160K (previously 160K).
This supportive print by all accounts will keep a June hike alive, although, with the BREXIT vote on June 23, July would most likely be the timing for a summer hike.
Aussie – Greenback bulls getting excited
AUD is opening lower this morning after Dr. Yellen put a smile on USD bulls’ faces by suggesting to a Harvard University audience that a US interest rate hike was probable in coming months. While not over the top hawkish, it was enough to get the USD bulls excited as she is most certainly entertaining the idea of a US summer rate hike.
However, the AUD/USD market is lacking any real spark plug, and we continue to trade in very tight inter-day ranges. This lethargy has been typical of 2016 where we enter extended periods of low volatility bookended by short spurts of high volatility driven by high-risk market news events.
At current levels, I expect the tug-of-war in the Aussie to continue. The currency is being pulled in a positive direction by very constructive price action on global equities, while struggling to gain traction due to pressure from future interest rate differentials, which should continue to weigh negatively on the currency. With RBA rate cut expectations rising following last week's dovish commentary from RBA Governor Stevens, local traders will zero in on two potentially high-risk local news events as the Aussie continues to fend off renewed downside pressure.
Australia: Q1 GDP June 1 – expectations are for Q1 GDP to tick up 0.6% quarter-on-quarter. China: official and Caixin Manufacturing PMI June 1 – expectations are for May manufacturing PMI to register near 50 breakeven level and Caixin PMI expected to show a mild contraction. Both outcomes will influence the RBA thoughts process and could dictate if the Aussie will put in another losing week or perhaps show its true grit.
Barring the unforeseen, it should be a quiet start to the week with markets closed in both the US (Memorial Day) and the UK (Spring Bank Holiday).
Yuan – higher after stimulus talk
USD/CNH continues to move higher after PBOC officials suggested Friday that China needs a slight dose of stimulus in its prudent monetary stance to spur economic growth. With the US on the verge of increasing interest rates and China now suggesting more stimulus is needed to reignite the economy, the relative calm the RMB complex has been experiencing over the past few months will be turned upside down in June.
With the Yuan all but set to weaken, capital outflows should accelerate, leaving officials scurrying to counter the anticipated rebound in the US dollar. The Fed-PBOC policy dynamics will continue to come under increasing focus in the weeks ahead.
MYR – tug-of-war for the ringgit
The ringgit is sandwiched between opposing forces. On the one hand, the ringgit should benefit from riding on the bullish sentiment of the local stock market, and firming oil prices. On the other, the uncertain path of Fed rate hike policy should keep traders cautious. Spot USD/MYR opened at 4.0900/4.0970 – about 0.25% higher than Friday close – in line with broader USD moves as US rate hike expectation heighten.
US equities – crept up despite rate hike looming
Equity markets ended a busy week on a solid footing on Friday, with the S&P 500 up 0.4% (closing just below 2100). Interestingly enough, the US markets closed on highs despite Dr. Yellen suggesting to a Harvard University audience that a US interest rate hike was probable in the coming months.
In turn, 10-year Treasuries weakened as the market is factoring a slightly greater than 50% likelihood the Fed will increase interest rates this summer. The US equity market reaction to a possible rate hike will be viewed by the Fed positively.
Oil – tighter supply driving sentiment
Scarcity risk premium on the back of decade-high supply disruptions in Canada, Libya and Nigeria continue driving trader sentiment as we enter the summer driving season when the US consumption accelerates. Expect WTI to remain firm on pullbacks due to scarcity drove demand premium.