Home / Asia / Asia Open: Stage 3, timing a potential turning point is “easier said than done.”
Asia Open: Stage 3, timing a potential turning point is “easier said than done.”

Asia Open: Stage 3, timing a potential turning point is “easier said than done.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.

8em)–sm” type=”text” content=”The first stage of the market fallout from the virus outbreak was about positioning adjustment. The second stage, which is the reaction to policy guidance, has been underway since last Monday when the PBoC began turning the stimulus taps on.

The third step, timing a potential turning point for Asia macro, however, remains less clear, pending clarity on peak virus outbreak, and broader appraisal of the economic fallout above and beyond just tourism. So, with the thought that global central banks are more than willing to cover the markets’ back, the extent to which investors look through weak China data in the coming weeks will help determine whether a rebound trade has the legs to run.

” data-reactid=”11″>The first stage of the market fallout from the virus outbreak was about positioning adjustment. The second stage, which is the reaction to policy guidance, has been underway since last Monday when the PBoC began turning the stimulus taps on.

The third step, timing a potential turning point for Asia macro, however, remains less clear, pending clarity on peak virus outbreak, and broader appraisal of the economic fallout above and beyond just tourism. So, with the thought that global central banks are more than willing to cover the markets’ back, the extent to which investors look through weak China data in the coming weeks will help determine whether a rebound trade has the legs to run.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.

8em)–sm” type=”text” content=”China returns from the holidays with global equity markets trading on the back foot. But the decline in comprehensive economic data concerning the extent China’s economy comes back on-line should not be underestimated.

On the one hand, coronavirus cases and deaths have stabilized. In contrast, some companies (e.

g., Toyota, Foxconn) have announced they will remain shut even after the end of the lunar year-end holiday.

” data-reactid=”12″>China returns from the holidays with global equity markets trading on the back foot. But the decline in comprehensive economic data concerning the extent China’s economy comes back on-line should not be underestimated.

On the one hand, coronavirus cases and deaths have stabilized. In contrast, some companies (e.

g., Toyota, Foxconn) have announced they will remain shut even after the end of the lunar year-end holiday.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.

8em)–sm” type=”text” content=”US equities were weaker Friday, as a robust;;;a href=https://www.fxempire.

com/macro/united-states/non-farm-payrolls rel=nofollow noopener target=_blankUS payrolls/a report was unable to deflect renewed concerns around the coronavirus. Traders moved into sell first, ask question later mode when Singapore;a href=https://www.

straitstimes.com/singapore/coronavirus-outbreak-alert-upped-to-orange-as-more-cases-surface-with-no-known-links-more target=_blank rel=nofollow noopenerraised its alert level;/aafter three cases of the virus were confirmed.

At the same time, in the US,;a href=https://edition.cnn.

com/2020/02/07/us/coronavirus-cruise-ship-new-jersey/index.html target=_blank rel=nofollow noopenerfour passengers from a cruise ship;/adocked in New Jersey were hospitalized on coronavirus concerns, which continues to raise fast-spread virus concerns beyond China borders.

” data-reactid=”13″>US equities were weaker Friday, as a robust   US payrolls report was unable to deflect renewed concerns around the coronavirus. Traders moved into sell first, ask question later mode when Singapore raised its alert level after three cases of the virus were confirmed.

At the same time, in the US, four passengers from a cruise ship docked in New Jersey were hospitalized on coronavirus concerns, which continues to raise fast-spread virus concerns beyond China borders.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”While a more fundamental issue is one about how much the market can believe the data.

But knowing that the damage is done in China, and the virus data seems to be peaking, so the numbers that the market is apt to take most at face value are the infections outside China, and in particular, the relatively low mortality rates. Which should be viewed positively” data-reactid=”14″>While a more fundamental issue is one about how much the market can believe the data.

But knowing that the damage is done in China, and the virus data seems to be peaking, so the numbers that the market is apt to take most at face value are the infections outside China, and in particular, the relatively low mortality rates. Which should be viewed positively

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”On Sunday, data was released, indicating there is a downward trend in newly reported coronavirus cases in China.

If the numbers are accurate, and the Zhong Nanshan scenario holds implying peak virus would hit last week, that would be tremendously useful news fore regional health concerns and then, of course, for local markets. This could see some long USDASIA gamma flush this morning and provide some relief to China proxies” data-reactid=”15″>On Sunday, data was released, indicating there is a downward trend in newly reported coronavirus cases in China.

If the numbers are accurate, and the Zhong Nanshan scenario holds implying peak virus would hit last week, that would be tremendously useful news fore regional health concerns and then, of course, for local markets. This could see some long USDASIA gamma flush this morning and provide some relief to China proxies

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”However, commodities remain laggards with some Chinese importers even starting to declare force majeure.

