What is good for the Hong Kong dollar is bad for property markets

The Hong Kong dollar on Friday posted its biggest gain against the US dollar since 2003, over concerns about tighter liquidity in the city, after the People’s Bank of China announced it would issue bills in the city.

“The issuance of PBOC bills in Hong Kong aims to enrich the spectrum of renminbi financial products of high credit rating in Hong Kong, improve the yield curve of renminbi bonds in Hong Kong and support the development of offshore renminbi business in Hong Kong,” the Chinese central bank said in a statement.

“There’s a stampede of unwinding of arbitrage trades, which is creating a domino effect of tighter liquidity,” said Jasper Lo, chief investment strategist at Eddid Securities and Futures. “It really is a historical day for the Hong Kong dollar.”

Lo said tighter liquidity would push up interest rates ahead of the expected interest rate increase by the US Federal Reserve next week.

The currency had been hovering near the weak end of its peg against the US dollar this year, forcing the HKMA to spend HK$95 billion to defend it in the currency markets.

Stephen Innes, head of trading at Oanda, said that while the market reaction had taken a tremendous amount of pressure off the currency peg, it was a worrisome sign for property investors nonetheless.

Liquidity at Hong Kong banks is likely to remain tight for the foreseeable future, until the PBOC’s intentions are clear, which would bring the soaring real estate prices in Hong Kong closer to a tipping point given the highly leveraged nature of the city’s property market.

“We are going to see more PBOC presence in Hong Kong money markets after the memorandum … and the PBOC will probably continue taping and draining the Hong Kong money markets and pushing rates, which is an ominous sign for property markets,” said Innes.

ASEAN currencies edge higher

Sept 21 (Reuters) – Asian currencies strengthened for the
third consecutive day on Friday, supported by a weaker dollar
and shifting views over how much damage the Sino-U.S. trade war
will inflict on global demand and export-reliant regional
economies.

The dollar index has fallen more than 1 per cent this
week. Analysts said investment flows are being diverted away
from the greenback to its peers such as emerging market
currencies as trade tensions have ebbed.
“A significant factor in adding to the current run of dollar
weakness is the drop on safe-haven appeal after China suggested
they won’t weaponise yuan in a trade war,” said Stephen Innes,
head of trading for Asia-Pacific at OANDA in Singapore.
“Regional risk is very steady supported by thriving global
equity markets, a slightly weaker dollar and a positive glean
that North Korea’s leader Kim Jung-un has asked for a second
summit with President Trump.”

 

Reuters

OANDA Trading Asia market closing note: HKMA in focus

EM sentiment continues to improve, and regional equities all in the green and USD broadly weaker. China complex in focus today following headlines that PBOC will issue bills via HKMA.

Hong Kong Dollar

The PBoC will via HKMA issue notes ( bills) Hong Kong. The market has interpreted this as one more tool to control liquidity in the offshore market, hence capping offshore spot upside.

Massive liquidation in long USDHKD positions sent liquidity tighter this morning as a pass-through from elevated funding rates following Pboc announcement to issue bills in Hong Kong, and the  CNH curve gapped much higher.

I guess are we going to see more Pboc presence in HK money markets after the memorandum of cooperation was signed between HKMA and the Pboc and will probably continue taping and draining the HK money markets and pushing rates?? Which is an ominous sign for property markets

While this takes a tremendous amount of pressure off the peg, but none the less a worrisome sign for property investors who given soaring real estate prices in Hong Kong are highly leveraged and remain at the mercy of floating HIBOR rates.

I suspect funding will remain tight for the foreseeable future until the Pboc intentions are fully vetted.

The other big discussion in Asia is  China reducing Import Tax

Reuters

Two significant takeaways, there could be a more bilateral trade with the rest of the world to compensate for increase tariff is one theory. However, if you look across Asia at the new iPhone release, I wonder just how much mainland consumer preference will change from what will amount to a 10 % increase on selected US products.

The other takeaway which is more significant in my view is that this tax break accelerates Mainland’s push to increase domestic demand and move off the reliance on traditional brick and mortars to stimulate the economy.

Finally, I think this a brilliant and measured response from Chinese authorities to not fight fire with more fire.

Abe re-election 

A good write up from our  local Singapore Senior Markets Analyst Andy Robinson

Yen at two-month low versus the dollar on Wall Street surge

OANDA Trading Podcast discussing Prime Minister Shinzo Abe’s third term win   on Singpore Money FM

Algiers in focus for oil traders

SEOUL (Reuters) – Oil prices were little changed on Friday after falling in the previous session as U.S. President Donald Trump urged OPEC to lower crude prices at its meeting in Algeria this weekend.

