- USD/JPY the bias remains on the upside as the policy divergence will act in favour of the greenback even though the Fed finds itself being the only central bank on the tightening path
- PBoC will have no choice but to support the economy further by cutting rates and lowering the RRR
- We expect the RBA to leave its benchmark interest rate unchanged and to sound relatively dovish, especially given the easing biased of most of its peers, as Governor Stevens will want to lock-in the competitive level of the Australian dollar
- Soft US data on personal income and spending will now put the Fed’s tightening strategy for this year into question
- We believe that hiking rates too prematurely will have a massive impact on the American economy, driving it into recession
- QE4 could be on the pipeline should inflation levels stay in the lower range
In the wake of Friday’s BoJ easing move, the policy divergence theme is back under the spotlight. During the Asian session, the US dollar consolidated earlier gains but lacked the strength to reach higher grounds as expectations for Fed tightening got pushed away. The entire US yield curve shifted lower last week, with the 2-year treasury rate back below 0.78% for the first time since early November. The 10-year is currently stabilising around 1.92%, down 41bps since the beginning of the year.
USD/JPY spent the entire Asian session trading in a very narrow range, between 121.11-121.49, after surging 2.25% amid the BoJ’s rate cut. Overall, the bias remains on the upside as the policy divergence will act in favour of the greenback. However, the decision has also cast a shadow on the US dollar outlook as the Fed finds itself being the only central bank on the tightening path.
In China, January official manufacturing PMI came in on the soft side, printing below the 50-point mark, signalling contraction, for the sixth straight month, coming in at 49.4 versus 49.6 median forecast and 49.7 in December. Non-manufacturing PMI also eased compared to December, printing at 53.5 versus 54.4 in Dec., but still above the threshold. The PBoC is in a tough spot as it faces a Cornelian decision where it has to choose between further monetary easing, which would help the economy to weather the slowdown, or to stand-by in order to avoid further yuan weakness, which would accelerate capital outflow. However, from our standpoint, the PBoC will have no choice but to support the economy further by cutting the rates and lowering the RRR. The People’s Bank of China set the USD/CNY mid-rate at 6.5539 this morning, up 0.04% from Friday.
In the equity market, returns are mixed this morning as Chinese data weighs. The Nikkei is up 1.98% in spite of a weaker manufacturing PMI (53.5 in Jan. vs 54.4 in Dec.). However, traders still have Friday’s rate cut on their minds. The Topix index was up 2.14%. In mainland China, the Shanghai and Shenzhen Composite were down -1.78% and -1.04% respectively. Hong Kong’s Hang Seng lost -0.77%, while in Singapore the STI fell 0.96%.
***Peter Rosenstreich, head of market strategy: China - Emphasis on Stability: "Asia continues to weigh on risk sentiment. This follows as a consequence of Friday’s sharp rally in equites driven by BoJ’s surprise move to negative interest rates, as weak China manufacturing PMI reports damaged the risk rally. However, despite additional disappointing data from South Korea (exports fell 18.6% y/y in January weakest read since 2009), Indonesia and Thailand, most of Asia was able to recover with the exception of China. China’s Shanghai composite fell 1.78%. China’s NBS manufacturing PMI contracted to 49.4 in January from 49.7 prior, and below expectations (non-manufacturing fell 53.5 from 54.4 less relevant but still a positive read), indicating sustained reservations to the outlook. USDCNY was basically unchanged at 6.5790 suggesting the PBoC's new emphasis on stability over economic growth. Today the RMB fix was slightly lower after six consecutive days of strong fixing. Our CNY forecasts are against consensus with limited expectations for extra significant devaluation. Capital outflow have become destabilising and expectations for further CNY weakness will only accelerate the flight. Yet, with demand still fragile we are expecting two 25bp benchmark rate cuts and fine-tuning with two RRR cuts this year. We remain positive on Asian carry trades as further monetary easing by the BoJ and potential accommodation by the PBoC will keep regional risk appetite supportive. As volatility subsides high-yielding currencies should outperform. Fuelling these interest rate differential trades should be the JPY.”***
In Australia, we expect the RBA to leave its benchmark interest rate unchanged. Inflation levels are back within the 2%-3% target range. TD securities inflation measures came in at 2.3%y/y in Jan. or 0.4% on a month-over-month basis. AUD/USD tested its 50dma on Friday and lacked the strength to break it to the upside. The tone used to communicate the decision will be decisive. We expect the RBA to sound relatively dovish, especially given the easing bias of most of its peers, as Governor Stevens will want to lock-in the competitive level of the Australian dollar.
***Yann Quelenn, US: soft data: "Markets have been awaiting the release of the Personal Income and Spending data since the FOMC decided late last week to keep interest rates unchanged at 0.5%. Both should print in lower versus last available data in November. A Bloomberg Survey puts both releases at around 0.2%m/m. Last week’s Q4 GDP print did not take us by surprise when it came in at a poor 0.7% q/q with the U.S. economy still struggling to enter a path of sustainable growth.
Soft US data will again put in question the Fed’s tightening strategy for this year. All other central banks are currently easing (except for the Bank of Mexico, which is actually carefully following the US rate path in order to avoid any capital outflows that would result from a smaller rate differential). The Fed is therefore alone. We believe that hiking rates too prematurely would have a massive impact on the American economy and drive it again into recession. Yet, the astonishing amount of U.S. debt needs inflation to be reduced over the long haul. In lack of it, we are not afraid to say that QE4 may be on the pipeline. This would be very contradictory knowing the Fed’s situation but we believe that rates have been raised because the central bank needed to show that it still has control of the situation.”***
Today traders will be watching manufacturing PMI from Norway, Switzerland, France, Germany, the euro zone, Turkey, UK, Spain, Italy, Brazil and South Africa; mortgage approval from the UK; personal income and spending, PCE deflator, ISM manufacturing and construction spending from the US; trade balance from Brazil; RBA rate decision (during the night).