Risk aversion in focus after Chinese reserve hike and Turkey unrest

- Forex: The JPY and CHF firmed on the back of renewed risk aversion, but forex volumes were low due to the holiday in Japan. Japan, on holiday for most of this week, usually accounts for 60% of JPY trading, and the lower volumes did not lead to abnormal volatility during today's session. The JPY could gain support from the Golden Week holiday, as Japanese investors who would normally be there to sell JPY are on holiday. The USD initially firmed against both the EUR and GBP, with traders talking about EUR/USD's upside momentum being unconvincing (the pair hesitated last week ahead of the short term rising channel resistance at 1.3685). Bullish housing data failed to give a lift to the GBP (HOMETRACK - UK APRIL HOUSE PRICES +0.7% M/M VS +0.8% IN MARCH, +6.8% Y/Y VS +6.7% IN MARCH, 4yr high for survey). Some technical analysts continue to say that a GBP/USD top has formed, with bearish divergence condition remaining in weekly RSI and daily MACD and key 2.0106 resistance not decisively taken out. In Asian currencies news, the TWD and THB gained against the USD, but the KRW lost about 0.20% against the USD. The impact from last week's worse than expected trade balance is still weighing on the KRW. There's also a seasonal factors such as the dividend payments weighing on the KRW.

- Risk aversion returns to markets: Several analysts expect the Turkish elections to put pressure on carry trades, and the JPY managed to gain some ground at the start of the Asian shift. The possibility of an observant Muslim president is leading to conflict between Turkey's deeply secular military and civilian establishment against its religiously oriented ruling party. In addition to the situation in Turkey, a hike in the Chinese reserve ratio over the weekend also contributed to risk aversion. The Chinese hiked the reserve ratio to 11%, the seventh reserve ratio hike in less than a year. High yielding currencies came under pressure during most of the Asian trading session on the back of these developments. The CHF managed to hold on to gains, while the JPY gave up most of its gains.

- Asian Equities: Asian equity trading was quiet as the Nikkei225 was closed in observance of the Golden Week holiday. Aussie equities opened higher on gains in shares of BHP and Orica, but gave back most of its gains to trade below the 6200 level. Despite another reserve ratio hike by the Chinese central bank, Chinese equities continue to rally to new all-time highs. There is growing speculation that the PBoC will have to implement additional measures in order to cool China's economic growth and asset appreciation. Despite gains in mainland China, the Hang Seng index is lower for the second consecutive session. Declines in Hong Kong are being driven by interest rate sensitive names such as China Life and the Bank of China. The Kospi index is currently lower by more than 0.10% and for the second consecutive session, following weaker than expected U.S. GDP data. Losses in South Korea are being led by Samsung Electronics.

- More data confirms that Aussie inflation is easing: (AU APRIL TD SECURITIES INFLATION MOM: 0.1% V 0.5% PRIOR; YOY: 3.0% V 3.5% PRIOR) Underlying inflation, excluding volatile items such as gas, slipped to 0.2% in April or 2.8% for the year. That's slower that the 0.3% rise in March. Even though the headline inflation reading came in softer than prior readings, the RBA is expected to remain hawkish over the coming weeks. It is expected that inflationary pressures will remain in the Aussie economy, with the cost of living expected to accelerate amid rising rents and as the drought threatens to curb food production.

- Construction data shows that RBNZ tightening starting to have an impact: (NZ MARCH BUILDING PERMITS MOM: -2.9% V 5.8% PRIOR, Ex-apartments down 3.1%) Before this piece of data, markets priced in a 15% probability of another RBNZ rate hike at the June 7 meeting. The consensus is that the RBNZ will want to wait to see the impact of their recent tightening, and data like today's building permits will make them feel confident that they have done enough to slow the economy.

- Commodities: Crude oil is lower, but still above $66.30 after the Qatar oil minister said that there is no need for OPEC to review energy markets before September. Iran agreed to join the U.S. and other countries to discuss Iraq, leading some to become optimistic about Iran taking a role in the stabilization of Iraq. Spot gold is slightly higher in Asian trading on a mixed USD. Shanghai Copper is currently higher by 1.0% on Friday's gains in the LME contract.