OPEC and its allies are scheduled to meet on Sunday in Algeria to discuss how to allocate supply increases to offset a shortage of Iran supplies due to U.S. sanctions.

Stephen Innes, head of trading for Asia-Pacific at OANDA in Singapore, said Trump’s remarks just days before the OPEC meeting put “a focus on the likely supply impacts of U.S.-led Iran sanctions.”

“The market had until that point been trading fluidly with the assumption that Saudi Arabia is now comfortable with Brent at $80 or even higher, which is challenging the market’s long-held supposition that prompt Brent between $70 and $80 was OPEC’s sweet spot,” Innes added.

 

Reuters

US-China trade war, yesterday’s news.?

US-China trade war, yesterday’s news.?

The US stock markets catapulted to a new record high on Thursday as investors continued to sidestep fears over the escalating global trade war and instead focused on a boomy American economy. And at least for today anyway, US-China trade war was yesterday’s news.

Make no mistake the US economy is running on all cylinders, robust growth, soaring employment and rising capital investments. Suggesting the healthy US economy is more than just a short-term knock-on effect from the intravenous elixir of easy credit and fiscal glucose. The US economy is thriving.

Oil Markets

And when you thought the ducks were aligning for a significant push higher in oil prices, enter President Donald with yet another timely twitter castigation of OPEC. Which comes just days before OPEC, Russia and non-OPEC partners meet in Algiers this weekend to review the state of the oil market, with a focus on the likely supply impacts of US-led Iran sanctions. Another case of President Trump having his cake and trying to eat it also, as its those US imposed sanctions on Iran and Venezuela that are causing the spike in oil!!

The market had until that point been trading fluidly with the assumption that Saudi Arabia is now comfortable with Brent at $80 or even higher, which is challenging the markets long-held supposition that prompt Brent between $70 and $80 was OPEC sweet spot.

But with significant support levels holding firm and sentiment is securely buttressed by Iran sanction, politically inspired dips in a bullish market will undoubtedly be bought. The problem, however, is we’re heading into a weekend where what was initially thought to be a meeting of OPEC steering committee to discuss Oil markets current affairs,  has morphed into an unofficial OPEC meeting with 20 + nations at the table, which means traders were going to profit take and reduce risk anyway. I guess President Trump brought forward that decision for traders  20 hours earlier than expected and perhaps the follow through a little thicker than anticipated.

So why the 1.5 % sell-off?

And while Saudi Arabia is revelling in these Iran sanctions, they are also worried that any sanctions-related, oil prices spike  will trigger fresh criticism from Trump, especially ahead of the November election where the blame for high energy prices will squarely fall on the Trump administration ramping up geopolitical risk, for the sake of a hawkish international policy mandate.

Indeed, Saudi Arabia does fear the ” wrath of Trump ” and are taking few chances with the longshot NOPEC bill lingering, but the real question is, even if they wanted to ramp up production, could they??

Gold Markets.
The precious complex is quiet while modestly reacting to the weaker dollar but surging US Bond yields are holding back speculators and not to mention there’s nary a hedger insight with US equity markets rising above all-time high-water marks.

Currency Markets

So where are the dollar bulls ?? more comfortable to short bonds in this market than to go long dollars, so look over at the bond desk!!

Indeed, a tangled web of confusion as USD remains doughy and while US yields didn’t lead overnight, they did hold stable support levels. Of course, the first discussion across our global trading desks was will the USD weakness linger. And the conclusion was a resounding maybe!! While the dollar was widely expected to wobble into the US midterm elections, I think that playbook trade has been brought forward by many factors that we will look at below. But ultimately USD should remain constructive post-midterms for no other reason than as the US economy is doing better than anyone else’s and the Feds will continue to raise interest rates.

The dollar leak

So modern-day forex desks are staffed by a compliment of the brightest kids, grizzled veterans and machine learning algorithms using 3000 data points, and still, no one can predict the course of the USD beyond 24 hours, well 8 hours to be exact in this market. So, forget trying to play long ball (6-month conjectures) and let’s look at some granularity that got us to the point this week where DXY/USGG10YR correlation has temporarily snapped.

EM markets have been catching the tailwind from CBT rate hike, CBR surprise rate hike, BI potential mandatory FX conversion for exporters and the RBI currency countermeasures. All of which contributed to taming the beast (USD) to various degrees. But a significant factor in adding to the current run of dollar weakness is the drop on safe-haven appeal after China suggested they won’t weaponise yuan in a trade war.