And ;China growth-proxy currencies like the a href=https://www.fxempire.

com/markets/aud-usd/overview rel=nofollow noopener target=_blankAUD/a closed at its lowest level since March 2009 on Friday after;a href=https://www.forexlive.

com/centralbank/!/rba-gov-lowe-on-coronavirus-large-risk-to-australian-economy-20200206 target=_blank rel=nofollow noopenerRBA Governor Lowe/a;cited a higher risk to growth from the coronavirus compared to SARS.” data-reactid=”16″>However, commodities remain laggards with some Chinese importers even starting to declare force majeure.

And  China growth-proxy currencies like the AUD closed at its lowest level since March 2009 on Friday after RBA Governor Lowe cited a higher risk to growth from the coronavirus compared to SARS.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”Beyond the China narrative, there has been an increased demand for TWSE index protection.

In Japan, price action was heavily skewed lower led by internet, financials, electrical appliances. And Australian, “macro sensitive” mining stocks went on offer.

” data-reactid=”17″>Beyond the China narrative, there has been an increased demand for TWSE index protection. In Japan, price action was heavily skewed lower led by internet, financials, electrical appliances.

And Australian, “macro sensitive” mining stocks went on offer.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”While outside of equities, Iron Ore bulls reduced longs, and fast money sold copper and bought Silver.

” data-reactid=”18″>While outside of equities, Iron Ore bulls reduced longs, and fast money sold copper and bought Silver.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”This week will be a bit of gut-check time for those playing the Asia macro rebound trade.

But while a plethora of uncertainties remains, one sure thing is that the mother of all stimulus measures will get laid down by the PBoC, but will it be enough remains the question as no one appears in much of a rush to put risk back on out of the gates this morning.” data-reactid=”19″>This week will be a bit of gut-check time for those playing the Asia macro rebound trade.

But while a plethora of uncertainties remains, one sure thing is that the mother of all stimulus measures will get laid down by the PBoC, but will it be enough remains the question as no one appears in much of a rush to put risk back on out of the gates this morning.

Oil markets<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”One might be wrong to think that there is no more downside for oil, now that a href=https://www.

fxempire.com/markets/brent-oil/overview rel=nofollow noopener target=_blankBrent/a has reached the lower 50’s.

The market is struggling with yesterday’s proposal from OPEC’s Joint Technical Committee for an additional 600kb/d cut from the OPEC+ alliance that would run at least through mid-year. Which has failed to alleviate the pressure on oil, in part because the proposal has yet to be formally discussed by OPEC ministers and because Russia continues to push back against further cuts? And if the cartel fails to reach an agreement, there will be more pain to come in oil downside.

” data-reactid=”41″>One might be wrong to think that there is no more downside for oil, now that Brent has reached the lower 50’s. The market is struggling with yesterday’s proposal from OPEC’s Joint Technical Committee for an additional 600kb/d cut from the OPEC+ alliance that would run at least through mid-year.

Which has failed to alleviate the pressure on oil, in part because the proposal has yet to be formally discussed by OPEC ministers and because Russia continues to push back against further cuts? And if the cartel fails to reach an agreement, there will be more pain to come in oil downside.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”There is a clear fundamental cause of why oil prices may settle lower.

Demand is not sufficiently responsive enough to lower prices, and outside of OPEC, only US tight oil stands as the most quickly responsive supply to prices. In order to make a dent in global oil supplies , US drilling activities need to fall.

In this scenario, a href=https://www.fxempire.

com/markets/crude-oil/overview rel=nofollow noopener target=_blankWTI/a prices may need to drop below USD 47/bbl for a lengthy period. And the demand devastation of gigantic proportions like what’s happening in China could set the stage for a shift in oil prices towards those critical break evens before relief sets in.

” data-reactid=”58″>There is a clear fundamental cause of why oil prices may settle lower. Demand is not sufficiently responsive enough to lower prices, and outside of OPEC, only US tight oil stands as the most quickly responsive supply to prices.

In order to make a dent in global oil supplies , US drilling activities need to fall. In this scenario, WTI prices may need to drop below USD 47/bbl for a lengthy period.

And the demand devastation of gigantic proportions like what’s happening in China could set the stage for a shift in oil prices towards those critical break evens before relief sets in.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”But what continues to be absent in the Oil narrative these days is bearish for oil case is that OPEC’s total of the oil market has fallen to 35%, they no longer have a monopoly on oil prices suggesting even with OPEC production cut those non-OPEC nations with low break-evens could still pump and monetize barrels.

