De-risking and profit-taking into the weekend
Asia investors appear to be in a de-risking and profit-taking frame on mind into the weekend, as they’ve been so prone to do in the Covid-19 environment, preferring not to count their chickens before they hatch.
Still, early morning trading decisions were possibly influenced by looming China retail sales and industrial production data and whether or not the PBoC will cut MLF.
But it’s been a troubling week for risk assets led by market skepticism on the recent rally and a view that this has potentially gone too far in light of continuing concerns of the global economic toll from the Covid-19 crisis.
With swaps being sold off across all tenors pre-open on the expectation of a 1-year MLF, the market reaction has been muted in a shadow of disappointment that interest rates were not nudged lower after the PBoC issues CNY100 bn of 1y MLF at an unchanged interest rate of 2.95%. The PBoC needs to exceed expectations in a big way – not just meet them!
China Data Beats and Misses
While China's industrial production data came in better than forecast, with consumers expected to carry the bulk of the heavy lifting during the initial phase of the post lockdown recovery the miss on retail sales is providing poor optics, suggesting consumption is falling well short of what was expected to be a pent-up demand rebound. And the beat goes on as the data paints a similar picture to what’s been observed lately: industrial production improving, but retail sales (demand) lagging.
The Range Trade
Mirroring the rally in US equities that has emerged into a tight range trade at the headline index level, a selloff in the broad trade-weighted USD since the lows for stocks on March 23 is showing a similar range of trade-sensitive. There are numerous quirky drivers in currency markets that are getting papered over by the low volatility calm; Brexit (GBP), negative rates (USD) and trade war bluster, to name a few.
The calm before the currency storm?
I'm firmly of the view that the relative stability of currency markets this week could prove short-lived, particularly as they pertain to the US dollar vulnerabilities. The Yuan is set to remain in the trade war spotlight as trade tension is unlikely to relent, but absent US tariffs getting reimposed the Yuan could be confined to current trading ranges over the near term.
Meanwhile, the USDJPY downside is more attractive in the context of growing US-China trade tensions amid diminishing rate differentials.
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Investors continue to grapple with inflation concerns; Surprise API oil build comes at a critical juncture; Even the hard-to-love EUR is trading higher