Yesterday the RBI stepped up their game as USDINR NDF fell abruptly this afternoon on wire reports suggesting RBI is studying the efficacy of taking oil companies USD demand away from the market. The state-run oil companies were now sourcing their entire dollar demand in markets, and the RBI is now considering opening a swap window to alleviate the pressure, something they have baulked at in the past.
Indeed, desperate times lead to drastic measures.

The Yuan rallied further on news that Mainland authorities are reportedly cutting import tax from most of its trading partners as soon as next month. Of course, the breadth and the actual tax % will be the key. Current estimates are the tax cut will be applied to around 1,500 consumer products. This move triggered more unwinding of trade war hedges as China will get creative to counter the adverse economic effects of US tariffs.

Trump constant attempt to undermine the Feds is also a distraction, as the markets knowing full well the Administration is lobbying for lower interest rates and a weaker USD in this trade war environment. None the less USD has put itself in the centre of discussion regarding what Fed Chair Powell is up to with Congress. Markets are chatty about this article  Bloomberg

And while the Forex markets have become a point for of frustration for some, overnights the price movements appear to be more related to USD haven hedge unwinds as opposed to any long-term structural adjustments the USD as the markets remain well within well-worn ranges.

G-10

The Euro

The EUR was toying with the market all week, and finally, the dollar bears got the bravado to take on the 1.1730 level which predictably triggered a cascading effect to 1.1780. So, with the USD bulls sidelined, short-term speculators seized the moment with the Euro Stoxx reaching a fresh all-time high and Bund yields moving higher pressed the 1.1730-50 zone and made a quick profit on the day.

The Japanese Yen

USDJPY is being carried higher by a higher NKY and higher USD rates

Asia FX
Regional Risk is very steady supported by thriving global equity markets a slightly weaker USD and a positive glean that North Korea’s leader Kim Jung-un has asked for a second summit with President Trump and has reportedly agreed to ‘verifiable’ dismantling of a missile testing site during the North/south summit.

Join me live at 8:30 AM SGT  discussing my views on   MONEY FM 89.3 Singapore   

 

 

Investors are snapping up Chinese Tech Stocks

Peer-to-peer online lender X Financial soared on its first day of New York trading, adding to a string of frenzied U.S. debuts by Chinese technology companies.

The company, based in the southern Chinese city of Shenzhen, more than doubled in early U.S. trading Wednesday. It later pared its gains to end the day 26 percent higher at $11.97. The company had raised $104.5 million after pricing its IPO at $9.50 per American depositary share, toward the bottom of the marketed range of $9 to $11.

“A lot of people are chasing this because, although the valuations are high, if we start to see a de-escalation in the overall trade wars, then obviously these companies are going to be safe bets,” said Stephen Innes, Singapore-based head of Asia Pacific trading with Oanda Corp. “Relative to what their counterparts in the U.S. are trading at, they’re actually not too bad.”

 

Bloomberg

OANDA Trading Asia market closing note:Lots of inflexion but a lack of direction

Lots of inflexion but a lack of direction

A day of inflexion in currency markets but we ended up with little direction.

Most of today was spent trying to find a reason, but with the USD looking battle worn and genuinely fatigued, dollar bulls are talking to the sidelines. While the US treasury yields approached the highest level for the year, the USD remains meek. But if the dollar cannot get a bump from higher US yields, where do we go??

Highlights:

NZD

New Zealand’s Q2 GDP surprised the street and printed 1% (0.8% expected). NZDUSD reacted from 0.6600 to 0.6650. Again proving you can never keep a good ” kiwi” down. But, another gut check for dollar bulls, who are falling by the wayside one by one.

Kiwi jumps on strongest growth in two years.

EUR

As London picks up the pace, the Euro finds itself back at that familiar 1.1700 teeter-totter level. Indeed, battle lines are getting drawn ahead of next week Fed meeting.

Asia FX

Everyone is dipping into the magic book of tricks to tame the effect of US tariffs and the strong USD

INR
USDINR NDF fell abruptly this afternoon on wire reports suggesting RBI is studying the efficacy of taking oil companies USD demand away from the market. The state-run oil companies were now sourcing their entire dollar demand in markets, and the RBI is now considering opening a swap window to alleviate the pressure, something they have baulked at in the past.
Indeed, desperate times lead to drastic measures.

