Asia close down; Aussie dollar falls 1.8% after inflation unexpectedly drops

Asia markets closed lower on Wednesday, ahead of key central bank decisions from the U.S. Federal Reserve, the Bank of Japan (BOJ) and the Reserve Bank of New Zealand this week.

Australia's benchmark ASX 200 reversed morning gains of over 1 percent to close down 32.94 points, or 0.63 percent, at 5,187.70, with the financials and energy sub-indexes dragging. The heavily-weighted financials sub-index finished down 1.17 percent, with major banking stocks selling off sharply.

Shares of Australia's so-called Big Four banks - ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac - ended down between 1.53 and 2.46 percent.

In Japan, the Nikkei 225 finished down 62.79 points, or 0.36 percent, at 17,290.49, while across the Korean Strait, the Kospi fell 4.23 points, or 0.21 percent, at 2,015.40. In Hong Kong, the Hang Seng index was off 0.26 percent as of 3:12 p.m. HK/SIN, while Taiwan's Taiex closed down 18.52 points, or 0.22 percent, at 8,563.05.

In China, the Shanghai composite ended down 10.69 points, or 0.36 percent, at 2,954.00, and the Shenzhen composite lost 5.47 points, or 0.29 percent, to 1,876.51.

Analysts said markets are still mostly on hold as investors await the outcome from the latest Fed and BOJ meetings.

"The Mighty Fed's decision this week will likely lay the groundwork for dollar fortunes through 2016," said Stephen Innes, a senior trader for Asia Pacific at OANDA.

A general view of headquarters of the Bank of Japan in Tokyo, Japan.
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A general view of headquarters of the Bank of Japan in Tokyo, Japan.

In the currency market, the dollar retreated slightly against a basket of currencies on Wednesday, with the dollar index down 0.10 percent at 94.474 at 2:55 p.m. HK/SIN, compared with its last close of 94.573.

The Japanese yen traded at 111.13 to the dollar, compared with the 110 handle it touched Tuesday afternoon local time and the near-112 level it was at late last week.

Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, said, "With Japanese officials backing off any promises for further stimulus, the pair has started to unwind some of its large gains from last Friday." He added if the Fed hinted at a possible June hike, the "move in dollar/yen could quickly propel the pair toward prior range highs around the 114 figure."

Market watchers are expecting some easing from the BOJ this week. John Vail, chief global strategist of Nikko Asset Management, said the Japanese central bank "will likely start a targeted longer-term refinancing operations program, like the European Central Bank's [program], to counteract the pain of negative rates on banks and further spur lending."

Vail added he expects mild declines in rates and an increase in ETF purchases by the bank to a level that "will start to have monetary policy implications instead of just being symbolic of the BOJ's desire to increase risk appetite by the Japanese people."

Nikko Asset Management expects the dollar/yen pair to hit 116 by end September.

Japanese banking stocks finished mixed, with shares of Mitsubishi UFJ down 1.41 percent, SMFG off 1.49 percent and Mizuho Financial up 0.22 percent.

Elsewhere, the yen's relative strength on Wednesday, compared to levels it traded at last week, saw major exporters drop, with shares of Toyota closing down 1.75 percent, Nissan down 0.43 percent and Honda off by 1.33 percent. A stronger yen is a negative for exporters as it usually reduces their overseas profits when converted into the local currency.

Overnight advances in oil prices seemed to have initially been "enough to lend some support to the commodity currencies," according to David de Garis, director and senior economist at the National Australia Bank.

The Australian dollar was around $0.7746 in early trade, compared with the $0.7698 level it briefly touched during Asian hours on Tuesday.

But the Aussie dollar then fell 1.77 percent to $0.7610 as of 3:00 p.m. HK/SIN, after Australia's consumer prices unexpectedly dropped, reviving talks of further easing from the Reserve Bank of Australia (RBA) in the months ahead.

Data from the Australian Bureau of Statistics showed headline consumer price index falling 0.2 percent in the first quarter of 2016, due to falling food and fuel prices. Reuters said the market was expecting a 0.3 percent increase. Annual inflation slowed to 1.3 percent, from 1.7 percent over the twelve months to the December 2015 quarter.

"While this is not a problem for short periods, the risk is that thanks to a combination of deflationary pressures globally, soft demand domestically and very weak wages growth inflation could remain well below target for an extended period," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.

Oliver added that this is a risk the RBA cannot ignore. "While we had virtually given up on a cut at [the RBA's] May meeting next week, after recent solid jobs data, there is now a reasonable chance that it may move next Tuesday," he said.

ASX 200
CNBC 100

Oil prices extended gains during Asian hours, after advancing overnight following reports of a drop in U.S. crude inventories.

Global benchmark Brent crude futures were up 1.16 percent at $46.27 a barrel as of 3:02 p.m. HK/SIN, while U.S. crude futures added 1.14 percent to $44.54.

Reuters said the American Petroleum Institute reported a draw-down of nearly 1.1 million barrels in U.S. crude inventories last week, versus a 2.4 million-barrel build forecast by analysts in a poll.

Energy plays in Asia closed mixed, with shares of Santos advancing 2.02 percent, Oil Search giving up morning gains to close up 0.14 percent, Woodside Petroleum dropping 2.83 percent and Inpex higher by 1.2 percent. Chinese mainland energy plays mostly finished up, with shares of Sinopec advancing 1.01 percent.

Resources producers mostly ended lower as commodity prices fell. On the London Metal Exchange, three-month copper, aluminum and lead prices declined between 0.46 and 0.61 percent in the afternoon during Asian hours.

In China, Shanghai steel futures were down 4.37 percent, while Dalian iron ore futures dropped 3.63 percent in the afternoon local time.

The drop in iron ore and steel futures in the mainland came after authorities raised trading costs to deter speculative investors and mitigate fears of a destabilizing crash, according to Reuters.

Major Australian miners, Rio Tinto, Fortescue and BHP Billiton closed down between 0.56 and 2.86 percent. Chinese metal plays ended mostly lower, with Aluminium Corp closing down 2.25 percent.

Stateside, the Dow Jones industrial average was up 0.07 percent, the S&P 500 finished 0.19 percent higher and the Nasdaq composite was down 0.15 percent.

In after-hours trade, Nasdaq 100 futures initially fell more than 1 percent, following a sharp drop in Apple shares on disappointing earnings.

Apple shares fell more than 8 percent in after-hours trading, erasing more than $46 billion in market capitalization.

The tech giant reported fiscal second-quarter earnings of $1.90 per diluted share on $50.56 billion in revenue. Wall Street expected Apple to report earnings of about $2 a share on $51.97 billion in revenue, according to a consensus estimate from Thomson Reuters.

During Asian hours, shares of major Apple suppliers mostly fell, with shares of Catcher Technology closing down 1.27 percent, Alps Electric down 1.15 percent and Murata Manufacturing down 4.42 percent. Shares of Nidec and Pegatron ended higher, up 1 and 0.43 percent respectively.

— Everett Rosenfeld contributed to this report.

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