The Bank of Japan has kept its short-term interest rate at 0.5% and has raised its inflation forecast for the fiscal year to 2.7%. As a result, the yen has slightly strengthened, with the USD/JPY rate dropping below 149.00 and then further down to under 148.65 after the announcement. In China, the Manufacturing PMI fell to 49.3, showing contraction for the fourth month in a row. The Non-Manufacturing PMI stayed in expansion at 50.1, but this is the lowest it has been since November.

Australian Economic Data

June retail sales in Australia exceeded expectations, growing by 1.2% month-on-month. Additionally, building permits soared by 11.9%. RBA Deputy Governor Andrew Hauser spoke positively about the labor market and CPI data, but this did not change expectations for a potential rate cut. US Commerce Secretary Lutnick announced new trade agreements with Thailand and Cambodia. There is also a new trade deal with South Korea that includes a 15% US tariff, with South Korea promising to invest US$350 billion in the US. Stocks in the Asia-Pacific region showed mixed results: Japan’s Nikkei 225 rose by 0.9%, while Hong Kong’s Hang Seng fell by 1% and the Shanghai Composite dropped by 0.7%. Gold prices firmed but stayed below USD 3300.

Chinese Economic Slowdown

The ongoing contraction in China’s Manufacturing PMI, now at 49.3 for the fourth month straight, indicates a significant slowdown. This trend mirrors the difficulties in the property sector and weak domestic demand observed throughout 2023 and 2024. We should prepare for further weakness in assets tied to Chinese growth, like the Australian dollar and industrial commodities such as copper. The Bank of Japan is taking a more hawkish stance by raising its inflation forecast to 2.7% and keeping rates at a historically high 0.5%. This continues the policy normalization that started with the end of negative interest rates in 2024. With strong Japanese industrial production and retail sales data, we should expect further yen strength and seek opportunities to sell USD/JPY, especially during any rallies. New US trade agreements with South Korea, Thailand, and Cambodia indicate a return to the targeted trade policies of the late 2010s. The South Korean KOSPI index reacted positively to this news, rising by 0.65%. These agreements create specific winners and losers, suggesting pair trades such as going long on the South Korean won against currencies from countries still facing trade uncertainty. Australia presents a mixed picture: retail sales are booming (+1.2%), but terms of trade are declining. This creates uncertainty around the Reserve Bank of Australia’s rate decision in August, even though officials are cautiously optimistic. We can use options to trade the expected volatility in the AUD/USD pair leading into this meeting. Signs of risk aversion are emerging, with Hong Kong’s central bank repeatedly intervening to support its currency peg. Combined with China’s new restrictions on precious metals purchases, it appears that capital is becoming uneasy. The recent rise in gold prices, nearing $3,300 an ounce, is likely a response to these regional pressures. Create your live VT Markets account and start trading now.

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