Thin markets + lots of economic data = volatility in Asia

April 1, 2015

It has been a very interesting session in Asia as thin conditions and lots of economic data played havoc with the FX market. NZDUSD was hit early on by the thin conditions and some rumours that the RBNZ may have played in the market in March, with the pair plummeting to 0.7740 before widespread USD weakness helped it to regain its lost ground. Meanwhile, the yen was able to largely brush aside a weaker than expected Tankan Large Manufacturing Index for Q1 (actual 12, expected 14).

Australia’s not-so-disappointing numbers
There was some important data out of Australia today, including manufacturing and housing data. Australia’s manufacturing sector has shrunk for the fourth straight month in March, but it improved slightly from the prior month at 46.3 (50 is the level that separates expansion and contraction). Building approvals in Australia fell 3.2% in February, but this was better than an expected 4.0% fall. Also, year-on-year building approvals rose at their fastest pace since August at 14.3%. While building approvals numbers can sometimes be brushed aside by the market, housing data takes on extra significance in Australia these days as policy makers debate the pros and cons of looser monetary policy to support an ailing economy. The stronger the housing market, the less room the RBA has to cut interest rates as it risks further inflating prices in Sydney and Melbourne.

China’s encouraging manufacturing data
In China, official and private sector manufacturing PMIs were released, with both indexes beating expectations. HSBC’s private survey of manufacturing sentiment jumped to 49.6 in March (expected 49.3), from 49.2 in the prior month. As we explained earlier, China’s official Manufacturing PMI jumped to 50.1 in March, braking back over the important 50 level which separates expansion and contraction, from 49.9 in February. This was a stronger reading than the market was expecting (expected 49.7).

AUDUSD’s wild ride
This combination of stronger than expected Australian and Chinese economic data bolstered confidence in the Australian dollar, with AUDUSD breaking 0.7650, albeit only for a short time. However, the commodity currency is still being hit by falling commodity prices - iron ore hit its lowest level in over a decade yesterday. These retreating commodity prices only increase the chance that the RBA will lower interest rates next Tuesday to a record low 2.00%.

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