Closer Yen, Yuan Correlation Is Danger Sign for Asian Currencies

Economic

Forex

Summary:

120-day correlation between yen, yuan has risen to record high. Asian currencies will be hit by yen, yuan losses, Mizuho says.

Asia’s two most important currencies are moving together like never before, increasing the risk of a broad decline among their regional peers amid the relentless strength of the dollar.

The 120-day correlation between the dollar-yuan and dollar-yen currency pairs climbed to 0.54 this week, a record high in data compiled by Bloomberg starting in 2007. A reading of 1 would mean the two move in lockstep.

The yuan is frequently described as a “currency anchor” for the rest of Asia given that other nations compete with China in global export markets. The yen is similarly influential due to Japan’s heft as the world’s third-largest economy. Closer Yen, Yuan Correlation Is Danger Sign for Asian Currencies_1

Closer Yen, Yuan Correlation Is Danger Sign for Asian Currencies_1

“It certainly beggars belief to suggest Asia FX are unfettered by yen and yuan weakness,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “The tight supply-chain and investment linkages as well as inter-dependencies mean that Asia FX will be materially impacted by yen and yuan bears.”

Weakness in either the yen or yuan often flows across to the other. China’s currency suffered its biggest one-day decline in two months on March 22, three days after the Bank of Japan disappointed markets by failing to flag future interest-rate hikes when it ended its negative rate policy.

Further yuan weakness may compel central banks across Asia to allow their own currencies to depreciate faster to maintain export competitiveness.

There’s an increasing chance the Reserve Bank of India will relax its “cap on USD/INR as India sees China as a competitor in manufacturing exports and a stronger INR versus CNY could hurt India,” Morgan Stanley strategists Min Dai and Gek Teng Khoo wrote in a research note last week.

The increasing correlation of the yen and yuan is also a concern for global currencies as a simultaneous decline in the pair is seen adding to the broad dollar gains.

“Stability in the yen and yuan is critical to Asian FX because the weakening momentum of these two currencies will likely accentuate the broad dollar strength and will impact Asian FX as well,” said Peiqian Liu, an Asia economist at Fidelity International in Singapore.

Source:Bloomberg

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Cohen

Economic

Japan's wholesale inflation accelerated in June as the yen's declines pushed up the cost of raw material imports, data showed on Wednesday, keeping alive market expectations for a near-term interest rate hike by the central bank.

Rising global commodity costs and a phase-out of gasoline and fuel subsidies also pushed up wholesale prices, the data showed, a sign of heightening inflationary pressure.

The data will be among factors the Bank of Japan (BOJ) will scrutinise at its next policy meeting on July 30-31, when the board will release fresh growth forecasts and debate whether to raise interest rates from current near-zero levels.

The corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, rose 2.9 per cent in June from a year earlier, BOJ data showed, matching a median market forecast.

It accelerated from the previous month's revised 2.6 per cent gain and rose at the fastest year-on-year pace since August 2023. The index, at 122.7, hit a record high for the seventh straight month.

The yen-based import price index climbed 9.5 per cent in June from a year earlier, accelerating from a revised 7.1 per cent rise in May, in a sign the weakening currency was inflating the price companies charge each other for imported raw material. The pace of increase in the index was the fastest since February 2023.

"Import prices are likely to keep rising due to sustained yen declines and elevated energy prices," said Yutaro Suzuki, an economist at Daiwa Securities.

"Inflation may accelerate toward autumn reflecting the impact of yen falls since the start of this year, which will be critical to the BOJ's decision on when to hike rates," he said.

The BOJ ended eight years of negative interest rates and other remnants of its massive stimulus in March, taking a landmark step toward normalising ultra-loose monetary policy.

BOJ Governor Kazuo Ueda has said the central bank will raise interest rates if it becomes more convinced that Japan was on track to durably hit its 2 per cent inflation target.

He has also said the BOJ will take "monetary policy action" if yen moves have a big impact on inflation, a view echoed by BOJ board member Seiji Adachiin late May.

Source:Reuters

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Alex

Central Bank

Economic

Overview

The Reserve Bank of New Zealand (RBNZ) is not far off cutting interest rates, as long as domestic inflationary pressures allow. That means next week’s June quarter consumer price inflation report could sow the seeds for the RBNZ to begin lowering rates as soon as August. NZD/USD has fallen heavily in response.

RBNZ unleashes the doves

The RBNZ set the tone for the policy statement early, choosing the headline “Inflation Approaching Target Range” as opposed to “Official Cash Rate to remain restrictive” in May.

Fitting with the dovish tweak, the RBNZ said restrictive monetary policy had “significantly reduced consumer price inflation”, a noticeable deviation from six weeks ago when it stated it had simply “lowered” inflation. It now expects headline inflation will return to within its 1-3% target range in the second half of the year, less specific than May when it forecast the end of the calendar year. Again, another step towards rate cuts.

