China to dictate sentiment

Risk currencies came off in yesterday’s afternoon Asian trade in a move that was started by a sharp gain in the yen.

USD/JPY fell sharply to lows in the 97.20 region, with the pair testing the 200-day moving average at 97.28. This has been big support recently and a break could see the pair head to 96.00. USD/JPY had experienced some sideways trade for a while and it was looking like the pair was bracing for a sharp move without a clear indication of which direction it will take. At 10:50 AEDT we got the weekly MoF fund flows and they showed a sharp rise in Japan foreign bond buying. Normally this would be negative for the yen but this has not been the case in Asia today. Perhaps traders are hesitant to sell the yen with uncertainty around China lingering.

China concerns hurt risk

Commodity currencies were hit the hardest in the risk currency space on the back of talk around policy tightening. China’s money market rates spiked yesterday due to the slight tightening of liquidity conditions. There are concerns the PBoC and the government are looking at tightening monetary and real estate policy in light of rising property prices. As a result, the AUD was one of the biggest hit in the risk FX space. AUD/USD was already sliding in Asia, dropping from a high of 0.9758 and is now just above the 0.96 handle. This sharp decline came despite a strong CPI reading.

The pair experienced a bearish reversal and will be back in focus today ahead of the HSBC flash PMI print, which is due out at 12.45 AEDT. The market expects the pace of expansion to pick up, with the index expected at 50.4. A weak number could confirm the reversal in AUD/USD.

RBA Deputy Governor Philip Lowe is speaking today and traders will be keen to hear more on interest rates and the local currency. While it looks like AUD/USD is in for a bearish turn, I’m more inclined to look at buying the dips, particularly heading into uptrend support at 0.96. There is also the 200-day moving average which is likely to support the price action in that region.

Euro remains resilient

While the AUD struggled, the euro and the pound actually held up fairly well against the greenback. EUR/USD momentarily dipped to 1.374 and swiftly recovered to knock on 1.38 again. Perhaps news that Spain has emerged from a recession with a 0.1% q/q rise in Q3 GDP gave the single currency a kicker. Talk of an asset quality review for euro area banks also did the rounds and affected sentiment. It’s a big day of trading ahead with a raft of PMIs set to hit the wires, with manufacturing PMIs for Germany and France being the highlights. Both data points are expected to be revised up slightly – this could support the EUR.

Pound could recover on Mark Carney

GBP/USD came off and lost the 1.62 handle, dropping to a low of 1.612 before recovering. The pair just moved in line with risk after BoE minutes came in line with expectations. There is certainly a less dovish tone in the UK, and with Mark carnet set to hit the wires later today, there is plenty of room for a cable recovery. 

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