Head of FX Strategy, Saxo Bank Group
(Editor's note: In a late-breaking development this morning, People's Bank of China governor Yi Gang was out this morning with verbal intervention, saying that the PBoC will “keep the yuan exchange rate basically stable at a reasonable and balanced level”. This may put a top in the USDCNY chart for now and if so, would lay to rest fears that China has “lost control” of the exchange rate.)
The CNY weakened further overnight after Chinese authorities set the fix lower for the CNY once again, with USDCNY rising above 6.72 overnight before settling back toward 6.67 as of this writing. At its weakest levels overnight, the currency had weakened over 4.5% versus the US dollar in the space of less than three weeks.
The key question here is whether China is trying to send a message to President Trump in the showdown over trade or whether the message is intended for the Powell Fed. In other words, China may be looking back to the early 2016 timeframe and how the strong US dollar finally triggered then-Fed chair Yellen to back away on forward guidance on further rate hikes – seen at the time as the key change of course that revived global markets .
Perhaps China is hoping it can trigger a similar reassessment from the Fed this time around as China’s policy needs at the moment sharply diverge from those of the US. If so, it is a risky gambit and could get Trump’s attention first.
In Australia, the Reserve Bank of Australia left rates unchanged and left the language on the economy unchanged, though it highlighted new risks, including tightening global financial conditions and the higher funding costs in Australia domestically. Note Saxo strategist Eleanor Creagh’s piece on domestic funding costs rising and the implications for tightening credit and slowing growth in Australia. The Royal Commission investigation of Australian banks’ practices is a negative for the credit impulse at the margin as well.
Nevertheless, Australian markets are oddly ebullient, with the widely followed ASX 200 index reaching record highs even as the market frets the risk of a yuan devaluation and key commodity price developments have been less than inspiring. Copper prices have dropped below the pivotal $3/lb. price level.
In Germany, Chancellor Merkel and her coalition partner’s leader Seehofer struck a deal on dealing with migrants that has saved the nearly 70-year-old coalition for now, as new transit centres will be setup along the German and Austrian border to process migrants and seek to return them to the countries that are processing their cases.
This provided little upside for the euro overnight as the currency remains mired in the range between 1.1500 and 1.1700+ versus the US dollar.
The run from here through the end of this week looks pivotal for the US dollar, which has gotten stuck in a nervous area in the majors – the FOMC minutes are unfortunate in that they pre-date the latest move in the Chinese currency, so the market may have to wait for the July 17 Powell testimony before Congress for a better feel for the Fed’s current thinking. So It will be up to economic data to carry the day.
Strong US data and a clearing of the immediate uncertainty surrounding German Chancellor Merkel’s future produce a collective shoulder shrug, keeping the uncertainty level high here. Surely we have a sense of direction by the Friday close? A break above 1.1700-25 suggests a bigger consolidation back toward 1.2000, while a break of the 1.1500 area opens up 1.1200 potential.
The G-10 rundown
USD – a massive June ISM Manufacturing print yesterday (60.2 versus 58.5 expected) continue to point to a hot US economy, but the market is reluctant to price in a more hawkish Fed at the moment; incoming data and July 17 Powell testimony are the next test, as is the constant pressure from recent CNY moves.
EUR – the single currency gets a modest fillip from the CDU – CSU ceasefire, but we’re still stuck in limbo on the EURUSD chart with a clear 1.1700-25 trigger area to the upside if the USD hits consolidation mode.
JPY – USDJPY pulling higher, mostly led by JPY weakness after USTreasuries reversed back lower yesterday – more JPY weakness to come if bond yields rise further and we slip above the cycle highs at 111.40.
GBP – interesting week ahead for sterling after EURGBP cleared local resistance as we await the outcome of a closed-door “Body Bag Summit” of Conservative party members geared toward finding the final Brexit negotiating position as the clock ticks down on the March 2019 deadline.
CHF – EURCHF gets a modest boost on the latest détente in Germany’s CDU/CSU coalition. Hard to see what holds the pair down if no new EU existential risks materialise here – next test into the 1.1675 area 200-day moving average.
AUD - There was nothing to celebrate in the RBA statement for the Aussie, which nonetheless managed to bounce, suggesting that downside progress could slow without fresh catalysts (wider risk off contagion – certainly for Australian domestic market, which looks bubbly).
CAD – USDCAD looking pivotal here as it hasn’t participated in the USD strength elsewhere, and important implications if the 1.3125-1.3050 area fails in coming sessions.
NZD – kiwi weakness continues apace and AUDNZD is pulling into new territory locally above 1.0960 – possibly opening up the range all the way to 1.1200+.
SEK – Riksbank on tap this morning – hard to see any dramatic adjustment in the language, though EURSEK has reached an important inflection point around 9.50 and a more positive tone across markets today could see SEK pushing back against further weakness.
NOK – we prefer EURNOK lower as long as we remain below 9.60 and avoid any meltdown in equity markets. A recovery in risk appetite may be required to get the ball rolling.
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