Although the LPR came in on expectation, the market was hoping for 4 % on the one-year LPR while pining for a nudge lower five years. The PBoC needs to exceed the market expectations, not hit them in this environment. Traders had been enthusiastically ignoring the soon to be released supply chain negatively impacted data while hoping for a significant PBoC policy impulse, and now it's questionable how quickly investors will look through that negativity. Indeed, if the PBoC made a bigger splash, the market would have reacted more favorably.
These markets are increasingly tricky, and while I won't go as far as saying the days of the easy trades of hammering the reversion button is gone. But without a PBoC policy deluge, traders might think twice before smashing the big risk-reward reversion bets.
The Yuan
China is at the epicenter of the coronavirus outbreak and will bear the brunt of the negative economic implications; the RMB has not been a significant underperformer yet, be it among EM Asian currencies or compared to the other currencies in the CFETS RMB basket – over the past one month.
Of course, for the RMB's resilience, we can thank the counter-cyclical factor, but other real reasons are also taming the Yuan weakness currently. For the most part, since trading resumed on February 3, foreign flows been Yuan positive on the Northbound stock connect. But perhaps the most significant reason is due to travel restrictions have removed one primary source of FX demand onshore temporarily, which could be as large as USD14bn/month according to government data.
FX turnover in the onshore interbank market is currently just about 50-60% of the levels before the Lunar New Year holidays. When economic activity normalizes, there could be "pent-up" trading, and Foreign currency notes demand from the resumption of outbound travel and a rebound in imports. But export hedgers will also start to pick up. And while humbly acknowledge my 6.75 USDCNH ends of year target was but a fleeting dream at the start of the Year, I think 6.95 looks about right.
But it's early days and the Yuan markets are blissfully ignoring a lot of economic negativity. So, to assume the near-term Yuan slide is by and large over could be wishful thinking as we still have the lingering aftershocks to consider
The Fed's COVID-19 Waiting Game
As for the FOMC statement, the discussion at the last policy meeting was cautiously upbeat, with growth expected to remain moderate despite the new threat from the coronavirus. As a result, policymakers seem content that the current stance is "likely to remain appropriate for a time," so long as core inflation returns to the target in the coming months.
Though on hold, for now, the minutes suggest that the bar to ease policy is lower than to lift rates. In particular, they back up Powell's recent comment that policymakers would not tolerate continued below-target inflation.
Gold
COVID-19 has been a critical reason to buy gold and the overwhelming contributing factors supporting billions of new demand. While the equity market was trading higher, the robust equities demand, in an atmosphere of COVID-19, maybe leading real money and portfolio managers to seek out a hedge in tech stocks. With the USD also going up, the JPY is not a palatable alternative given a sizable portion of those USD inflows USD/JPY flows coming out of Japan are dominating.
So, while demand for US Treasuries is very active, it is not the only perceived "safe-haven" or quality asset. Gold is getting its lions share of equity hedge-related buying, which is clearly showing up in the gold-ETFs, which are increasing.
The Fed's review of its policy framework is expected to conclude by mid-year. Still, it's easy to read between the lines from last night statement that while the current mandate and 2% inflation target are off the table, pretty much everything else is up for grabs. Bullish for gold
Oil markets
The oil supply disruptions are helping to alleviate the virus impact, but it is probably premature to think the worst of the economic impact is by and large over. Although the markets have covered some shorts on the unexpected supply concerns, once we reach that new perceived position /price equilibrium, any excuse to sell still feels like the sentiment in the market right now.