China rattles stock markets, central bankers calm 1Sept15

China rattles stock markets, central bankers calm

Michael O’Neill

FX Consultant / IFXA Ltd


  • Paradox: While China knocks stock markets, central bankers seem unfazed
  • US ISM Manufacturing disappoints
  • Canadian Q2 GDP says "recession"
  • Loonie remains handcuffed to weak oil prices

The slide in Chinese equity markets knocked equities globally, but central bankers,

including those at the Fed, seem unimpressed. Photo: iStock

By Michael O’Neill

Chinese equity market instability has been the dominant forex trading theme for the past two weeks. A few collapses in the Shanghai Composite Index (SHCOMP) spread like a virus, infecting equity indices globally. Commodity prices took a beating, with WTI breaking key support in the $40.00 per barrel zone. Commodity bloc currencies got walloped as well.

The financial and mainstream media were jam-packed with stories of another global market crisis. Many analysts viewed the equity market and commodity carnage and concluded that there was no way that the US Federal Reserve would raise interest rates in September.

The Fed’s Jackson Hole Symposium was expected to be the platform where the Federal Open Market Committee (FOMC), in the person of vice chairman Stanley Fischer, would acknowledge the risks and announce a longer period of zero interest rates.

But he didn’t. And therein lies the paradox. FX, equity and commodity traders have all reacted to the Chinese stock market chaos as if it were “Patient Zero,” in the style of Lehman Brothers, for the next global financial catastrophe.

Central banks, on the other hand, don’t seem to see Chinese matters in the same light. The FOMC’s Mr. Fischer didn’t dismiss China’s woes outright but, according to MarketWatch, said “we are following developments in the Chinese economy and their actual and potential effects on other economies more closely than usual.” That sentence smacks more of annoyance than of fear.

A week earlier, the governor of the Reserve Bank of India (RBI), Raghuram Rajan warned about attributing everything to China. In a BBC interview he said “"Every adverse development across the world affects the rest of the world in some way. It works through financial markets first, then trade later. So it’s something that everyone is concerned about. But you have to be careful about attributing everything to China.”

Earlier this morning, the Reserve Bank of Australia (RBA) appeared to downplay Chinese equity market concerns, going as far as attributing the sharp declines to voluntary deleveraging rather than a result of margin calls.

So who is right? Are traders seeing something that central bankers aren’t?

At the risk of being blindly naive, bet that the central banks have a better long-term handle on global economic markets and that the volatility in the past two weeks is more a result of an overreaction in thin summer markets.

Canada in recession? Maybe, maybe not

Canadian second-quarter GDP shrank by an annualised 0.5%, with the economy contracting for a second consecutive quarter, which, for many, means Canada is in a technical recession. While it’s not good news, it wasn’t unexpected. What was unexpected was a glimmer of hope, in the form of a 0.5% rise in real GDP for June that, like the first buds in spring, says growth may be on the way. Another sign that things may be looking up was a 0.1% increase in exports of goods and services. Minuscule, for sure, but it is headed in the right direction.

As important as this data is, it is still rather stale. Oil prices have collapsed since June, and China’s economic slowdown has shaken global financial markets. Maybe things are as lousy as some people believe.

Canada’s GDP shrank for a second consecutive quarter

Source: Statistics Canada.

USDCAD outlook

Canadian GDP data today offered a glimmer of hope for those looking for a second-quarter recovery based on the uptick in the month-on-month data for June. It is certainly not enough to spark a wholesale rally in the Canadian dollar, but it does sow a seed or two of doubt in the minds of US dollar bulls. The key question is oil. Is the rally from the $38.30 per barrel low merely an overdue correction in a thin market with extreme short positions? The daily charts say correction while trading below $53.20/b. However, the hourly charts say "rally" while above $45.50/b.

Flight of the loonie held down by oil’s plight. Photo: iStock

Yesterday’s report of lower US production estimates for the first half of 2015, along with a story that Opec would consider production cuts to obtain a “fair” price, has helped fuel oil gains and the loonie’s rise. But there is no way that any Opec deal will be reached any time soon. Friday’s Canadian employment report is unlikely to provide any support to the Canadian dollar unless it beats expectations and posts a gain.

This morning’s US ISM Manufacturing data missed forecasts (Actual 51.1 vs. forecast 52.6) and helped to undermine the loonie in the process on the assumption that weak US demand will hurt Canadian exports.

As long as a September rate hike by the Fed remains on the table and oil prices trade below $53.20/b, USDCAD will be on the defensive.

USDCAD technicals

The short-term USDCAD uptrend since the Bank of Canada’s July rate cut remains intact while trading above 1.3080-1.3100. However, there isn’t any clear direction between 1.3100 and 1.3300 as both ends of the range have dealt multiple times in the past week. A break of 1.3350 (2015 high) signals further gains to 1.3450. A move below 1.3080 warns of a steep drop to the 1.2950-1.300 support zone.

USDCAD hourly with range

Source: Saxo Bank

— Edited by John Acher

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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