Investors Trim Long Positions on Asian Currencies, Yuan Bets Halved

The 13 responses came in before the Federal Reserve’s policy meeting late on Wednesday where it stunned by signalling it might raise interest rates as early as 2023, a faster pace than initially assumed.

Emerging markets in the past have not fared well with the prospect of U.S. interest rate hikes, and with the Fed opening the door to an accelerated timetable to wean off pandemic-driven monetary stimulus, it could suck funds out of riskier assets and force Asia’s central banks to tighten quicker.

For now, investors remain largely bullish on emerging currencies in Asia, with long bets on the Taiwan dollar and Indonesian rupiah slightly raised from two weeks ago.

The central banks of both countries meet later on Thursday and are expected to leave policy rates unchanged at record lows, but may offer more commentary on their own timetable and economic outlook in light of the Fed’s hawkish shift.

Taiwan’s dollar has appreciated sharply since late March as the economy booms on the work-from-home trend fuelling global demand for tech.

Bank Indonesia’s governor has promised to keep rates low and liquidity in abundance until there is inflationary pressure, but also warned that local bond markets – susceptible to foreign flows – may be impacted by U.S. policy shifts.

Long bets on the rupiah were at their highest since February.

The Fed’s hawkish messaging sent the U.S. dollar to its highest level in around two months and resulted in declines across Asia’s currency space on Thursday, including a more than 0.5% drop by the rupiah.

Emerging markets “will face material headwinds over the next several months” and “will likely sell off in absolute terms and will underperform their DM (developed market) peers,” said Arthur Budaghyan, chief emerging markets strategist at BCA Research.

Broadly, long bets on China’s yuan were lowered after they hit a six-month high in the last poll. It follows the central bank stepping in to warn against speculative bets on the currency after its recent rally.

ING, in a note, said the yuan’s rise will slow from now on.

Bullish bets on the Singapore dollar, South Korean won and Philippine peso were all trimmed.

For the Indian rupee, a strong performer in May, long bets were also lowered.

The “significant hit to economic confidence in the second wave suggests the recovery is going to be delayed,” analysts at ING said, adding that it will cap any significant upside in the rupee.

The Asian currency positioning poll is focused on what market participants believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.

The figures include positions held through non-deliverable forwards (NDFs).

(Reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Shailesh Kuber)

 

Emerging Asian Currencies Finish Year on Strong Note as Vaccine-Hope Raises Outlook for Global Economy

The weaker U.S. Dollar not only drove the major currencies higher in 2020, but it also had an impressive impact on the emerging Asian currencies. They finished the pandemic-hit year on a mostly positive note, first underpinned by favorable U.S. fiscal and monetary policies then driven higher as broader sentiment was lifted by hopes of a vaccine-led economic recovery. A surge in China’s Yuan also gave regional currencies a boost.

Emerging Currencies in Asia Broadly Firmer

Emerging currencies in the region were broadly firmer after the U.S. Dollar weakened as investors continued to bet that COVID-19 vaccine rollouts will help the global economy toward a more sustainable recovery.

“A smooth vaccine rollout can be a game-changer,” said Christopher Wong, a senior foreign exchange strategist at Maybank.

“Global economy could be closer to a more sustainable recovery trajectory amid unprecedented fiscal and monetary support.”

China’s outperformance also helped regional units, with the Taiwanese Dollar firming about 7% in 2021. Investors have lauded the island’s handling of the pandemic, while a global shift to working remotely boosted demand for its tech products.

Emerging Asia’s currencies stand to benefit from a recovery in economic growth in 2021, with the trade-linked Taiwan Dollar, Singapore Dollar, South Korean Won and Chinese Yuan appearing as winners, whereas low interest-rate and inflation environment should support the region’s carry trade favorites.

