Solid manufacturing PMIs in Asia for November are driving broad-based FX gains vs the US Dollar (INR: 0.6%, TWD: 0.5%, CNH: 0.3%) and in equity markets across the region (KOSPI:1.7%, CSI 300: 1.5%). China's Caixin manufacturing PMI rose to a stronger-than-expected 54.9 in November (cons: 53.5, prior: 53.6), Indonesia and Thailand's PMIs printed above 50, and while India's PMI fell (to 56.3, from 58.9), it remains well above the 50-mark that demarcates contraction and expansion.
Asia FX gains are also exerting a gravitational pull across G-10 markets today.
Central banks in the region are increasingly uncomfortable with FX strength, but their caution is not unusual early in a global economic cycle.
Relatively attractive yields vs. G10 suggest foreign investment flows into local bond, and equity markets should continue.
Fed Chair Powell's testimony before the Senate Banking Committee (released ahead of Tuesday's hearing) is sufficiently cautious on the economic outlook to constrain an aggressive steepening in the UST curve into year-end which has helped risk sentiment across the board. Rising covid cases and restrictions tempered the enthusiasm around good vaccine results, but bonds have done the heavy lifting, and risky assets are welcoming the financial conditions easing.
G-10 FX
The typical year-end pattern is for the US dollar is to drop into year-end. Downward momentum then builds as new capital gets deployed in the new year. Peak USD sell-off "voguishness" is reached by mid-January, when FX and cross-asset vol also tend to base. Given the plethora of recent events, including the wanton spread of the virus, oil market uncertainty, and central bank (ECB) push back, all of which have prevented strong trends from developing.
History suggests New Year dollar selloffs are best pre-positioned for rather than chased since they could be fast, furious, and dramatic. BBDXY has weakened steadily since the US election, with traders cutting tail hedges depressing realized vol across the board. EM portfolio flows have rebounded, buoyed by strong efficacy reports from early pandemic vaccine trials and the extension of positive data surprises in the most cyclical Asian economies. All of which is suggesting the time is still right to short the US dollar.
EUR/USD is feeling ist's usual gravitational pull for Asia FX today and shifting higher. While sovereign yields on the Eurozone periphery are falling to new all-time lows (e.g., Greece, Italy), real yields have risen more sharply in the region relative to the US since March. Real yields are putting upward pressure on EUR.
A rotation in global equity markets from technology to value benefiting the more value-orientated Euro Stoxx 50 (+6.6% vs. SPX in November) is consistent with greater risk-taking and declining safe-haven US dollar demand.
AUD/USD came under a bit of pressure during the US session yesterday with US stocks traded towards the recent lows, but the A$ drifted higher today in Asia, as risk sentiment firmed. The RBA proved to be a non-event, as expected. Regardless, the correlation between AUD and US equities is overwhelming monetary policy drivers, for now, keeping AUDUSD well supported.
GBP/USD remains in somewhat of a holding pattern and is consolidating as market participants seek to play the range, given expectations that there may be more Brexit clarity soon.
EUR/CHF is back at 1.0850. With month-end noise out of the way, the desk is biased towards buying EUR/CHF on dips into the 1.0800/25 area, targeting a retest of the top in May at 1.0920. Trade USD/CHF from the short side, expecting a test of 0.8980 in USDCHF and another attempt above 1.2000 for EUR/USD.
USD/CNH spot traded heavy in the Asia morning, with China's better-than-expected Caixin manufacturing PMI for November. This reinforces the bullish China sentiment. The spot should consolidate further in a broad 6.5500-6.6000 range. CNH funding traded softer, with t/n dealing from 4.2 to 3.6. On top of that, there has been decent selling interest in the forward points by locals, tracking the spot move lower, which has kept the curve suppressed.
Not to unexpected gold is started to reconnect to its inverse US dollar correlation, this correlation will never completely evaporate. Gold is bouncing off cycle lows, and after the massive position cleanses of the last few weeks, at some point, it will re-correlate with the dollar and 10
Y US real yields, and that could continue to support gold*as it did in Asia today