” data-reactid=”59″>But what continues to be absent in the Oil narrative these days is bearish for oil case is that OPEC’s total of the oil market has fallen to 35%, they no longer have a monopoly on oil prices suggesting even with OPEC production cut those non-OPEC nations with low break-evens could still pump and monetize barrels.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”And while there is a rationale for “strongemnyet/em/strong,” as Russia break evens are much lower.

As Alexander Novak, who threw cold water on hopes for a short-term OPEC cut, even a “strongemdah”/em/strong response still might not be sufficient enough compliance response.” data-reactid=”60″>And while there is a rationale for “nyet,” as Russia break evens are much lower.

As Alexander Novak, who threw cold water on hopes for a short-term OPEC cut, even a “dah” response still might not be sufficient enough compliance response.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”Let’s not try to sugar coat things here, with a chunk of China’s industrial complex have been shuttered for an extended beyond LNY; we’re headed for one of the worst Q1 economic growth periods on record.

With a significant haircut yet to be completely factored into the equation, so for the finely tuned global oil supply balances, it could be devastating if the data comes in worse than expected.” data-reactid=”61″>Let’s not try to sugar coat things here, with a chunk of China’s industrial complex have been shuttered for an extended beyond LNY; we’re headed for one of the worst Q1 economic growth periods on record.

With a significant haircut yet to be completely factored into the equation, so for the finely tuned global oil supply balances, it could be devastating if the data comes in worse than expected.

Gold markets<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”Investors should continue to favor more defensive fixed income and, therefore, long gold positions until the impact of nCoV on growth becomes apparent.

But its what brings the Fed into play is the real question for gold bulls, and it’s probably not going to be the coronavirus.” data-reactid=”63″>Investors should continue to favor more defensive fixed income and, therefore, long gold positions until the impact of nCoV on growth becomes apparent.

But its what brings the Fed into play is the real question for gold bulls, and it’s probably not going to be the coronavirus.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”strongCurrency Markets/strong” data-reactid=”80″>Currency Markets

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”strongAsia FX;/strong” data-reactid=”81″>Asia FX 

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”emThe Malaysian Ringgit/em” data-reactid=”82″>The Malaysian Ringgit

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”The a href=https://www.

fxempire.com/markets/myr-usd/overview rel=nofollow noopener target=_blankMalaysia Ringgit/a remained under pressure on general Asia de-risking.

But after the rate cut last month, the market is pricing the BNM, delivering another reduction in H1, mainly as the virus weighs on growth via tourism, consumption, as well as to defend against the potential disruption in the supply chain linkages with China.” data-reactid=”83″>The Malaysia Ringgit remained under pressure on general Asia de-risking.

But after the rate cut last month, the market is pricing the BNM, delivering another reduction in H1, mainly as the virus weighs on growth via tourism, consumption, as well as to defend against the potential disruption in the supply chain linkages with China.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”emThe Thai Baht/em” data-reactid=”84″>The Thai Baht

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”There are a number of reasons why the a href=https://www.

fxempire.com/markets/thb-usd/overview rel=nofollow noopener target=_blankThai currency/a is vulnerable, the most apparent being coronavirus’s drag on tourism – a significant contributor to Thailand’s GDP.

But there are others; a deterioration in domestic banks’ credit,;a href=https://www.bangkokpost.

com/business/1852254/ptt-drought-likely-to-limit-production target=_blank rel=nofollow noopenerdrought/a, and currency outflows via a potential Tesco supermarket deal, to name a few.” data-reactid=”85″>There are a number of reasons why the Thai currency is vulnerable, the most apparent being coronavirus’s drag on tourism – a significant contributor to Thailand’s GDP.

But there are others; a deterioration in domestic banks’ credit, drought, and currency outflows via a potential Tesco supermarket deal, to name a few.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”emThe Basket;/em” data-reactid=”86″>The Basket 

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”Asia currency markets have been remarkably orderly thanks to the PBoC, who continue to lay monetary policy and verbal intervention on thick and heavy.

Last People’s Bank of China’s Deputy Governor Pan says they will boost counter-cyclical adjustments and keep markets stable while hinting at addition MLF and LPR cut in February.” data-reactid=”87″>Asia currency markets have been remarkably orderly thanks to the PBoC, who continue to lay monetary policy and verbal intervention on thick and heavy.

Last People’s Bank of China’s Deputy Governor Pan says they will boost counter-cyclical adjustments and keep markets stable while hinting at addition MLF and LPR cut in February.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”Still, there was a surprising degree of risk complacency — at least, that was the case until Friday, when gamma caught a bid tone across the board in G10 and USDAsia as investors don’t want to be caught out in the event of any escalation of the coronavirus outbreak over the weekend.

