Weekly wrap-China supplants Greece in the trader worry file


China supplants Greece in the trader worry file

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US data supports greenback
  • Loonie tracking oil price moves
  • Greece worries put to rest

By Michael O’Neill

Today, the Greece parliament passed the latest bail-out agreement putting "Grexit" in the trash bin and ended the risk of a debt default, for now. China fears and overproduction helped WTI to drop to prices not seen since 2009 which combined with worse-than-expected (but low level) Canadian data is putting downward pressure on the loonie.

The tempest in a China tea pot

The surprise currency devaluation by China poured scalding hot tea right into the lap of the global FX market, injecting a huge dose of China economic uncertainty into the picture.

China maintains the move was merely an adjustment to address an imbalance between the CNY reference rate and the market rate which was affecting the reference rate’s role as a benchmark.

Maybe so, but the move increased the number of skeptics who believe the devaluation was necessary to jump start an economy that is performing well below the “official” measures of growth.

China is the new Greece

Just as one crisis gets resolved another bigger and better one comes out of the woodwork. The Greek parliament just passed the latest bail-out agreement which ends the risk of a Greek debt default and “Grexit”. At least until next time.

The People’s Bank of China currency move this week has radically altered the FX landscape. For the most part, the risk of a Greek default or exit from the Eurozone was really a regional problem. Whether Greece stayed, left or defaulted would have had a minimal FX impact in the rest of the G-7 currencies.

China is different. China is the 800lb gorilla in mist and the mist is the global economy. The evidence is clear in the reaction of the commodity bloc currencies to speculation of a larger-than-anticipated slowdown in China.

FX markets remain fixated on the timing of a US rate hike but with the FOMC meeting over a month away, traders will make mountains out of mole hills with any large deviations in upcoming Chinese data, exacerbated by August being holiday month for many people.

This scenario should play out until the September 16-17 FOMC meeting statement and press conference.

As Greece risk fades, China enters the picture. Photo: iStock

Loonie and oil – not mixing well

The fall-out from the perception of a rising risk of a slowing Chinese economy splattered commodity prices including oil. The prospect of reduced demand for oil by China coupled with an increasing glut of crude has weighed on oil prices. WTI reached a six-and-half-year low this morning and although it has bounced the downtrend persists.

The prospect of lower oil prices is not sitting well with the Loonie, already under pressure from sluggish economic growth, weak exports and the expectations for a US interest rate increase in September.

USDCAD technical outlook

USDCAD is in a short-term uptrend while trading above 1.29600 but unless 1.3200 breaks decisively there is a risk of choppy trading within a 1.2900-1.3200 trading band. USD support is at 1.3030, 1.2990 and 1.2950. Resistance is at 1.3080, 1.3130 and 1.3180.

USDCAD daily with trading band highlighted

Source: Saxo Bank


The week that was

This was the final week in the time of the year known as the “dog days of summer” and this week the dogs were barking mad.

The week wasn’t expected to be anything special. The only top tier US data release was retail sales and that wasn’t scheduled until Thursday.

Monday started with Asia traders still digesting Friday’s US nonfarm payrolls report and then having to deal with weak Chinese data. It was a sign of things to come. Fed speakers got into the act in New York, with vice chair Stanley Fischer, a noted hawk, cooing like a dove and another hawk, Atlanta Fed president Dennis Lockhart, sounding less hawkish. Twitchy traders didn’t like the sounds and they sold US dollars.

China was the show on Tuesday. The PBoC devalued the yuan by a mere 2% and markets world-wide reacted like the Four Horseman of the Apocalypse had arrived. The US dollar rallied across the board with Aussie and Kiwi being hardest hit.

Wednesday was a replay of Tuesday although less extreme. USDCNH fixed another 1.6% higher than Tuesday and the PBoC had another press conference to reiterate that the yuan devaluation was merely a way off addressing an imbalance between the reference rate and the market rate. Traders appeared to have accepted the PBoC explanation because the US dollar was down across the board by the end of the New York day.

By Thursday, a degree of calm had come over FX markets, in a large part due to the stabilisation in the Chinese currency. However, questions about the true health of the Chinese economy continued to pressure commodity prices. Oil prices remained under pressure due to rising supplies and increased production. The highly anticipated US retail sales data release beat expectations and helped the US dollar recover.

The week ahead

There isn’t a whole lot of anything to inspire traders at the beginning of the week which suggests that the China USDCNY fix will be on everyone’s radar screens. Tuesday will be all about the Reserve Bank of Australia minutes and a slew of data releases from the UK. The week gets more interesting on Wednesday, in the New York afternoon with the release of the FOMC minutes especially in light of this week’s speeches from Lockhart and Fischer. The Jackson Hole Symposium starts on Friday but Janet Yellen is reportedly skipping the party which should diminish its importance to traders.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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