The Bank of Japan maintained its short-term interest rate at 0.5% and increased its inflation forecast for the fiscal year to 2.7%. This decision resulted in the yen strengthening slightly, with USD/JPY falling just below 149.00 before further dipping to under 148.65 after the announcement.
In China, economic data showed the Manufacturing PMI slipped to 49.3, indicating contraction for the fourth consecutive month. The Non-Manufacturing PMI remained in expansion at 50.1, although it was at its lowest level since November.
Australian Economic Data
Australia’s June retail sales surpassed expectations, growing 1.2% month-on-month, while building permits soared by 11.9%. RBA Deputy Governor Andrew Hauser commented positively on the labour market and CPI data, but it did not influence expectations of a potential rate cut.
US Commerce Secretary Lutnick announced trade agreements with Thailand and Cambodia. Additionally, a new trade deal with South Korea included a 15% US tariff, with South Korea committing to US$350 billion in US-based investments.
Stocks in the Asia-Pacific region showed varied performance, with Japan’s Nikkei 225 rising by 0.9%, while Hong Kong’s Hang Seng decreased by 1% and Shanghai Composite declined by 0.7%. Gold prices firmed but remained below USD 3300.
Chinese Economic Slowdown
The repeated contraction in China’s manufacturing PMI, now at 49.3 for a fourth straight month, confirms a significant slowdown. This pattern is reminiscent of the struggles with the property sector and weak domestic demand seen through 2023 and 2024. We should consider positioning for further weakness in assets linked to Chinese growth, such as the Australian dollar and industrial commodities like copper.
The Bank of Japan is becoming more hawkish, raising its inflation forecast to 2.7% while holding rates at a historically high 0.5%. This continues the policy normalization that began with the end of negative interest rates back in 2024. Given the strong Japanese industrial production and retail sales data, we should anticipate further yen strength and look for opportunities to sell USD/JPY, especially on any rallies.
New US trade deals with South Korea, Thailand, and Cambodia signal a return to the targeted trade policies seen in the late 2010s. The South Korean KOSPI index has already reacted positively, jumping 0.65% on the news. This creates specific winners and losers, suggesting pair trades like long the South Korean won against currencies from nations still facing trade uncertainty.
Australia presents a conflicting picture, with booming retail sales (+1.2%) but falling terms of trade. This makes the Reserve Bank of Australia’s upcoming August rate decision highly uncertain, even as officials sound cautiously optimistic. We can use derivatives like options to trade the expected volatility in the AUD/USD pair leading into that meeting.
We are seeing underlying signs of risk aversion, with Hong Kong’s central bank repeatedly intervening to support its currency peg. This, combined with China’s new restrictions on precious metals purchases, suggests capital is becoming restless. The recent strength in gold, which is pushing toward $3,300 an ounce, is likely a direct result of these growing regional pressures.