The Rapidly Rising Yuan

Setting in motion much of the movement in the region was the extremely strong Chinese Yuan. The Yuan has risen rapidly since May, while posting its first annual gain in three as a weaker U.S. Dollar, the widening yield gap between China and the United States and Beijing’s effective coronavirus containment underpinned gains in the currency.

China’s onshore spot Yuan finished its domestic trading session at 6.5398 per dollar on December 31, strengthening 6.5% against the greenback this year.

For a look at all of today’s economic events, check out our economic calendar.

Markets May Need Help Getting to The Weekend.

Markets

Equities weaker again Wednesday, with the S&P500 closing 4.9% lower, taking back the gains seen. Weighing on sentiment, the WHO declared the coronavirus a pandemic, noting it is “deeply concerned” by the “spread and severity” of the virus, perhaps most troublingly, however, by the “alarming levels of inaction” in various countries. While the culprit which send the ball rolling downhill was a report of the US coronavirus cases topping 1000

The market is faced with two highly uncertain bearish shocks in the form of an unholy Covid19 economic catastrophe in Italy, and most of Europe, compounded by a dizzying oil price downdraft with the apparent outcome a sharp price sell-off across all assets. Indeed, nothing is immune from this insidious virus. Still, the market may not be yet pricing in a worst-case scenario from this double whammy risk beat down.

Vacationers and business travelers continue to cancel trips, and social distancing is suddenly a term in common usage. So needless to say, all eyes remain focused on travel bans around the globe. That said, everyone knows the number of reported cases in the US will skyrocket soon because proper testing has begun. Is it fully priced? I am not sure, but I doubt? However, there is an increasing probability that current containment measures in Italy might become a necessary way of life across much of Europe and regionally in the US too, which could swamp the US economy.

It feels like we’re doing little more than moving from one air pocket to the next while the less turbulent air in between is getting supported by the thought of fiscal input. This will eventually trigger an even more aggressive budgetary response globally, but time is of the essence.

The first order of business is that in the US, there needs to be comprehensive testing to arrive at a credible tally of cases, without which we have no way to quantify the effectiveness of the next point. That is, there needs to be a policy response, draconian or not, that is perceived as sufficient to stop the virus from spreading further and mitigate economic damage. Both could easily take another few weeks, if not months. The question is, can we stand another week let along another month in Covid19 purgatory with the markets on the precipice of a cliff edge.

It still feels like the COVID-19 / energy credit wallop hasn’t seen its worst deadfall yet as the public health crisis will most certainly mushroom in the US and should be at its worst in the next two to four weeks probably. Only then will the market see from the bottom and maybe start buying the dip.

STRESS STRESS STRESS

It sure looked like a spooky NY afternoon with fixed income and stocks both trading poorly as it seems like a fund or multiple funds are unwinding a huge risk parity bet or fund. Absolutely bizarre moves in break-evens, TIPS, etc. It has to be viewed as a stress singal and liquidity issue, I think.

Meanwhile, corporations are going to start drawing on credit lines en masse, which will probably put more pressure on the system in ways that are hard to quantify or forecast but certainly not in a good way. Yes, the ” sum of all fears” is coming to fruition.

*HILTON TO DRAW DOWN PART OF $1.75 BILLION LINE AS VIRUS SPREADS
*BOEING WILL DRAW DOWN $13.8 BILLION LOAN TO STOCKPILE CASH
*BLACKSTONE URGES ITS COMPANIES HURT BY VIRUS TO TAP CREDIT LINES

I started my trading career on what effectively was a repo desk, but I’m far for an expert on today’s market plumbing. Still, I do know that in general, when everyone calls on lines at the same time, that is not good and will stress an already stressful market.

As such, look for possible mad a dash for the dollars as US dollar funding concerns grow, which could put ASIA and EMFX under pressure.

I’m tossing aside my correlation calculator for the next 72 hours.

I’m revising everything again for an unprecedented 4th time in 4days.

