Calm In China And CNY
Swissquote Bank Ltd | Jan 12, 2016 05:38AM ET
Market Brief
Risk aversion has taken a temporary reprieve today with Asia’s regional equity indices mixed, fading the weak US close which wiped out 4Q 2015 gains. The lull in Chinese selling is partially due to stability in CNY. China fixed the CNY at 6.5628, broadly unmoved for the third day. This forced CNH to appreciate sharply (combined with tightened liquidity issues, verbal intervention and unconfirmed reports of policy intervention) and converge with CNY . The offshore rate briefly traded above the onshore rate. With Tokyo back from a long weekend the Nikkei sold-off to catch up to prior regional weakness. The Hang Seng was marginally lower by -0.65% but the Shanghai Composite increased by 0.20%. Moving forward we suspect that the Chinese authorized will endeavor to inject a level of steadiness to CNY. The high degree of volatility has does significant damage to Chinese policy maker’s credibility and they are unlikely to sacrifice more critical reputation and potential disorientation in order to rejuvenate growth. On the data front China will get December trade data on Wednesday. A significant deterioration in trade activity will support the markets fears of an economic slowdown and likely pressure Chinese assets further. On the commodity front, oil prices continued to decline as WTI plunged 5.8% to $30.41 and Brent crude falling to $30.34. In FX markets, the G10 was mixed with winner and losers tied against the USD. Commodity currency remained a sell while safe haven currency gained verse the greenback.We remain negative on commodity linked currencies such as CAD, NOK, NZD as see any rebound as a opportunity to reload shorts.
On the daily charts the USD/JPY exhibited a bullish engulfing pattern which is a clear reversal signal (potentially indicating that 117.23 was the low). The JPY has been the strongest G10 currency in 2015, based on the dominate risk-off sentiment. Japanese November Trade surplus increased to Y1.1453trln against Y858.5bln expected. However, Japan’s November BoP data indicated that that capital outflows more than counterbalanced the current account surplus. Japanese December consumer sentiment all households rose to 42.7 from 42.6. The recent strength of the JPY has negated a significant potion of the policy driven weakness from October BoJ initiative. The BoJ is nearing a challenging cross roads. With global demand weaker and risk aversion driving the JPY higher the likelihood of reaching its 2% target is unlikely. However, policy actions are having an increasing degree of limited success. We anticipated the BoJ to shift language to more dovish language in the near term in attempt to verbally weaken the JPY.
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Todays focus will be on UK will be on November’s industrial output, expected to fall 0.0% m/m from 0.1%. UK Manufacturing production should increase 0.1% from -0.4%. The Thursday BoE MPC meeting should have no changes with minutes broadly in line with December’s meeting. The vote should be unchanged at 8-1 (potential McCafferty removes his hike vote). Member emphasis of global risk and weak inflationary pressure has only increased since the last meeting.
Currency Tech
EUR/USD
R 2: 1.1387
R 1: 1.1095
CURRENT: 1.0896
S 1: 1.0458
S 2: 1.0000
GBP/USD
R 2: 1.5529
R 1: 1.5242
CURRENT: 1.4520
S 1: 1.4321
S 2: 1.3657
USD/JPY
R 2: 125.86
R 1: 123.76
CURRENT: 117.30
S 1: 115.57
S 2: 105.23
USD/CHF
R 2: 1.0676
R 1: 1.0328
CURRENT: 0.9976
S 1: 0.9786
S 2: 0.9476
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