Asia Macro Morning: US leads large-cap tech rally but China remains in focus

Market Analysis / 2 Min Read
13 Oct 2020

HK delays opening due to typhoon

In the US there was a large-cap tech-led rally; Nasdaq +2.5%, S&P +1.6% and FAANG were big outperformers, AAPL was +6.5% ahead of its expected new iPhone launch, and AMZN +4.7% with its Prime Day event to kick off. Volumes remained on the lighter side, plus there was quiet in the headlines given US holidays and bond markets were closed.  
APAC starts the day on a positive note, but HK is shut for the morning (or day) due to a typhoon. 
But the devil does tend to do the work for idle hands, especially in the currency market when the PBoC gets involved in the dust-up. Traders expect the PBOC to set the yuan mid-point at 6.7209 v 6.7126 prior, so now we have a salient benchmark.

China remains a primary focus for investors after it moved to reduce the costs of shorting CNH. A more symmetric two-way interest in USDCNH is likely after the central bank removed the required 20% risk reserves ratio for financial institutions for sales on some FX forward contracts. Any upward pressure in USDCNH on the back of this change needs to be set against an absolute trade-related force that drives selling in the pair.
USD/Asia, particularly North Asian currencies, tends to be sensitive to significant turning points in USDCNH, so caution across the basket must be exercised until the dust settles. After yesterday's 100 pip gap at the close, traders will exert a considerable degree of caution defending against the PBoC's not-so-invisible hand.
If history reminds us not to fight the Fed, it also suggests we shouldn’t fight the PBoC;  rule no. 1 in the FX trader’s manual is never fade a central bank pivot until a significant position clear-out has happened. So far, that hasn't occurred.
AUDUSD could prove very sensitive to CNH downside. Besides tracking USDCNH relatively closely, some power stations in China have been told to stop using Australian coal immediately, according to reports. Eroding diplomatic ties between Australia and China should slow the AUDUSD upside, irrespective of whether USDCNH rallies.
Bank Indonesia is expected to leave its policy rate unchanged at 4.00% today. Foreign investors have to weigh the most attractive real yields in the region with uncertainty around the possible extension of debt monetization into 2021. The central bank will be keen to show that it's prepared to continue supporting the economy via unconventional measures to avoid crippling its yield advantage. 

The more significant risk for IDR is external. A bear steepening in the UST curve following the US election, assuming a Biden presidency and Democratic sweep of Congress, would pressure high yielders like the IDR.

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