China
Mainland authorities are reportedly cutting import tax from most of its trading partners as soon as next month. Of course, the breadth and the actual tax % will be the key. Current estimates are the tax cut will be applied to around 1,500 consumer products.

Oil Markets

WTI
Oil prices continued to firm throughout the day as the drop in US inventories coupled with the rise in exports suggests demand is robust.

Traders are banking on $80 Brent not being a near-term cap and have turned their targets higher. All supported by Saudi comments earlier in the week suggest that they are tolerant  to prices moving above that level

Iran sanction continues to provide the underbelly of support for oil prices.

The ducks are aligning for a push higher suggesting the ” “The bulls are back in charge,”

OANDA Trading Asia market closing note : Irrational exuberance ? YUAN

Irrational exuberance? YUAN

EM Asia currencies

The Yuan

Could be little more than a case of irrational exuberance as the markets have completely latched on to Premier Li Keqiang comments which, at the World Economic Forum, said China would not devalue the currency to stimulate exports and as one would expect the Australian dollar is getting taken along for the ride

Traders are positioning long USDCNH based a weaker RMB currency profile that was thought would underpin domestic economic activity and possibly prop-up equity markets. So, if the US does ramp up tariffs, I’m not sure what possible counter-strategy mainland authorities would implement that would be as easy and as impactful as steering the Yuan weaker. None the less the USD has been trading broadly weaker on the news despite my overly pessimistic view of the current proceedings.

The Thai Baht

Despite the BoT leaving its policy rate unchanged at 1.50%, USDTHB is dipping lower to June levels. . The markets are viewing the two dissenting votes as hawkish. But the THB has been an excellent regional haven play as its been pretty insulated from the trade war fracas. A hefty current account surplus will do that for you in this environment, not to mention tourists aren’t about to skirt BKK anytime soon and that industry provided nearly 20 % of GDP.

G-10

The Euro 
Once again, the Euro has a spring in its step in early London trade. However, pushing through the August high of 1.1730 remains critical for a substantial extension. Frankly, the EURUSD is where the near-term US dollar (X JPY) battle lines are forming as the ECB has shifted less dovish and should continue to so with Italian risk falling. But Brainard has signalled the Fed intentions, so the battle lines are forming around 1.1730

 

US yields take a runner.

One could expect a bit of apprehension to enter the fray, and traders to tap the brakes not just from a relief rally hangover perspective, but local bond and currency traders could start looking over their shoulders at US 10y bond yields that have raced higher to 3.05 %.

While everyone thought US bond yields could begin to rise in September as the markets emerged from summer holiday, but few could have predicted returns to come on as strong as the did with US 10Y touching to 3.05 %
While last NFP data produced robust wage growth data, I think its as much a function of hawkish fed speak as anything else.

The most significant shift in my view comes from Fed Governor Lael Brainard, who I dare say it was starting to roost with the Hawk suggesting the sitting Federal Reserve Board is a tad more hawkish than markets have priced.

While last week lower than expected US CPI, print does suggest we are nowhere near a reprice higher of the Fed curve from an inflationary standpoint.

But with the market emerging from its summer slumber and the US economy rocking on overdrive, traders may soon realise that they are pricing 2019 rate hike risk far too pessimistically. If the strong run of US economic data continues and an even more so on the first glint of inflation.

The pragmatist in me says this is USD supportive and not an especially appealing prospect for local Asia markets, in my view.

US yields on a runner

US yields on a runner

One could expect a bit of apprehension to enter the fray, and not just from a relief rally hangover, but local bond and currency traders could start looking over their shoulders at US 10y bond yields that have raced higher to 3.05 %.

While everyone thought US bond yields could begin to rise in September as the markets emerged from summer holiday, but few could have predicted yields to come on as strong as the did with US 10Y touching to 3.05 %
While last NFP data produced strong wage growth data I think its as much a function of hawkish fed speak as anything else Where the most significant shift in my view comes from Fed Governor Lael Brainard, who I dare say it starting to roost with the Hawk suggesting the sitting Federal Reserve Board is a tad more hawkish than markets have priced in.

While last week lower than expected US CPI, print does suggest we are nowhere near a reprice higher of the Fed curve from an inflationary standpoint

But with the market emerging from its summer slumber and the US economy rocking on overdrive, traders may soon realise that they are pricing 2019 rate hike risk far too pessimistically. If the strong run of US economic data continues and an even more so on the first glint of inflation.

The pragmatist in me says this is USD supportive and not an especially appealing prospect for local Asia markets, in my view

Tariffs? – So what!