Asian bourses started sideways as tailwinds from the modest gains in Wall Street following the somewhat dovish market reaction after FOMC Minutes release are offset by the COVID variant concerns, which threatens additional restrictions in the region. Today, Japan confirmed it recommends declaring a state of emergency for Tokyo as infections rise; Economic Minister Nishimura says they seek a state of emergency from July 12th to August 22nd. The risk is growing in the region, with South Korea reporting a record increase in COVID-19 cases with new daily infections at 1,275.
On the economic front, China’s Cabinet announced it would use targeted reserve requirement ratio (RRR) cuts promptly to support the real economy. The theme mostly comes from high commodity prices that pressure the Chinese economic growth and financial health of small and medium enterprises (SMEs). FX traders will be keeping their attention to this theme because this comes ahead of a potential Fed tapering talk during the Jackson Hole meeting in August that could boost market positioning for a strong dollar in the second half. Funding needs and dollar demand ahead of the year-end could support this thesis. A weaker Yuan could be expected against the US Dollar in the coming weeks. Overall, small and medium enterprises survival rates could rise, which could help support the job market and economic growth. Along with a positive market reaction to this, Chinese GDP revisions will also be on the radar. Worth noting that China will be paying close attention to the Yuan depreciation.
