In Asia, the Japanese market is closed today due to a holiday, following an election with unfavourable results for the ruling party. This brings potential pressure on Prime Minister Ishiba.
The economic data calendar is light, except for New Zealand’s Consumer Price Index (CPI) data. Expectations are for this to show a decrease quarter-on-quarter but an increase year-on-year. The lower quarterly figure may impact the New Zealand dollar but could benefit local equities.
China’s Monetary Policy Update
The People’s Bank of China will announce its monthly Loan Prime Rate (LPR) setting. In May, the LPRs were reduced by 10 basis points for both 1- and 5-year loans, bringing them to 3.0% and 3.5%, respectively. No change is anticipated in today’s announcement. The main policy rate, the 7-day reverse repo rate, is currently set at 1.4%.
Given the political instability surrounding Mr. Ishiba, we see an opportunity in Japanese market volatility. History shows us that when Japan’s leadership is in question, such as during the 2021 transition, the Nikkei Volatility Index has surged over 20% in the following weeks. We believe traders should consider buying Nikkei put options or selling futures to hedge against a likely downturn.
New Zealand’s Economic Outlook
The inflation report from New Zealand presents a clearer path for the kiwi dollar. A quarter-on-quarter fall would align with the Reserve Bank of New Zealand’s own projections from 2024, which anticipated inflation returning to its target band by late 2025. This should strengthen bets on future interest rate cuts, making it a good time to buy put options on the NZD/USD pair.
For China, the central bank’s expected inaction will likely be viewed negatively by the markets. With youth unemployment figures from the National Bureau of Statistics still stubbornly high and the property market yet to recover from its 20% price drop since 2021, holding rates steady will signal insufficient support. We believe this creates a compelling case for buying puts on Chinese equity ETFs, like the FXI, in anticipation of weak sentiment.
