Both sides of the markets Dr. Jekyll and Mr. Hyde’s personalities have been on display in the first half of this week, with the Chinese Currency the Yuan, very much determining the mood.
Weekend reports of a “leaked” draft of a Trump administration bill that would provide President Trump with the powers to raise tariffs without congressional consent and a platform to withdraw from the World Trade Organisation, ensured a rocky start to the week. Regional equities finished Monday’s session mostly lower, led by declines in the Shanghai Composite, the Nikkei and the KOSPI. While the Chinese currency the Yuan, fell to a 10-month low driven also by fears of a potential escalation in trade tensions.
A repeat performance appeared likely on Tuesday, before verbal intervention from the Governor of the Peoples Bank of China (PBOC) Yi Gang, who called for investors to remain calm and rational. Also, soothing investor nerves was rumoured intervention in the Foreign Exchange market by Chinese banks to support the Yuan. The battered Yuan was able to reverse earlier losses to finish the day with small gains (chart below) as were some Asian equity markets.
While the turbulence appears to have subsided for now and ahead of the U.S. Independence Day holiday, it allows investors to consider what comes next for the Yuan and for other correlated currency pairs including AUDUSD, NZDUSD, USDKRW, USDSGD etc.
After the Yuan’s -7.50% depreciation against the U.S. Dollar, since the lows of March 2018, Tuesday’s reaction from the 6.7167 high, indicates a type of “line in the sand” for the PBOC may have been reached. During similar episodes of Yuan weakness in August 2015 and January 2016 after USDCNY found rejection/intervention at a level as it was rumoured to have done today, a period of consolidation/retracement ensured. In the 2015 and 2016 examples mentioned above, it took 121 days and 169 days respectively and a retracement of approximately -2.0% before USDCNY traded beyond its spike highs.
Based on recent episodes of Yuan weakness and barring any new escalation in trade tensions, USDCNY may now stabilise in a range between 6.7000 and 6.6000. This would imply that the implementation and the impact of U.S. $34 billion tariffs by both the U.S. and China at the end of this week has largely been priced into the market. As has a continuing run of solid U.S. economic data which will underpin the U.S. dollar as witnessed earlier in the week by the ISM manufacturing PMI data (surprised to the upside at 60.2 vs. 58.5 consensus). An idea which also fits in with the generally quieter markets and lack lustre trading that comes with the Northern Hemispheres summer months of July and August.
Pending USDCNY remaining below the “line in the sand” 6.7150ish, this should allow the AUDUSD to retrace back to .7500c, while the NZDUSD may again see a .6800c handle. Levels to keep in mind for those looking to short the antipodeans.
Source Tradingview. The figures stated are as of the 4th of July 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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