Taking on board

  • the spread of the virus in the US (additional consumption pull-back and supply chain disruption across multiple countries)
  • the slow pace of normalization in China
  • the oil price collapse
  • chaos stateside when the virus case count explodes higher
  • a brewing liquidity squeeze

OIL markets

Sure an expected fiscal policy deluge is on the way. Still, the markets continue for the most part to run with the dominant narrative as news coming out of Saudi Arabia after last week’s meeting collapsed has been uniformly bearish for oil, which is getting reflected in the nearest time spreads, which are dropping more profoundly into a contango structure.

Adding to the downdraft OPEC now expects there will be no growth in global demand this year so producer the oil outlook is pretty dire

OPEC and Russia oil price war in a way that leaves no doubt started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years

Traders are trying to use the 2014-15 collapse as a blueprint. Still, today it’s worse as the prognosis for oil markets culminates with the significant breakdown in oil demand due to the coronavirus.

But the markets are finding a bit of support in Asia and a couple of reasons why. China’s case counts are dropping, and people are slowly coming back to work. But there’s also some noticeable price front running in early Asia as after President Xi Jinping’s visit to Wuhan; Traders are viewing this is a signal that the mother of all stimulus programs could be announced soon. My working theory has always been that fiscal stimulus will come after things get better in China because there is no point stimulating an economy when nobody is at work. With everyone back to work, the time is about right for the Beijing Bazooka.

As well China’s demand is recovering as Teapots are finally ramping up production in consort with the restrictions on transportation and travel.

Gold market

Extremely confused by the price action in gold, but looking at the straining cross asset price action where both stocks and bonds are trading poorly, it’s signaling a liquidity issue. To which I assume, as in similar fashion to sudden gold market sell-offs during the great GFC, funds are selling gold to raise cash.

Currency markets

Australian dollar 

The non-price-sensitive speculators in New York continue to pound the Australian dollar lower likely triggered by yesterday’s 3.5+ standard deviation drop on Australian equities as the energy resource sectors came under the cosh.

If you’re playing reversion trade on an anticipated China stimulus package trade lightly today and buy Aussie after the NY close if you are looking to layer in as the latest algo sellers in NY are price agnostic.

The Euro 

The ECB meeting is too complicated to analyze. There are so many moving parts. In a world where everyone is cutting at the same time, do rate cuts matter for the currency?

USDCNH

Possibly a dollar funding squeezes afoot.

USDMYR

Lower for longer oil prices will continue to stress the Ringgit and if the expected liquidity crunch unfolds in the US market with everyone tapping their credit lines at the same time and showing up to their ATM”s en masse look for USD funding squeeze to dissuade investors adding risk buying the Ringgit and could trigger an exodus from local equity and bond market s

USDKRW

Yesterday the KRW curve collapsed. There has been keen selling KWR interest from locals funding USD, and foreigners were selling local equities and custodians lose USD deposits, as well as USD demand for quarter-end funding, which has taken 1m lower in a panicky fashion.

 

Risk-off Thursday: Fade Trade or Call It a Week

It was a Risk-off Thursday, with the S&P500 down 0.5% heading into the close and Europe’s Stoxx600 closed 0.9% lower. US 10y yields slipped 5bps to 1.52%, levels not seen since early February. While the market has been prepared to look through rising coronavirus infection rates as a brief affair, news direct from US corporates about supply-chain disruptions impacting revenue has weighed. After Apple downgrade on Wednesday, Procter and Gamble warned Thursday about lower Q1 sales and earnings, citing supply chains, and reduced store traffic in China.

Still, Chinese officials indicated that new case numbers of the coronavirus dropped sharply Wednesday to 394 from 1749 a day before. Consistent with that theme, there was a better tone in Asia, with the Shanghai composite up 2.3% and modest gains for the Nikkei. Oil also rose by 1.6%.

The US stocks fell on concerns the coronavirus will exert a heavy toll on earnings, with tech leading declines.

