Optimism Ahead of the Fed
Asian markets are doing well today in cautious positioning ahead of the Fed rates decision, with currency moves in particular reflecting the general feeling that rates will be left unchanged.
The Korean won, one of the most sold currencies in Asia, is having an impressive day, rising 0.6% against the US dollar. The Aussie has also had a wild few days, rising 1.5% this week. It even touched $0.72 overnight, while only a week or two ago it looked unlikely to rise above $0.70 again for the rest of the year.
Most interestingly for the Aussie, a number of its big rallies in recent days have happened during US trading hours. It seems to be one of the main venues in G10 currencies where foreign traders can express their opinion that the Fed will not hike. With USD weakness we should also see a bout of strength in commodities denominated in USD, and this could further support AUD to the upside.
This seems unlikely to last because the Reserve Bank of Australia (RBA) have been increasingly negative on their outlook for the Australian economy, and indeed there is a rising possibility that they may have to cut interest rates further in the coming months.
Were the Australian dollar to rise into the $0.73 level (or above!) if the Fed leaves rates unchanged, one could only look at that as a prime selling opportunity. A similar pattern holds true for the JPY and NZD in Asia, with both central banks quite likely to further ease monetary policy in the future.
China
China has been concerned about the potential for a Fed rate hike in September for months. The renminbi was sitting at about a 10% overvaluation in real effective exchange rate terms. Therefore, due to the renminbi’s partial peg to the US dollar, the renminbi would have rallied alongside the USD if the Fed had raised in September. It was arguably concerned about further overvaluation of the renminbi that led to the seemingly rushed devaluation in August, along with its attendant poor communication and a bout of global volatility.
Given this, it is unsurprising to see the familiar sight of impressive rallies in the Chinese stock indices during the last few hours of trading. The government is clearly very concerned about volatility emanating from the Fed meeting. Chinese markets looked to be selling off at the start of the week, with big losses seen in the tech-sector heavy ChiNext and Shenzhen indices, with only government support for the large-cap sectors in the Shanghai Composite preventing it from seeing similar declines. The renewed risk of a major selloff seems to have prompted significant action from the government, and the strong buying seen towards market close yesterday seems indicative of the government being keen to forestall any selloff risk.
The Shanghai Composite looks to have continued this trend with many companies trading up to 10% limit. With very strong performances by the industrial and utilities sectors, which are often the sectors that see strong state buying.
The other major news out of China today is the removal of Zhang Yujun as Deputy Chairman of the China Securities and Regulatory Commission (CSRC) for severe disciplinary violations. He is to be replaced by Li Chao, the former secretary of Zhou Xiaochuan, who was head of the People’s Bank of China.
This is quite significant as it should ease conflicts between the CSRC and PBoC, and hopefully see them working well together in the reform of China’s securities sector. It is also further evidence of the rise and rise of the PBoC towards an international-standard central bank during Xi Jinping’s reign, a world away from its position as an unimportant backwater in the Communist hierarchy at the beginning of the Reform period.
Australia
The ASX has been rallying on expectations that the Fed will leave rates on hold, with the index rising 1.3%. Most impressive has been the surge of volumes in the index today, up 31.6% above the 30-day moving average. Volumes have been pretty light this week as traders were fairly cautious ahead of the Fed meeting. So the bounce in volumes seen today is evidence that a lot of people trading in the market are fairly confident the rally will continue into trading tomorrow.
Oil prices have been rallying as US production continues to fall and also because weakness in the USD should support USD-denominated oil prices. This has helped the energy sector in the ASX today as it saw the biggest gains in the index, rising 2.5%. The small-cap energy company AWE also saw some of the biggest gains today, rising 9.2%. AWE is a potential buyout target in the energy sector and saw strong gains around Woodside’s bid for Oil Search (OTC:OISHY).
Privately-held health supplements business Swisse Wellness, which at one point had planned to IPO on the ASX, announced a $1.5 billion buyout from an “Asian Group.” Chinese groups Hony Capital and Shanghai Pharma (HK:2607) were both vying for the target as Chinese demand for high-quality health supplements continues to grow rapidly. The announcement of this deal provided a further boost to the crazy run by Blackmores (ASX:BKL), which gained 5.4% today, taking the share price to $137 when it had been sitting at $25 a year ago.
The materials sector similarly saw strong gains, rising 1.8%, as USD weakness looks to provide support for USD-denominated commodities. This was particularly pronounced for gold miners, with the gold mining sector up 4%.