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Calm in China and CNY, Japan’s current account increases

- We think that the Chinese authorities will endeavor to inject a level of steadiness into CNY
- A significant deterioration in Chinese trade activity should support markets fears of an economic slowdown and likely put further pressure on Chinese assets
- Commodity currencies remained a sell while safe haven currency gained verses the greenback
- We remain negative on commodity-linked currencies such as CAD, NOK, NZD and see any rebound as an opportunity to reload shorts
- With global demand weaker and risk aversion driving the JPY higher the likelihood of reaching its 2% target is unlikely
- We anticipated the BoJ to shift to more dovish language in the near term.
 
Risk aversion has taken a temporary reprieve today with Asia’s regional equity indices mixed, fading the weak US close, which wiped out 4Q 2015 gains. The lull in Chinese selling is partially due to stability in CNY. China fixed the CNY at 6.5628, broadly unmoved for the third day. This forced CNH to appreciate sharply (combined with tightened liquidity issues, verbal intervention and unconfirmed reports of policy intervention) and converge with CNY. The offshore rate briefly traded above the onshore rate. With Tokyo back from a long weekend the Nikkei sold-off tocatch up to prior regional weakness. The Hang Seng was marginally lower by -0.65% but the Shanghai campsite increased by 0.20%. Moving forward we suspect that the Chinese authorities will endeavor to inject a level of steadiness into CNY. The high degree of volatility has does significant damage to China’s policy-making credibility and they are unlikely to sacrifice more critical reputation and potential disorientation in order to rejuvenate growth. On the data front, China will get December trade data on Wednesday. A significant deterioration in trade activity will support the market’s fears of an economic slowdown and likely put further pressure on Chinese assets. On the commodity front, oil prices continue to decline as WTI plunged 5.8% to $30.41 and Brent crude falling to $30.34. In FX markets, the G10 was mixed with winner and losers tied against the USD. Commodity currency remained a sell while safe haven currency gained verse the greenback. We remain negative on commodity-linked currencies such as CAD, NOK and NZD and we see any rebound as an opportunity to reload shorts.
 
On the daily charts the USDJPY exhibited a bullish engulfing pattern, which is a clear reversal signal (potentially indicating that 117.23 was the low). The JPY is the strongest G10 currency in 2015, based on the dominant risk-off sentiment. Japanese November Trade surplus increased to Y1.1453trln against Y858.5bln expected. However, Japan’s November BoP data indicated that capital outflows more than counterbalance the current account surplus. Japanese December consumer sentiment all households rose to 42.7 from 42.6. The recent strength of the JPY has a significant portion of the policy driven weakness from October’s BoJ initiative. The BoJ is nearing a challenging cross roads. With global demand weaker and risk aversion driving the JPY higher, the likelihood of reaching its 2% target is unlikely. However, policy actions are having an increasing degree of limited success. We anticipate the BoJ to shift to more dovish language in the near term.
 
***Yann Quelenn, market analyst: In Japan, the current account printed well above expectations at 1.14 trillion yen in surplus for 17 straight months in November which provides some support to Shinzo Abe, Japan’s prime minister, who is struggling to spur the Japanese Economy with his Abenomics. Yet, it is the smallest surplus since last June. A weaker yen drove up income growth from overseas and the surplus was also due to a gain in services, stimulated from tourism boosted by a weaker yen. On the contrary the trade balance went back into deficit at -271 billion yen, and this is likely to keep weighing on the inflation level as Japanese consumers will buy imported goods at a lower price. Inflation remains flat and still far away from the BoJ target of 2%. For the time being, the price of crude oil continues to fall and should also improve the trade balance in the near future. Over the last month, the Japanese currency is strengthening against the greenback and is now trading around 117.40 yen for one dollar. Nonetheless, we remain bullish on the pair even if global uncertainties amid subsequent Fed rate hikes and global turmoil increasing downside risks.”***
 
Today’s focus will be on UK will be on November’s industrial output, expected to fall 0.0% m/m from 0.1%. UK Manufacturing production should increase 0.1% from -0.4%. The Thursday BoE MPC meeting should have no changed with minutes broadly in line with December’s meeting. The vote should be unchanged at 8-1 (potential McCafferty removes his hike vote). Member emphasis of global risk and weak inflationary pressure has only increased since the last meeting.

Tuesday, 12 Jan, 2016 / 10:31

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