Although some market participants were quick to dismiss the Apple warnings, clearly, it has dented the market bravado as investors aren’t nearly so eager to buy the dip, suggesting that a level of discontent, especially around earning, is starting to set in.

And now with investor’s inboxes stuffed to the brim with research reports suggesting “Covid -19 could significantly affect short term earnings: Reiterate Sell.” the market could go in a de-risking mode. And if the Teflon heavyweight tech giants of the US market start to wobble in a domino effect, things could turn ugly quickly.

It took Apple to do what the coronavirus couldn’t – make stocks feel a little queasy. While the market seemed to absorb the initial apple shock in its typically pleasant manner, but it’s the aftershocks when corporate America starts waving the warning flags in tandem that could prove to be the biggest gut check.

Traders are very much creatures of habit, and if the past few Friday’s are any indication for today, we should expect risk to trade better offered and with South Korea emerging as the new cluster hotbed with confirmed cases of COVID-19 more than tripling in two days and the outbreak spreading to non-Seoul areas it could be cause for concern especially  among locals, and thus the negative impact on the Korean economy is set to continue,

While the virus headcount stories don’t carry the same headline gravitas, it’s still a focal point while the economic data fears continue to simmer on the back burner. It will soon be the fear of the data unknowns’ that will keep investors awake at night. And while wobbly data hasn’t stopped the market from frustrating the bears this year, something tells me it could be a lot different this time around.

For the proper record, the dollar rose against every G-10 peer save the Swiss franc, with the Aussie and kiwi faring the poorest. Gold hit a seven-year high, and oil jumped. Asian equity futures are pointing lower.

Oil markets

Oil is trading on improved footing as the demand outlook betters as mainland official reports suggest that new case numbers of the coronavirus continue to fall sharply. But bolstering the recent price recovery, inventory figures showed the US crude stockpiles rose less than expected last week, tempering some of the more exaggerated fears about the impact of the coronavirus.

In early Asia trade, however, prices are well of the NY. Session highs. And as has been the case on prior Fridays since coronavirus worries hit, is that Oil prices tend to trade more tightly correlated to risk sentiment as cross-asset investors divest equity positions. They then move into gold and bonds to hedge the weekend risk.

Still, new virus hotbeds are emerging in South Korea and Japan (Colossal oil importers in their own right). So, this could keep Asia oil risk a bit more defensive than in US markets as anxiety is creeping back into play amid the spike in coronavirus infection outside of China.

Gold Markets

Views on the spread and potential economic disruption of COVID-19 have spread quickly, and gold has been in massive demand as a result. And anxiety is creeping back into play amid the spike on coronavirus infection outside of China. And since it might be premature y to fully account for the medical, let alone the economic impact of the epidemic, gold could continue to outshine all others.

While COVID-19 has been a critical reason to buy gold, there is more to the gold run than meets the eye, as news, any upcoming FOMC reformulation of the inflation target methodology may have a more significant bullish impact on gold.

Currency markets

The Yen and the GPIF

That was four standard deviations 2-day move in USDJPY. Those are rare, obviously, and there are only five unique occurrences of a 2-day, 4SD move higher. The current movement, while epic, is more complicated to explain but impossible to ignore. The tricky thing this time is that it’s not like the BOJ easing moves (2013 and 2014) or the Abe announcement of Abenomics in 2012. Yesterday the proximate trigger wasn’t clear as my memory banks failed the pique portfolio rebalancing story that has suddenly caught the market’s imagination for reasons nobody fully understood yesterday; it makes a bit more sense today after going over the data.

Capital outflows saw the Yen dislocate from risk appetite. Data overnight show Japanese funds bought JPY3trn in overseas debt last two weeks. This is the most significant jump since Sept 18 and shattered vital resistance levels as the market wasn’t ready for the furious buying frenzy with some large traders hedged long Yen has a haven and got stopped into trades.

