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The Daily Fix: Eyeing modest weakness in Asian equities

Chris Weston
Head of Research
17 Feb 2020
We start the week eyeing modest weakness in Asian equities, with growth dynamics firmly in focus.

Although, earnings will start to get greater attention for those trading the ASX200, where a handful of names start the ball rolling on 1H earnings season.

Interbank FX markets have opened on a sanguine footing, with no meaty weekend news to spark life into G10 FX. Although, we’re seeing small buyers of AUD, which is following the move from USDCNH, with traders reviewing their coronavirus hedges after Wang Xinhuan, head of the Wuhan Leishenshan hospital, detailed on state TV that a turning point has been reached. Keep USDCNH on the radar, as an upside break of 7.0122, should it play out, would be the trigger for AUDUSD to retest 67c, with the AUD once again moving inversely to USDCNH.

Red – USDAUD, white – USDCNH
Source: Bloomberg

The roll down into weaker economics, stemming from China’s growth prospects and supply chains, is yet to fully play out in the data, although liquidity and central bank offsets are still supportive for risk. One suspects that as long as implied vol stays subdued, credit spreads don’t blow out too aggressively, and equities remain bought on pullbacks, then carry will remain a standout thematic in FX and we stay bullish on the MXN as a primary vehicle here.

Data on the docket today

Through trade today though we see Japanese Q4 GDP, which is expected to contract 3.8% (annualised, seasonally adjusted), while industrial production will be seen later in the day. Singapore January exports (consensus eyeing electronic exports -10.5% YoY, non-oil exports -3.2%) are due, with Thailand’s Q4 GDP (2%) and Indonesia (Jan) trade data (imports -4.9%, exports +1.4%) also in play. All economies closely linked to China, even if it’s the February data is where we should see the brunt of the impact from the world's actions to limit the spread of the virus.

Whether these data points influence market sentiment is yet to be seen, but it feels a tall order to believe any of these cause a sudden jolt to markets. Weak numbers could plant a seed, especially ahead of this week’s Korean trade data and European and German PMI data, all of which could show deterioration. I guess this scenario leads to higher prospects of stimulus though, both at a monetary and fiscal level and could reinforce the idea that for now, the US is the best place to park your capital. It’s also not hard to see why we saw a massive $23.6b of inflows into fixed income and ETF funds last week (the most since 2001), and why after pushing up to 38bp we now see the US 3m vs 10yr Treasury curve threatening to become inverted again, with the rates market now pricing 41bp of cuts over the coming 12 months. A break of 1.50% in US 10s would be telling.

Gold making moves

Gold looks interesting here, with price (in USDs) pushing into the top Bollinger band as well as the highs esculents of the $1590 to $1550 range. We see real and nominal bonds yields once again in EUR terms (XAUEUR) has been well traded, with EURUSD sold into any strength and we’ve seen price make a lower low for nine straight days. With the weekly Commitment of Traders report showing EUR net shorts hitting 85,669 contracts and into the 27th percentile (of the 12-month range), there is no doubt EUR is on the radar for counter-trend traders who see the EUR as grossly oversold. I see EURUSD 1-month implied put vols trading at a 0.29 vols difference to calls – the most since September.

Weekly CoT report
weekly chart report

We’re seeing small buyers of EURs on open this morning, but until price can forge a daily close above the 5 or 7-day EMA then EURUSD heads lower and EUR-denominated gold longs will work.

Nevada caucus due on Saturday

US politics and the November election are not causing any real need to hedge, especially given the markets belief that the Republicans have this in the bag. We watch for this weekend's Nevada caucus, as this is a solid representation of Super Tuesday (3 March), so it will be interesting to see how well Sanders performs here and if there is any subsequent reaction in gold should he take this home, which is what the polls are suggesting.

What would be the trigger for a EUR rally though? I guess it would have to come from risk aversion, promoting a part unwind of carry positions or any belief that this Fridays EU PMI’s could come in above expectations. We shall see but our EUR flow has perked up on the long side and retail traders are looking for a slight snapback of sorts.

We have eyes on the crude open too, after WTI crude closed 1.2% on Friday and holds a 52-handle. The correlation with the CAD has picked up too, so should oil build on last week's move then CAD should outperform.

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