Asia AM Digest: Markets Eye Risk Trends, BoJ and RBNZ Commentary

Current Market Developments – Italy Fears Continue Unnerving Markets, RBNZ Hurts NZD

Stocks across the globe finished Tuesday’s session in the red as Italian political jitters made their way into US and the UK following the Memorial Day long weekend. The country is heading for new elections as the spread between Italian and German 10-year bond yields rose to their highest in about 5 years. The S&P 500 and FTSE 100 fell 1.16% and 1.26% respectively, closing at their lowest since May 9th.

Italy’s populist League party leader Matteo Salvini commented that the earlier the vote, the better. On Tuesday, the country’s president hinted that one may happen as early as fall or even the beginning of 2019. Meanwhile, ECB’s Executive Board Member Sabine Lautenschlager noted that it is much too early assess the Italian situation.

On the currency side of things, the anti-risk Japanese Yen and Swiss Franc appreciated. Following closely behind them was the US Dollar. The greenback rose as investors sought safety in local government bonds. Also known as the world’s “risk-free” asset, 2-year yields on those fell to their lowest since April 12th. Meanwhile, the sentiment-linked Australian Dollar fell. EUR/USD dropped to its lowest since July 2017.

As the markets transitioned into Wednesday’s trading session, the RBNZ released its financial stability report. There, the central bank kept LVR (loan-to-value ratio) restrictions unchanged and said that it is unlikely to ease them for at least six months. The New Zealand Dollar swiftly fell as the measures in place can be anti-inflationary, potentially reducing the urgency for the central bank to lift rates. Keep in mind that the Reserve Bank of New Zealand is at a more neutral stance for monetary policy direction as is.

A Look Ahead – Risk Trends and Commentary from the BOJ and RBNZ in Focus

The aggressive declines in Wall Street may be echoed in Asian stocks as they come online for Wednesday. Such a scenario could bode well for the Japanese Yen while not so much for the Australian and New Zealand Dollars.

We will also get a speech from Bank of Japan’s Governor Haruhiko Kurda and RBNZ’s Governor Adrain Orr later on. The former’s speech may not influence the Yen as much as risk trends given the central bank’s commitment to easing for now. As for the latter, more commitment to a neutral policy stance could bode ill for the New Zealand Dollar as hawkish bets continue reducing.

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IG Client Sentiment Index Chart of the Day: USD/JPY

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Retail trader data shows 52.3% of USD/JPY traders are net-long with the ratio of traders long to short at 1.1 to 1. The number of traders net-long is 7.3% lower than yesterday and 14.7% lower from last week, while the number of traders net-short is 2.4% higher than yesterday and 14.2% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/JPY price trend may soon reverse higher despite the fact traders remain net-long.

Five Things Traders are Reading:

  1. Risk Aversion Hits the FX Market: Trade it, or Fade it? by James Stanley, Currency Strategist
  2. Dow Gaps Down to Fibonacci Support: Can Buyers Hold the Lows? by James Stanley, Currency Strategist
  3. USD Muted After Consumer Confidence Figures, Eyes on NFPby Justin McQueen, Analyst
  4. EUR/USD Technical Analysis: Euro Sinks to Key Support – Now What?by Ilya Spivak, Senior Currency Strategist
  5. ASX 200 Technical Analysis: Closer to a Lasting Reversal? by Daniel Dubrovsky, Junior Analyst

— Written by Daniel Dubrovsky, Junior Currency Analyst for

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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