Article Highlights

  • AU AIG services index down from 57.7 to 54.5 in January
  • NZ ANZ commodity prices slips by 0.1% vs. 0.7% uptick last month
  • China’s Caixin manufacturing PMI down from 51.9 to 51.0 in January
  • PBoC surprisingly tightened open market operations rates
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Forex price action was as exciting as watching paint dry, as traders stayed in the sidelines ahead of the much-awaited NFP report.

Major Events:

PBoC surprises markets with rate hikes – The People’s Bank of China (PBoC) started its new year with a bang, as it surprised markets with interest rate increases in a bid to tighten liquidity.

Earlier today, the central bank had raised interest rates on open market operations (OMO) by 10 basis points effective immediately.

The 28-day reverse repo (RR) rate was pushed higher from 2.55% to 2.65%; the 14-day rate was raised from 2.4% to 2.5%, and the 7-day RR was lifted from 2.25% to 2.35%.

But wait, there’s more! Reuters cited two banking sources saying that the PBoC had also raised its lending rates on its standing lending facility (SLF) loans. The overnight rate was supposedly raised from 2.75% to 3.10%, while the seven-day and one-month rates were lifted to 3.35% and 3.70%, respectively.

For trading newbies out there, you should know that the PBoC is racing to control capital outflow and risks from debt-fueled stimulus. By raising its OMO rates, the PBoC can influence market activity even as it retains its easy monetary policies.

BOJ bond purchases disappoints – Earlier today the Bank of Japan (BOJ) stepped up its efforts to hold down Japan’s bond yields. If you recall, Kuroda and his team have pledged to target “near zero” yields for Japan’s 10-year government bonds.

Unfortunately, investors now need more conviction. The BOJ bought 450B JPY worth of bonds due in 5-10 years today, higher than its usual 410B JPY purchase. Market players felt underwhelmed though, which is probably why the 10-year JGBs spiked to 0.15% – the highest since the BOJ implemented its negative interest rate policy –while the yen also spiked higher across the board. Duhn duhn duhn.

Caixin manufacturing PMI – A closely-watched survey on China’s manufacturing sector reflected slower growth in January. The Caixin manufacturing PMI clocked in at 51.0 last month, which is lower than December’s 51.9 reading.

The reading also supports Tuesday’s official figures also reflecting a slowdown last month. Remember that the official manufacturing PMI focuses on large, state-owned manufacturers while the Caixin report covers private, smaller manufacturers.

Looking closer at the report, we can see that the loss of momentum can be attributed to lower employment. See, output and new orders actually ticked higher, but efforts to cut down costs led to the fastest job-shedding in three months. The combination of a lack of personnel and higher job orders eventually caused tons of backlog for the industry. Yikes!

All eyes on the NFP report – Forex price action was as exciting as watching paint dry, as Asian session players waited for the much-awaited NFP report.

As mentioned in my U.S. session recap, analysts seem to be expecting a good reading after seeing strong releases from leading indicators. Still, seasonality could factor in and contribute to a downside surprise later today.

Australia’s ASX 200, which did NOT like China’s weak Caixin PMI, capped the session 0.30% lower. Meanwhile, the Shanghai index and Hang Seng played catch up to this week’s events and priced in the PBoC’s tightening moves by closing 0.56% and 0.46% lower, respectively. Only Nikkei was spared the bloodshed as it traded 0.12% higher on a lack of further losses for USD/JPY.

Major Market Movers:

JPY – The low-yielding yen lost ground against its major counterparts after receiving a short boost some time during the middle of the trading session.

USD/JPY fell to a session low of 112.50 before trading back up at 113.09 while EUR/JPY recovered from its 121.09 lows to trade at 121.64. Ditto for AUD/JPY, which fell to 86.02 before shooting back up to 86.52.

USD – The Greenback inched higher across the board ahead of the monster NFP report.

EUR/USD slipped by 8 pips (-0.07%) to 1.0756, USD/CHF popped up by 9 pips (+0.09%) to .9934, and AUD/USD fell by 12 pips (-0.16%) to .7650.

Watch Out For:

  • 9:15 am GMT: Spanish services PMI (54.7 expected, 55.0 previous)
  • 9:45 am GMT: Italian services PMI (52.6 expected, 52.3 previous)
  • 9:50 am GMT: French final services PMI expected to remain at 53.9
  • 9:55 am GMT: German final services PMI expected to remain at 53.2
  • 10:00 am GMT: Euro Zone final services PMI expected to remain at 53.6
  • 10:30 am GMT: U.K. services PMI (55.8 expected, 56.2 previous)
  • 11:00 am GMT: Italian preliminary CPI (0.2% expected, 0.4% previous)
  • 11:00 am GMT: Euro Zone retail sales (0.3% expected, -0.4% previous)

See also:

U.S. Session Recap
London Session Recap

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