The were dovish remarks sprinkled throughout the statement with the committee noting “government spending will restrain overall spending in the economy” while there were “signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions.” Two new and important additions relative to views communicated six weeks earlier.

While the RBNZ continued to suggest that policy needs to remain restrictive, it put a caveat on that guidance, acknowledging “the extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures”.

Rate cuts loom in New Zealand

With price stability being the RBNZ’s primary mandate, that essentially translates to when it sees further evidence that it will meet its mandate, it will reduce the level of restriction. That means rate cuts.

It also means the RBNZ could be easing as soon as next month should it find that evidence in next Wednesday’s June quarter consumer price inflation report. Interest rates markets think so, shifting the probability of a cut on August 14 from around a one-in-three chance to now being more likely than not.

New Zealand two-year interest rate swaps which are heavily influenced by RBNZ rate expectations plunged following the statement, tumbling 13 basis points to 4.665% as at the time of writing, well below the 5.5% current cash rate.

NZD/USD plunge stalls at 200DMA

NZD/USD fell sharply on the dovish RBNZ shift, losing as much as 0.8% before stalling ahead of the 200-day moving average at .60728, an important level that has encouraged buying in the past. Below, .6050 is the next layer of support before a trip back into the 50c region looms. Above, resistance is found at .6105, .6150 and .6218.

While the momentum is to the downside, I wonder whether it’ll stick. On Thursday we receive the next US consumer price inflation report for June. If we see another soft underlying print of 0.2% or less, it’s likely the Fed will join the RBNZ in shifting towards a less restrictive stance. If the Fed signals looming rates cuts, it’s doubtful NZD/USD will be trading lower.

Source：forex.com

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Samantha Luan

Economic

Stocks

Most Asian stocks kept to a tight range on Wednesday as markets digested mixed inflation prints from China and Japan, while focus remained on when the Federal Reserve could begin trimming interest rates.

Regional stocks took middling cues from Wall Street, where gains in technology stocks saw the S&P 500 and the NASDAQ Composite just about hit new peaks. But Wall Street’s pace of gains was slowing.

U.S. stock index futures were flat in Asian trade, as investors digested a testimony by Fed Chair Jerome Powell. Powell noted some cooling in the economy, but gave no clear signals on when the central bank could begin cutting rates. Still, traders were seen maintaining bets on a September cut.

Powell is set to testify further on Wednesday, while focus is also on key U.S. inflation data this week.

Asian markets grappled with mixed inflation prints from China and Japan.

Japanese stocks stall at record highs on mixed PPI inflation

Japan’s Nikkei 225 index moved sideways on Wednesday, briefly hitting a record high of 41,777.50 points, while the broader TOPIX rose 0.2% and also briefly hit a record high.

Recent gains in Japanese markets were fueled largely by foreign buying, amid sharp declines in the yen and as investors bet on a dovish outlook for the Bank of Japan.

But data on Wednesday showed Japanese producer price index inflation picked up slightly in June, with the year-on-year rate rising to 2.9%.

But month-on-month PPI inflation grew less than expected at 0.2%.

The reading indicated that while Japanese inflation was increasing, it still remained sluggish, raising doubts over whether it could eventually pressure the BOJ into tightening policy further.

Chinese stocks mixed as CPI data disappoints but PPI improves

China’s Shanghai Shenzhen CSI 300 index rose 0.2%, while the Shanghai Composite fell 0.1%. Hong Kong’s Hang Seng index jumped 0.8% as it rebounded from over two-month lows.

Chinese consumer price index inflation shrank in June from the prior month, as consumer spending weakened amid persistent concerns over an economic recovery.

But PPI inflation shrank at its slowest pace in 16 months, indicating that China’s factories were benefiting from persistent government stimulus measures.

Still, Wednesday’s data showed that China’s overall disinflationary trend remained in play, inspiring little confidence in the country. Chinese stocks were nursing steep losses in recent weeks as fears of a trade war with the West eroded sentiment.

Chinese trade data, due Friday, is now in focus.

Broader Asian markets moved in a flat-to-low range as optimism over U.S. interest rate cuts cooled.

Australia’s ASX 200 index fell 0.3%, while South Korea’s KOSPI sank 0.2%.

Futures for India’s Nifty 50 index pointed to a mildly positive open, as the index and the BSE Sensex 30 continued to notch record highs on persistent confidence in India’s economy, which is the fastest growing major economy in the past two years.

Source：Investing

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Alex

Economic

Stocks

Asian shares fluctuated on Wednesday following fresh highs for US equities as traders parsed comments from Federal Reserve Chairman Jerome Powell about the US economic picture.