GPIF is set to conclude its five-year asset mix review in February or March (I don’t have the exact date or even if its concluded), where they are expected to announce a higher benchmark allocation for foreign bonds. If other pension funds follow suit, which is typical for Japanese funds to pursue the GPIF lead, that could add up to more than USD 100 billion of outflows with a good chunk earmarked for the US Treasury

So, the USDJPY move could be nothing more sinister than the market getting caught off guard while Tokyo banks went on a USDJPY buying frenzy hedging GPIF foreign allocation flows.

Still, with Japan’s economy in the tank, the direction of travel makes sense.

The Ringgit

Indeed, it was a gnarly day for the Ringgit right out of the gates yesterday amid mounting economic concern from China and now with Japan about to hit the skids; the question is who’s next? While slower growth in China will have a broad-based impact on ASEAN economies as supply chain disruptions affect exports while commodity dislocations weigh on inflation. And now with Japanese teetering on the cliff edge of recession. It suggests demand for safe-havens rather than riskier ASEAN assets will likely be the name of the game over the short term, at least.

RMB had not been a significant underperformer until yesterday, as it seems like a reality check of sorts is hitting. Yuan markets had been are blissfully ignoring a lot of economic negativity, thanks to the PBoC smokescreens. Now, to assume the near-term Yuan slide is by and large over could be wishful thinking as we still have the lingering aftershocks to consider.

With the RMB trading, lower local traders were more apt to sell MYR rather than buy due to the RMB correlation factor.

The PBoC didn’t do enough on the policy front either yesterday.

Local pain trades

THB, CNY, and KRW are most heavily positioned in bond and equity market by historical standards (foreign ownership shares converted to % ranks) take the sensitivity of currencies to flows into account that would indicate the THB and KRW are most at risk from potential equity/debt outflows.

 

Forex Daily Recap – Fiber Drenched in Red over Downbeat Eurozone CPI

EUR/USD

After making a downside rebound price action on testing the center line of the Bollinger Bands on August 26, the pair continued to slip even today. Quite noticeably, the mouth of the south-side heading Bollinger Bands was getting wider over time, signifying high volatility. Fiber has fallen on Friday mainly on the back of adverse EUR-specific economic data releases.

EURUSD 1 Day 30 August 2019 with Bollinger Bands, RSI, and ADX
EURUSD 1 Day 30 August 2019

Although the Eurozone July Unemployment rate remained in-line with the previous statistics, the Eurozone August YoY CPI – Core missed estimates. Meantime, the highly crucial Italian QoQ GDP Growth rate reported 0.1% lower than the previous data. Earlier today, German July MoM Retail Sales published -2.2% over -1.0% forecasts.

Nonetheless, the Average Directional Index (ADX) was indicating below 20 mark, revealing a lack of momentum in the downward price actions.

USD/JPY

Yesterday, the USD/JPY bulls had already crossed above the center line and entered into the upper vicinity of the Bollinger Bands. Anyhow, the pair appeared to shed significant accumulated gains today on the back of upbeat Japanese data releases. Despite losing ground, the USD/JPY pair continued to sustain above the center line, keeping intact uptrend possibilities.

USDJPY 1 Day 30 August 2019 with Bollinger Bands, RSI, and ADX
USDJPY 1 Day 30 August 2019

At around 05:00 GMT, the Japanese Unemployment Rate recorded 0.1% lower this time over the previous 2.3%. Also, the Industrial Production data (both YoY and MoM) reported positive figures in comparison to the previously recorded negative statistics. Laterwards, the YoY Housing Starts came around -4.1% over the last -5.4%.

USD/KRW

South Korea’s central bank skipped a rate cut this time in order to save firepower for the next meeting. Notably, the Bank of Korea (BOK) had lowered the interest rates in the last July meeting. Anyhow, this time, the BOK policymakers voted to keep the interest rates unchanged near 1.5% the same as the previous rates.

