CNY bounces from new lows, AUD resilient after RBA

John Hardy

Head of FX Strategy

(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. 

Chart: EURUSD

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.

Enlarge
EURUSD (source: Saxo Bank)

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.

Upcoming Economic Calendar Highlights (all times GMT)


   • 0730 – Sweden Riksbank Interest Rate Decision
   • 0830 – UK Jun. Construction PMI
   • 0900 – Sweden Riksbank’s Ingves Holds Press Conference
   • 0900 – Euro Zone May PPI / Retail Sales
   • 1400 – US May Factory Orders
   • 1600 – ECB’s Praet to Speak

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.