Credit Agricole

Asia overnight

Risk sentiment has seemingly improved somewhat overnight with the main Asian stock markets as well as the US and European stock market futures recovering. The recovery came on the back of evidence that Chinese lenders have moved to ease the funding conditions by lowering their five-year loan prime rate by a record amount. The move seemingly helped ease somewhat the growing fears in the markets that the persistent tightening of global financial conditions on the back of continuing central bank policy normalisation can precipitate the next cyclical downturn.

Given that the USD has been at the epicentre of the market growth angst of late, the easing concerns have given the currency some reprieve although the USD still lagged behind the likes of the CHF, CAD and JPY. The AUD emerged as the biggest underperformer overnight with investors shifting their attention to the general election in Australia on 21 May ahead of which recent polls have been predicting a victory for the opposition ALP party. We further note that, historically, AUD/USD tended to underperform its fundamentals in the event of an ALP election victory, and modestly outperform its fundamentals in the event of a LNP coalition victory. The rise of the ‘teal’ independents further increased the chances of a hung parliament and thus added to the political headwinds for the AUD.


FX Flows

China cuts 5-year LPR lifted Mainland stock indices and slight influence to the rest but little effect on currency markets.

New Zealand April trade turned to a surplus of NZ$584bn, however March deficit revised to -NZ$581mio from -NZ$392mio. NZ$ barely moved, equity indices are up but the Kiwi slipped.

AU$ slipped off mornings high 0.70485. Looks like some people are nervous about the Federal elections this weekend and offloaded AU$ as well as AU$NZ$. There was a headline NSW Health has identified a probable case of monkeypox in a recently returned traveller to Europe. The said bids around 0.7040 disappeared and AU$ printed 0.70105. Average size strike at 0.7050 will expire today. On the elections, there has been speculation that it is so divided that they could end up with a hung parliament. During a discussion, our trader Jon believes AU$ will be sold if Labour wins or hung parliament but given the modest shifts in policy with both parties proposing more spending, AU$ could end up back to square one.

Yes, it is Goto-bi Day but the price action this morning is linked to US yields and the equity market. Japanese importers bought a round of $YEN which kept the pair supported above 127.70, profit taking from speculators drove the pair above 128.00. Japanese retail day traders have added to long and will likely unwind on the way up. Nothing worth mentioning in terms of options, note there are large topside strikes due on Monday at 128.17 and 129.00.

Not exciting at all for the EUR$, it drifted lower while $YEN climbed, pretty boring. Nothing worth mentioning in terms of options, note there are large topside strikes due on Monday at 128.17 and 129.00.

UK May consumer confidence fell to record low of -40 as concern grows about whether households will be able to afford rising utility, food and fuel bills. Consumers have little hope for the outlook for the wider economy, which contracted in March and is expected to shrink further this year. Bloomberg wrote economists have warned in April when the index dropped to -38 that such a low reading was consistent with Britain’s economy falling into recession, because it had closely tracked GDP over the past five decades. Hardly any reaction in FX, drifted lower in similar pattern to the EUR$.

Witnessed buying of $CAD by Tokyo banks for the fix but the move up to 1.2835 was when the oil futures fell. WTI July saw a quick move from $109.35 to $108.70, it struggled to recover. This left some pressure on the Loonie against the US$. The latest news Canada said it will ban Huawei and ZTE from providing 5G services. Will this decision force the Chinese to reverse the decision? Take note that $2.63bn of 1.2730 matures today.