Rumors about additional Japanese stimulus as well as better-than-expected Chinese manufacturing data have given upside momentum to commodity dollars, the Japanese yen, and the region’s equity markets.
With no major Japanese or US data released on Monday, the Japanese yen (JPY) continued to trade higher against most major currencies. Talk of another Japanese stimulus package is gaining momentum, with local newspapers reporting over the weekend that an announcement will be made on Tuesday, October 1.
Government officials apparently "leaked" the details of the package, which is aimed at stimulating growth and offsetting concerns about the negative impact of the 3% consumption tax hike, which will probably be announced at the same time.
The stimulus program, which is widely known as the "third arrow of Abenomics,” is a five-trillion yen program that includes a reduction in the corporate tax rate, which may come in the form of a removal of the surcharge added in 2011 to help the economy recover from the earthquake and tsunami.
There could also be increased incentives for capital expenditure and higher wages, which the government hopes will boost household income and spending. These programs are expected to be financed by the supplementary budget and the main budget.
The official announcement of the stimulus package should be good for stocks, and given the relationship between the Nikkei and USDJPY, it would be potentially negative for the currency pair in the near term.
Meanwhile, according to the latest CFTC IMM data, speculators reduced their short yen positions slightly last week, but overall, traders are still very short yen.
Chinese Data Props Commodity Dollars
Better-than-expected Chinese data drove the Australian dollar (AUD) sharply higher against the greenback. The New Zealand dollar (NZD) and Canadian dollar (CAD) also benefitted from the report, but not to the same extent as AUD.
According to HSBC, Chinese manufacturing activity continued to expand at a stronger pace in the month of September, which is good news for the Asia-Pacific region and the countries that rely on Chinese demand. Considering that many view the private sector survey as a more conservative assessment of the health of China's manufacturing sector, the uptick in PMI fuels hope that the much-needed recovery in China is gaining momentum.
The biggest beneficiary of the upbeat view of China should be the Australian dollar. We have already seen a significant reduction in AUDUSD short positions, and according to Friday's CFTC IMM report, in the past week, short positions have been cut by more than 50%.
NZDUSD should have also benefitted from the news, but given how strong the recent rally has been, the currency pair failed to extend much beyond its current levels.
See related: The Longest Winning Streak in FX Right Now
A Big Fundamental Catalyst Due Tuesday
With no economic data expected from Australia or New Zealand overnight, the Canadian dollar will be in focus because Canadian retail sales are due for release tomorrow. The latest employment report from Canada was three times stronger than economists anticipated, and this uptick in job growth should translate into stronger spending.
See related: 2 CAD/JPY Trades That Suit Any Trader
By Kathy Lien of BK Asset Management