Calm Before another Storm?
Markets seem to have weathered the initial wave of Eurozone politically-induced risk aversion. Euro bond yield stabilised after a recent sell-off in France and peripheral markets, and major equity indexes closed flattish on either side of the pond.
These are only the initial tremors, as the market is turning its focus on to potential event risk in France and Germany. Consider the double-barrelled risks from both President Trump’s delaying his economic agenda, and from China re-entering the risk fray, as their foreign reserve data recently fell below the psychological USD3tn, which wobbled the markets. Given the current level of Investor anxiety, it will not take much of an event for investors to reinstate the distinctly risk-averse mindset that gripped the market yesterday.
The Australian dollar was hit hard overnight after Chinese reserves data came in below the psychological 3 trillion level. While the broader USD caught a tailwind, commodity currencies, which have been holding up well, versus more general USD moves of late, have been hit hard as there remain some concerns that China might reduce their purchases of commodities. However, there are heightened risks, especially as the market is conceding, and if reserves fall further in China, it will weigh on Chinese traders.
Yesterday’s RBA statement was very neutral, as expected, with AUD trading higher after the release. However, I think that was more position related as traders were leaning for a dovish bias, or at least expecting the central bank to acknowledge headwinds from recent weakness in GDP and inflation.
With Fed-speak not letting go of a March rate hike as the Fed are stubbornly behind the curve and in danger of falling even more so, the dollar bulls are digging in for a real battle zone at the current significant technical levels.
The oil patch offered little support for commodity currencies this morning, as WTI is getting hammered after US crude oil inventories increased an eye-watering 14,227 million barrels, the second largest buildup in US history.
At stake too, according to a Bloomberg report, are “cracks appearing in Australia’s trillion dollar debt pile,” as Australian households struggle to pay down personal debt.
Coming off overnight lows, the Euro is trading poorly with an offered tone in early Asia trade. While it is premature to draw any definitive conclusion, the political landscape in both France and Italy are coming under immense scrutiny from investors, which should keep EURO upticks limited. If we factor in a possibly divisive German election, risks are rising immensely on the European political stage.
In my view, the breach of 3 trillion is not in itself a significant incidence.But the trend is worrying , and if there is anything that the PBOC policy makers can take away from this reserve erosion, it is a fact the current financial market model they rely on is stale and in need of an overhaul.
These financial market woes are nothing new to mainland policymakers who continue to find themselves in a terrible place. Despite their heavy-handed interventions, the reserve data clearly signals greater than anticipated capital flight and highlights the ineffectiveness of current policies.
Letting the currency float will not help ease the pressure, as this current issue is more about capital flight. Who can blame mainland investors that want to escape financial markets that regularly change the rules of market engagement?
Buying dollars is the correct move, but do not fall for the perverse perception that 3 trillion is some sacred threshold and that the Mainland market is about to spiral downward. Nothing could be further from the truth, but I am sure yesterday’s data will be a revelation to Chinese authorities about the ineffectiveness of current policies.
The recent ‘rinban’ operations and hawkish Fed-speak have offered some near-term support for USDJPY. Yen dealers are turning their focus to the Trump-Abe meeting scheduled for 10 February 2017.
There is a RBI rate decision at 5:00 PM SGT today and the market expects a .25 bp cut.