MSCI’s Asia-Pacific gauge slipped, though more stocks were up than down. Hong Kong and Japanese equities rose, while those in Australia, South Korea and mainland China fell. US and European equity futures inched higher.

China’s consumer prices eked out another small gain in June, hovering near zero for a fifth month, a sign that deflationary pressures continue to impede an economic recovery. Factory-gate prices remained stuck in deflation.

The S&P 500 advanced for a sixth consecutive session on Tuesday, its longest winning streak since January, as traders held to bets the Fed will cut rates this year. The Nasdaq 100 also set a record.

Powell was careful not to offer a timeline for rate cuts in comments to lawmakers on Tuesday. However, he emphasized mounting signs of a cooling job market after government data showed a third straight month of rising unemployment. Shorter-term Treasuries outperformed on bets they would more likely benefit from policy easing. China Stocks Eye Gains; S&P 500 Steady On Powell_1

China Stocks Eye Gains; S&P 500 Steady On Powell_1

In his comments, Powell said regulators are close to agreeing to change their plan to force big banks to hold significantly more capital - a major win for Wall Street lenders. The overhaul is tied to Basel III, an international accord that followed the 2008 financial crisis and is intended to prevent bank failures and another crunch.

The rhetoric “continued to move toward preparing the market for a cut in rates later this year,” said Michael Feroli at JPMorgan Chase & Co. “Powell largely stuck to the script when it came to the economy.”

Elsewhere, the Reserve Bank of New Zealand held interest rates steady. Australian bonds fell in early trading, echoing moves in long-dated Treasuries.

Bond traders are getting ready for China to start pushing back on record-low yields, with the central bank now armed with “hundreds of billions” of yuan of securities at its disposal to sell.

China Vanke Co. stock fell after the homebuilder warned that losses grew substantially in the second quarter. Shares in Samsung Electronics Co were little changed after the company’s largest labor union declared an indefinite strike. The union is currently staging a three-day strike that began Monday.

Baidu Inc. shares rose as much as 11% in Hong Kong, following an 8.5% gain in the US-traded stock. The company’s robotaxi Apollo Go is gaining popularity in China.

Treasuries pared losses after a solid $58 billion sale of three-year notes, though a rout in European bonds kept a lid on the market. Swap traders continued to project two rate cuts in 2024.

Currencies held to muted moves. A gauge of dollar strength was rangebound, while the yen weakened against the greenback. An index of emerging markets currencies was little changed Tuesday.

Treasury Secretary Janet Yellen said the labor market is no longer driving inflation in the US economy to the extent it was earlier in the pandemic recovery, echoing earlier comments by Powell.

In Asia, Japan’s largest banks called on the Bank of Japan to make deep cuts to its monthly bond purchases during hearings of market participants at the central bank, according to people who attended.

Tech Rally

Wall Street has tilted toward the tech sector to a historic degree, raising the stakes should the artificial intelligence-fueled rally falter. Valuations are stretched, while earnings growth is poised to slow from here.

That adds to uncertainty for investors betting that Big Tech’s rally will continue, according to Lisa Shalett at Morgan Stanley’s wealth management unit, who warns of “stretched momentum, weak breadth and complacency” in the market.

The rally in artificial-intelligence stocks may show little sign of flagging, but a historical review suggests it’s time to take profit in the biggest names, according to strategists at Citigroup Inc. led by Drew Pettit. Sentiment toward AI-exposed equities is the strongest since 2019 and free cash flow at the bulk of those firms is forecast to outstrip analyst expectations, they said.

Source:Bloomberg

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FastBull Featured

Daily News

[Quick Facts]

1. Powell signals a subtle but important shift.

2. WSJ's Timiraos says Powell inches the Fed closer to cutting rates.

3. U.S. retailers accelerate restocking ahead of the holiday season.

4. Institutions see Powell's speech as signal of no rate cut before Nov.

5. Putin and Modi issue a joint statement, emphasizing the peaceful resolution of the conflict in Ukraine through talks.

[News Details]

Powell signals a subtle but important shift

Federal Reserve Chairman Jerome Powell delivered his semi-annual monetary policy testimony to the Senate on July 9. Powell said a wide range of indicators suggest that labor market conditions have returned to pre-pandemic levels - strong but not overheated.

It would not be appropriate to cut rates until we have gained more confidence that inflation is moving sustainably toward 2%. The data for the first quarter of this year did not support such greater confidence. The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%.

We will continue to make decisions meeting by meeting. In considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully assessing incoming data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy.

In the following Q&A session, Powell repeatedly dodged questions from members of Congress about specific rate-cut timing, saying he would not send any signals about the timing of future actions.

WSJ's Timiraos says Powell inches the Fed closer to cutting rates

Federal Reserve Chair Jerome Powell on Tuesday said the trade-offs between bringing inflation down and maintaining a solid labor market are changing – a subtle but important shift that moved the central bank closer to lowering interest rates, said Nick Timiraos, chief economics correspondent for The Wall Street Journal (WSJ).

