Markets 4x4: What caught our eye in Asian trade

Welcome to Markets 4x4, post delivered daily by 4pm in Sydney detailing the key macro themes from the Asian session.

Here’s what you need to know for Wednesday, November 1.

Japanese officials even more twitchy about JPY than usual

You don’t have to be member of Mensa to understand the probability of the BOJ intervening to support the Japanese yen has risen appreciably following its October monetary policy decision. In 24 hours, USD/JPY is around 200 pips higher, leaving it within touching distance of multi-decade highs.

In response, Japanese officials are even more confused than usual as to exactly what’s going on, suggesting it is being driven by speculative forces rather than fundamentals. Masato Kanda, Japan’s top currency diplomat, was rolled out twice to express the government’s displeasure. But while he’s knocking, markets aren’t answering. Perhaps it’s because the BOJ announced another unscheduled bond buying operation today, artificially suppressing bond yields relative to other parts of the world.

With that placing upward pressure on USD/JPY, it looks like a fabled “rate-check” may be the next communication method. Be cautious trading yen pairs right now.

We have more on Japanese markets here.

PBOC already fighting market forces

While Japan’s Ministry of Finance hasn’t asked the BOJ to intervene yet, officials over at the People’s Bank of China aren’t taking any chances, setting the midpoint of the USD/CNY daily trading range at the strongest level relative to expectations on record. The pushback was 1,549 pips lower than the 7.3327 level expected by traders, coming in at 7.1778.

But market forces aren’t persuaded that easily. As soon as it began trading, USD/CNY was back testing the upper limit of its permitted 2% deviation from where the PBOC fixed it.

King dollar, for a reason

Speaking of China, want to know why the yuan and almost every other Asian currency is being taken out to the woodshed against the US dollar? We were provided a strong hint at 11.30am in Sydney when S&P Global dumped the latest batch of manufacturing PMI reports across the region. Rather than go through the details, here’s the screenshot we took at the time.

Source: Refinitiv 

Yuck, yuk, yuck and more yuck. Australia wasn’t immune with its figure printing at 48.2, adding to the big miss on building approvals. More importantly, China’s PMI slumped from 50.6 to 49.5, moving back into contractionary territory and confirming the weakness in the government’s official survey yesterday.

The performance provides a signal on the health of the Chinese and global economy. And right now, it’s spluttering except for the US. Google 'Dollar Smile’ and it will explain why USD remains the king dollar.

US real yields pushing higher again

US real yields look like they may hit more than decade highs before long, creating even stiffer headwinds for low and no-yielding assets. Benchmark 10-year real yields – which are calculated by subtracting yields on inflation-protected Treasuries against those of equivalent nominal Treasury yields – have stealthily pushed above 2.5% again, making this the sixth probe above the level. As yet, however, it’s not had any success staying there for long. But with the US Treasury refunding announcement out later in the session, along with the Fed’s interest rate decision, maybe this sixth probe will hit markets for 6?

Source: Refinitiv

Market of the day: Gold

When you talk assets vulnerable to dollar strength and rising real yields, gold pretty much tops the list. It’s priced in it and has no yield, meaning it should be struggling. But as we looked at yesterday, bullion has been hanging tough despite the difficult environment. But even with its recent resilience, it’s rolled over today in Asia.

Right now, the former channel resistance located around $1965 looms as the next test for shorts having attracted decent buying at the level during late October. Below, $1946 and $1903 are the next levels to watch. Should the former channel resistance hold on a retest, $1985 and $2000 will provide a stern test given the price action seen this week.

-- Written by David Scutt

Follow David on Twitter @scutty