“I expect a cut at the October meeting as domestic demand remains weak and as we need to confirm a sustained recovery in exports, especially semiconductor exports that kicked off the country’s economic downturn,” said Oh Suk-tae, an economist at Societe Generale in Seoul.

USDKRW 1 Day 30 August 2019 with Gann Fans, SMA, RSI and ADX
USDKRW 1 Day 30 August 2019

On the technical side, the USD/KRW pair has slightly moved out of the track, deviating below the 2:1 Gann line. And, the Relative Strength Index (RSI) was hovering near 50 mark, showing neutral buyer interest. However, even if the pair had made further downside moves, then the significant underlying SMAs would have got activated.

USD/CAD

As per the predictions in our USD/CAD Daily Forecast Article, the bulls continued to take control over the pair’s daily price actions. Today, the Canadian Q2 QoQ Annualized GDP recorded upbeat data, reporting 3.7% over 3.0% market hopes. However, the downbeat Canadian July MoM Industrial Product Price and Raw Material Price Index seemed to discourage the CAD bulls. While, on the USD-side, July PCE data stood in-line with the market expectations. In the interim, July Personal Spending rose by 0.3%, and Personal Income slumped by 0.4%, over the respective previous statistics.

USDCAD 1 Day 30 August 2019 with Ichimoku Clouds, ADX, and RSI
USDCAD 1 Day 30 August 2019

Nevertheless, after a small dip inside the underlying red Ichimoku Clouds, the pair ensured to stay above the Clouds. Somehow, the ADX technical indicator was pointing below 20 mark, allowing the price actions to stay range-bound throughout the day.

The article was written by Bharat Gohri, Chief Market Analyst at easyMarkets

Trump, Kim Historic Summit Sparks a Bullish Sentiment for US Dollar

The President of the United States said that the two have made a big progress and that the meeting went better than he anticipated. They are both hoping for a historic deal to end the nuclear standoff crisis at the Korean peninsula.

How Markets React

The US Dollar rose versus the Yen, the Koren Won went up almost 0.2% while the Asian equity Markets were more volatile than usual with the Nikkei getting some gains of about .5%. The euro retraced from a three week high of $1.1840 to about  0.1% at $1.1791 and the Spot Gold went down about 0.2 % to $1,297.31 an ounce.

Analysts at OCBC stated “The key question is whether this summit will lead to a lasting, materially positive outcome”

The real question here is whether markets getting more balanced after the end of the summit or will Investors gain more trust?

Many investors have their hopes pretty low after the summit and believe that the summit was not successful.

Robert Carnell, a chief Asia-Pacific economist at ING said “So today, we have the opportunity for a historic meeting, a possible end to the Korean war, and a possible move to denuclearize, and maybe even demilitarize the Korean peninsula. All of that’s great, but how can you make money from it. Well, the short answer is you probably shouldn’t even try.”

Also, Robert Carnell after the meeting of the G7 said that “existential global threat” is the tariffs and those are a bigger threat.

The busy week ahead may give investors some clues of what might happen with the global economy as the U.S. Federal Reserve policy meetings and the European Central Bank are next, as well as the Brexit bill vote. The U.S. Federal Reserve is almost certain to raise interest rate next week but investors will focus on the central bank’s outlook for 2018.

Goldman Sachs forecast that the Fed will hike rates three and four times in 2018 and 2019, respectively.

Gold Prices remain vulnerable on the anticipation for the upcoming U.S. Federal Reserve meeting which means that gold may be bearish as its struggle to compete with yield-bearing assets when rates rise.

On the other hand, Gold could find some support from safe-haven buying as markets try to recover from the aftermath of trade tensions and the G7 Meeting.

Other reports to watch this week include the U.S. inflation, retail sales and industrial production.

This article was written by Marios Athinodorou, TeleTrade’s market analyst, and commentator. Among others, Marios is delivering weekly trading webinars. Sign up for upcoming webinars here.