Cross currency traders bid up both a href=https://www.fxempire.

com/markets/usd-cnh/overview rel=nofollow noopener target=_blankUSDCNH/a and a href=https://www.fxempire.

com/markets/usd-krw/overview rel=nofollow noopener target=_blankUSDKRW/a as the primary currency hedge against coronavirus risk. The market seems keen on owning low-yielder Asia gamma as those pairs have shown higher beta to virus news rather than the higher-yielding a href=https://www.

fxempire.com/markets/usd-inr/overview rel=nofollow noopener target=_blankUSDINR/a, a href=https://www.

fxempire.com/markets/usd-idr/overview rel=nofollow noopener target=_blankUSDIDR/a, and a href=https://www.

fxempire.com/markets/usd-php/overview rel=nofollow noopener target=_blankUSD PHP/a.

” data-reactid=”88″>Still, there was a surprising degree of risk complacency — at least, that was the case until Friday, when gamma caught a bid tone across the board in G10 and USDAsia as investors don’t want to be caught out in the event of any escalation of the coronavirus outbreak over the weekend. Cross currency traders bid up both USDCNH and USDKRW as the primary currency hedge against coronavirus risk.

The market seems keen on owning low-yielder Asia gamma as those pairs have shown higher beta to virus news rather than the higher-yielding USDINR, USDIDR, and USD PHP.

G-10 Markets<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”emThe Australian dollar/em” data-reactid=”90″>The Australian dollar

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”a href=https://www.

fxempire.com/markets/aud-usd/overview rel=nofollow noopener target=_blankAUDUSD/a vols and risk reversals jumped higher Friday as spot head lower (closely tracking USDCNH).

But with the policy PBoC policy stimulus pump about to hose down the market and with Eurozone getting ready to spend more to boost the flagging economy, commodities could get a little bit perky. But it remains challenging being the only person in the room supporting that trade this morning as the focus remains on coronavirus fear.

” data-reactid=”91″>AUDUSD vols and risk reversals jumped higher Friday as spot head lower (closely tracking USDCNH). But with the policy PBoC policy stimulus pump about to hose down the market and with Eurozone getting ready to spend more to boost the flagging economy, commodities could get a little bit perky.

But it remains challenging being the only person in the room supporting that trade this morning as the focus remains on coronavirus fear.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”emThe Euro;/em” data-reactid=”92″>The Euro 

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”The a href=https://www.

fxempire.com/markets/eur-usd/overview rel=nofollow noopener target=_blankEuro/a continues to languish through the Risk on-risk off (RoRo) cycle.

There is no haven appetite as Europe has the developed world’s lowest real yields. But when risk appetite turns on, because of those low yields, the Euro becomes the world’s best funder as everyone short trades the Euro to fund those EM carry trades.

It’s a continuous cycle of “lose-lose” for the Euro in a “RoRo” environment.” data-reactid=”93″>The Euro continues to languish through the Risk on-risk off (RoRo) cycle.

There is no haven appetite as Europe has the developed world’s lowest real yields. But when risk appetite turns on, because of those low yields, the Euro becomes the world’s best funder as everyone short trades the Euro to fund those EM carry trades.

It’s a continuous cycle of “lose-lose” for the Euro in a “RoRo” environment.

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”Carry Trades” data-reactid=”94″>Carry Trades

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”Besides, the RoRo real yields are a significant driver of currencies at the moment.

In a “risk parity,” world currencies with high real yields (high rates, low inflation) are a desirable destination for bond inflows and might stay healthy (Indonesia, Mexico). Those currencies with meager returns become engaging funders and could weaken.

(a href=https://www.fxempire.

com/markets/sgd-usd/overview rel=nofollow noopener target=_blankSGD/a and the Euro)” data-reactid=”95″>Besides, the RoRo real yields are a significant driver of currencies at the moment. In a “risk parity,” world currencies with high real yields (high rates, low inflation) are a desirable destination for bond inflows and might stay healthy (Indonesia, Mexico).

Those currencies with meager returns become engaging funders and could weaken. (SGD and the Euro)

<p class="canvas-atom canvas-text Mb(1.

0em) Mb(0)–sm Mt(0.8em)–sm” type=”text” content=”This a href=https://www.

fxempire.com/forecasts/article/asia-open-stage-3-timing-a-potentialturning-point-is-easier-said-than-done-631969 rel=nofollow noopener target=_blankarticle/a was originally posted on FX Empire” data-reactid=”96″>This article was originally posted on FX Empire

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