All major currencies traded sharply lower on Wednesday against the US dollar (USD) and Japanese yen (JPY). With no US data released over the last 24 hours, the moves in the FX market were driven exclusively by concerns about China, and unfortunately, the health of the world's second-largest economy should continue to dominate FX flows over the next 24 hours.
The big story was the build-up of bad loans in China, but overnight, the emerging giant’s manufacturing sector will be in focus with the HSBC flash manufacturing sector PMI report scheduled for release. Economists are looking for a minor improvement, and if they are right, the Australian dollar (AUD) could resume its rise. However, if the data is weak, losses in the AUD and other high-beta currencies could compound quickly.
See related: China Bank News Kills the High-Beta Heyday
There is some US data on the economic calendar, but that should take a backseat to the Chinese data and its impact on risk appetite. Investors have now become immune to the improvements in jobless claims, and US trade numbers tend to be stale.
The Faster They Rise, the Sharper They Fall
The Japanese yen traded sharply higher against all major currencies as a result of the Chinese banking news, and with no economic reports released from Japan over the past 24 hours, risk aversion created the newfound JPY demand. The hardest-hit JPY cross was NZDJPY, which dropped more than 2%, followed by CADJPY and AUDJPY, both of which sustained sizable losses as well.
This is a classic example of the impact of gravity on currencies because the pairs that rose the fastest of late are also the ones that fell the sharpest today. Japanese stocks were hit particularly hard by the China news because Japan is largely seen as the proxy for Asia. USDJPY dropped to its lowest level in two weeks on the combined drag of weaker stock prices and lower US Treasury yields.
Now, looking ahead, JPY crosses will remain vulnerable with Nikkei futures pointing to a lower open. The Ministry of Finance weekly portfolio flow report is scheduled for release this evening along with the Cabinet's monthly economic report.
Given the recent comments from Bank of Japan (BoJ) Governor Haruhiko Kuroda, policymakers are confident that the current level of monetary stimulus is sufficient for the economy. As a result, the Cabinet's economic outlook is not expected to change. Therefore, over the next 24 hours, the yen will most likely trade based on the outcome of Chinese data.
By Kathy Lien of BK Asset Management