- Risk appetite back in equity and indices although volumes still remain thin
- CNY should remain weak against USD in spite of PBoC liquidity injections
- Continued rally in US front-end yields unable to offset short-term selling pressures on USD
- AUDUSD should further appreciate after RBA showed a bias less dovish than expected
- CAD will remain firm as oil and broader commodity complex firms
- Abe confirms that Japan will keep on its commitment to FX stability
- RBA: We still believe that weakness in China and commodity prices will force the central Bank to cut 25bp in 2016
- Brexit: Despite the latest poll we remain bearish on the GBP until getting confirmation from multiple polls giving a more solid indication that the remain option will prevail
Risk appetite returned in the Asian session following Wall Street's example yet volumes remained thin. Asian regional equity indices were higher as the Nikkei rose 0.82% and Hang Seng increased 0.27%. However, the Shanghai composite fell -0.47% despite PBoC liquidity injections and CNY remains weak against the USD. In FX USD was marginally weaker against G10 and EM currencies. The continued rally in US front-end yields was unable to offset short-term selling pressures. The AUD appreciated solidly as the RBA minutes provided a slightly less dovish tone then the market had anticipated. AUDUSD opened at 0.7290 but post-RBA minutes forced speculative shorts to liquidity sending AUDUSD to 0.7366 session highs.
Crude oil has spiked on renewed concerns over the Canadian wildfires and Nigerian supply outages. WTI hit a seven-month high of $48. The follow through into CAD (and NOK) has been less dramatic as the strong oil prices should support the loonie yet with 1 million barrels daily having to be taken offline due to safety concerns, revenues will suffer. USDCAD traded from 1.2910 to 1.2850 and we anticipate that the CAD will remain firm as oil and the broader commodity complex firms. Finally, Japan Finance Minister Aso has suggested that the G7 will discuss currencies at its upcoming meeting. He stressed that Japan remained committed to FX stability and global cooperation but that each nation needs to have the freedom to adopt monetary and fiscal policy which suits their own specific needs. USDJPY remained tight 108.85 to 109.00.
In Asia, the RBA minutes from May 3 indicated that the decision to cut ORC by 25bp to 1.75% was a close call. This less dovish read sent the pricing of a June cut plummeting from 25% to 13%. The market now believes that the threshold for additional easing near term has been raised; a one-and-done strategy dominates. We remain confident that suspected weakness in China and commodity prices will force the RBA to cut 25bp again in 2016. Yet the timing will more likely be in the fall or earliest in August.
Yann Quelenn, market analyst: “RBA reluctantly cuts rates: The release of the minutes from the latest RBA meeting have been released, which saw a strengthening in the Aussie against the dollar to 0.7350 after the minutes revealed the less dovish stance of RBA members. The very soft inflation seems to have forced policymakers to cut their benchmark interest rate to 1.75% from 2%. Inflation is clearly suffering and the country is facing its first deflation period since 2008 with Q1 inflation printing at -0.2% q/q. There are now growing pressures that the Australian Central Bank needs to lower its inflation target, currently between 2% and 3%, in order to reflect the increasing global deflation pressures that are out of its control. We believe that members are waiting to collect more data - global and domestic - to adjust their monetary policy. In our view this is why no rate cut should happen at the June meeting. However, it seems it will also prove difficult for members to further cut rates at the August meeting but future markets have already priced in another rate cut to 1.5% at around 50%. In addition, Aussie strength should not last long as there is no reason why Australia will not participate in the global currency war judging by the fact that the first symptom of necessary devaluation is already evident: low inflation.” —
The Brexit conversation has heated up with Telegraph ORB poll indicating a wide lead for the “remain” vote. According to the newspaper the “remain” vote is now 15 points ahead of the “leave” vote in the UK referendum poll. This comes on the back of former London mayor Boris Johnson equating European Union policy to Hitler’s Nazi Germany, aiming to unify Europe under-one “authority”. GBPUSD rallied from 1.4395 to 1.4491, and EUR/GBP dropped from 0.7860 to 0.7815 on the back of the Telegraph poll results. We remain bearish on the sterling, until confirmation is made from multiple polls that this wide divergence is factual. Until then, we see GBPUSD rallying as opportunity to reload shorts. The incoming, firm UK CPI reading at 0.5% y/y is unlikely to revive dovish BoE expectations.
In the European session traders will be watching, UK CPI and PPI, EC trade balance. Things will heat up in the afternoon as the US will release housing starts, building permits, CPI, industrial production and capacity utilization. In addition, Fed Presidents Williams and Lockhart speak. We anticipate a marginal improvement in inflation and industrial production which should provide USD with short-term demand.