Shifting narratives

Shifting narratives


Events in China and Japan have played a significant role in shaping currency markets bias over the last 24 hours and to a degree crystallising the broader-based dollar correction that started in earnest after the markets dismissed the weaker US Non-Farm Payroll number last Friday.

With the USD leaping higher in London, the PBoC surprised the market by suspending its use of the countercyclical factor in managing the exchange rate which sent a USDCNH rally in motion while adding momentum the US dollar mini-revival.The suspension does not change the longer term Yuan narrative it only removes a measure that was designed by degrees to limit the need to intervene when RMB was weakening. However, the long RMB was a well-subscribed trade this year, and the combination of stronger USD, weaker Yuan fixes, and the countercyclical surprise suggests the rampant USDCNH downtrend is temporarily snapped causing an aggressive wave of profit-taking.Local CNH traders and now in wait and see mode awaiting  Pboc next manoeuvre.

This policy shift is far from a repeat of the iron-fisted Pboc moves from yesteryear. But  it does appear the central banks not so invisible hand was at work curbing the rapid appreciation of the Yuan below 6.50.Expect this debate to go on.

The BOJ bond purchase reductions remains a hot topic in many circles, but the not so ” stealthy ” taper should not be interpreted as a sudden policy shift by the BoJ as they have been tapering all along.
But what’s essential for the JPY, will be the pace of the reduction given that most G-10 centeral banks are preparing to pare stimulus measures to some degree.  A lot of smoke but little fire.

FX Asia

Although we could see a further wobble on USDCNH, the removal of the countercyclical is a sign of longer-term confidence in the currency in the sense the Pboc are more comfortable with how the CNY is trading and not so concerned about the threat of rapid depreciation. This policy shift is a sign of strength and confidence, but in the near term, we should expect a few hic-up on the way to a stronger Yuan.

There is no arguing the CNY complex is a considerable momentum driver for all of Asia, and the correction could dampen short-term regional sentiment as traders pause for the cause.

The Malaysian Ringgit

Structurally the MYR looks poised to rally on surging energy prices, but investors are cautious across all of EM Asia FX and tactically scaling back risk for a few reason One, the weaker Yuan fix will have a significant influence on regional inflow. Two, the recent USD dollar mini-revival has triggered profit-taking on short dollar positions globally.Three, a few Asia central banks are expressing displeasure with a stronger currency ( BOK and BoT the most vocal) Lastly, speculative views are getting a bit one-sided as a lot of investors jumped back on the regional bandwagon late 2017 early 2018 triggering some minor overbought signals.

The floor remains firm as the market continues to reiterate the core bullish sentiment drivers.
The market stirred and popped higher when the EIA bumped their global oil demand forecast for 2018. And for good measure, the American Petroleum Institute (API) reported an eye-watering draw of 11.19 million The significant inventory draw sent both WTI and Brent rocketing to 3-year highs. Traders will now look for confirmation from The U.S. Energy Information Administration report on oil inventories due to be released on Wednesday at 10:30 a.m. EDT which would cement this rally and could take WTI above 65 per barrel. No, if and or buts, the trend is your friend in the oil patch.


Gold is trading lower on the back of the resurgent USD and higher US bond yields. But stronger equity market is also taking some shine of gold as investors pare back early year equity market hedges as global stock equity markets remain on the ups.
However, much of the USD appeal is being expressed via the Euro suggesting this mini dollar revival is little more than traders unwinding overextend EUR bets and with no evidence that the broader US dollar downtrend has run its course Gold should remain sticky above USD$ 1,300.00 support levels spurred on by seasonality demand.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.