"Elevated inflation is not the only risk we face," Powell said, "We've seen the labor market cool significantly, so it's not the source of the inflationary pressures that are prevailing in the economy." That assessment is notable because Fed officials have long argued that an overheated labor market is the main risk to the process of disinflation.

Powell acknowledged that he would not make such a judgment two months ago. Indeed, Powell was more cautious in his remarks at a meeting in Portugal last week before the U.S. Labor Department released the June jobs report.

U.S. retailers accelerate restocking ahead of the holiday season

Retailers are accelerating restocking ahead of the holiday season. The Global Port Tracker forecasts, published by the National Retail Federation (NRF), show that U.S. importers will import 2.21 million containers (in twenty-foot-equivalent units) in July, increasing by more than 15% from the same month last year. June's increase rate was more than 14%, and August's increase is expected to be more than 13%. The NRF estimates that year-on-year growth in imports by retailers will slow down in September and October, but monthly imports will remain above 2 million containers.

Institutions see Powell's speech as signal of no rate cut before Nov.

In his testimony before the Senate, Fed Chairman Jerome Powell did not send any signals about when the Fed might start cutting rates. He said instead that the decision would be made "meeting by meeting". However, this could be a sign that rate cuts will not come as quickly as the market expects.

Stephen Stanley, chief economist at Santander U.S. Capital Markets, said Fed officials usually let the market prepare for the next move. Powell's comments on a "meeting-by-meeting" basis certainly seem to rule out a rate cut at the next meeting in July, and a rate cut in September doesn't seem as certain as financial markets are currently pricing in. Stanley currently expects the Fed to cut rates for the first time in November.

Putin and Modi issue a joint statement, emphasizing the peaceful resolution of the conflict in Ukraine through talks

On July 9, Russian President Vladimir Putin and Indian Prime Minister Narendra Modi issued a joint statement after talks in Moscow, emphasizing the need for a peaceful resolution of the Ukraine conflict through talks. According to the statement, nine cooperation documents were signed between the two countries, mainly related to bilateral economic cooperation.

In the course of the talks, the leaders of the two countries talked about the main elements of bilateral strategic cooperation until 2030, setting the goal of increasing the Russian-Indian trade to $100 billion by 2030. The two sides also discussed the development of joint production in the defense sector. Putin and Modi agreed to further develop the bilateral settlement system between the two countries through the use of their national currencies.

[Today's Focus]

UTC+8 10:00 RBNZ Interest Rate Decision (Jul)

UTC+8 16:00 ECB Governing Council Member Nagel Speaks

UTC+8 21:30 Bank of England Chief Economist Pill Speaks

UTC+8 22:00 Fed Chair Powell Delivers His Semi-annual monetary policy testimony to the House Financial Services Committee

UTC+8 02:30 Chicago Fed President Goolsbee Speaks

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Alex

Economic

Commodity

Global oil demand will outpace supply next year, the U.S. Energy Information Administration said on Tuesday, reversing a prior forecast for a surplus.

The change came after OPEC and its allies, collectively known as OPEC+, extended most of their deep oil output cuts into next year at a meeting last month. The producer group has been restricting output since late 2022 to shore up oil markets in the face of weakening demand growth, high interest rates and record U.S. output.

If the market goes into a deficit, refiners will need to drain oil from inventories to meet demand.

The deficit will be smaller next year than this year, the EIA said. Global oil demand will average about 104.7 million barrels per day (bpd) next year, while supply will be around 104.6 million bpd, the EIA said in its monthly short-term energy outlook.

The EIA pegged global demand at around 104.5 million bpd and supply at 104.7 million bpd and in its previous forecast.

Lower OPEC+ output is also deepening the supply deficit through the rest of this year, EIA projections showed. World oil demand will exceed output by around 750,000 barrels per day in the second half of 2024, based on EIA's outlook.

Its earlier forecasts showed a smaller deficit of about 550,000 bpd in the second half this year.

Withdrawals from global inventories will push oil prices higher, EIA said. Global benchmark Brent crude prices will average $89 a barrel in the second half this year, up from $84 a barrel in the first half, it said.

The market could flip to a surplus again from the third quarter of next year if OPEC+ unwinds production cuts, the EIA said. The producer group said last month that it would slowly unwind some voluntary cuts from October.

"We anticipate that the market will gradually return to moderate inventory builds in 2025 after the expiration of voluntary OPEC+ supply cuts in 4Q24 and after forecast supply growth from countries outside of OPEC+ begins to offset growth in global oil demand," EIA said.

U.S. oil output will grow by 320,000 barrels per day this year to a record of 13.25 million bpd, slightly more than its previous forecast of 13.24 million bpd, EIA said.