Fx flash fx market back to slumber 23 september 2016

FX Flash

Group Economics Macro & Financial Markets Research

23 September 2016

FX market back to slumber?  FX volatility expectations decline post Fed, BoJ event risks

Roy Teo

 Monetary policy divergence: AUD/NZD recovering

Senior FX Strategist Tel: +65 6597 8616

 Chinese yuan steady ahead of SDR inclusion on 1 October 2016

roy.teo@sg.abnamro.com

FX volatility expectations decline post Fed, BoJ event risks Volatility expectations in the currency markets have declined as global central banks are unlikely to announce changes to their monetary policy bias over the next one month. One month EUR/USD implied volatility has plunged to the lowest level since late 2014. In Asia, volatility expectations in Asian currencies and the AUD/USD have also declined, though at a more moderate magnitude.

DM FX volatility expectations decline One month implied volatility index

Monetary policy divergence: AUD/NZD recovering Level

350 330 310 290 270 250 230 210 190 170 150 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

%

1.15

0 -0.4

1.10 -0.8 1.05

-1.2 1.00 Jan-15

-1.6

May-15

AUD/NZD (lhs)

DM implied vol index

Source: Bloomberg, ABN AMRO

Sep-15

Jan-16

May-16

Sep-16

2y AU-NZ yield spread % (rhs)

Source: Bloomberg

Monetary policy divergence: AUD/NZD recovering The AUD has outperformed the NZD in the past week as financial markets are coming to terms that the Reserve Bank of Australia (RBA) is likely to keep monetary policy unchanged this year, while another 25bp rate cut is still expected in New Zealand. Earlier this week, RBA governor Lowe said that the RBA is not an ‘inflation nutter’ and some degree of variability in inflation is inevitable and appropriate. This has raised the hurdle rate of policy easing in the coming months even if inflation in the third quarter remains below the RBA’s 2-3% target range. On the other hand, the

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FX Flash - FX market back to slumber? - 23 September 2016

Reserve Bank of New Zealand reiterated that further policy easing will be required to ensure that future inflation settles near the middle of their target range. As monetary policy divergence in Australia and New Zealand is not fully priced in by financial markets, it is likely that AUD/NZD will continue to grind higher towards 1.07 in the coming weeks.

Chinese yuan steady ahead of SDR inclusion on 1 October 2016 In the past month, the Chinese yuan (CNY) has remained remarkably steady against currencies of China’s main trading partners and against the US dollar. This is due to an improvement in economic data releases in China and China’s policy makers objective to smooth volatility in the CNY. The CNY inclusion in the IMF SDR basket is expected to be effective on 1 October 2016. The State Administration of Foreign Exchange (SAFE) recently reaffirmed our view that inflows are unlikely to be big due to CNY inclusion in the SDR basket. Nevertheless, the SDR inclusion is likely to boost confidence in yuan assets. We expect the CNY to trade around the 6.70 and 6.80 level against the USD at the end of the third and fourth quarter of this year respectively.

CNY TWI steady in the past month

USD/CNY price action likely to remain subdued

Index level

Level

107

6.80 6.75 6.70 6.65 6.60 6.55 6.50 6.45 Jan-16

105 103 101 99 97

95 93 Dec-14

Jun-15

Dec-15

10 9 8

7 6 5

4 Apr-16

Jul-16

3mth USD/CNY NDF outright (lhs)

Jun-16

3mth USD/CNY volatility expectations (rhs)

CNY Index

Source: CFETS, ABN AMRO

Implied volatility

Source: Bloomberg

Oct-16

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FX Flash - FX market back to slumber? - 23 September 2016

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FX Flash - FX market back to slumber? - 23 September 2016