Monday was marked by risk-off trading, with equities tumbling after the PBOC set the onshore USD/CNY rate above 6.90 for the first time this year, prompting traders to push the offshore USD/CNH pair well above the key 7.00 mark. In the central-bank world, the RBA refrained from acting this morning, but kept the door open for further easing in the months to come. Tonight, the torch will be passed to the RBNZ, which is expected to cut its OCR by 25bps.
The dollar traded lower against the majority of the other G10 currencies on Monday and during the Asian morning Tuesday. It was found higher against JPY, and slightly against AUD, while it underperformed versus EUR, CHF, SEK, CAD, NOK and GBP in that order. The greenback was found virtually unchanged against NZD.
At first glance, the performance in the FX sphere provides little with regards to the broader market sentiment. However, throughout most of the day yesterday, we saw the safe havens yen and frac staying under buying interest, as investors continued reducing their risk exposures drastically. Indeed, major global stock indices were a sea of red yesterday, with both Dow Jones and S&P 500 falling nearly 3.0% each, and Nasdaq tumbling 3.47%.
Remember that investors were caught off guard last week, after US President Trump threatened China with tariffs on all the remaining goods imported to the US. The risk-off mood rolled into this week as well, as headlines and developments since Trump’s announcement served only to make things worse. During the Asian morning Monday, the PBOC set the onshore USD/CNY rate above 6.90 for the first time this year, prompting traders to push the offshore USD/CNH pair well above the key 7.00 mark. It almost hit 7.14 overnight.
This was seen as Beijing weaponizing its currency in the face of the escalating tensions with the US. The thinking behind this is that a weaker yuan against the US dollar could make Chinese exports to the US cheaper, something that could offset some of the tariff effects, and thereby keep Chinese goods attractive. However, this would also make it harder for the trade surplus China has with the US to be reduced, something that would not bode well for Washington. Indeed, yuan’s fall has already triggered reactions in the Trump administration, which designated China as a “currency manipulator” for the first time in decades.
Having said all that though, during the Asian morning today, China appeared to be taking steps to halt the yuan’s slide. The nation stated that it is planning to sell CNH 30bn of offshore yuan denominated bills in Hong Kong, a move that could offset short-selling in the currency, while the PBOC set its onshore rate slightly firmer than the market had expected, although this was still a weaker level than yesterday and the lowest since May 2008. This encouraged traders to buy back the offshore yuan, with USD/CNH correcting sharply lower and hitting support near 7.06, and also triggered liquidation in recent long-yen positions, with USD/JPY recovering around 160 pips and JPY taking the last place in the G10 performance table.
Back to the dollar, it may have come under selling interest as all this uncertainty surrounding the US-China trade relationship increases the chances for Fed policymakers to cut more aggressively than they hinted last week, as it may have more adverse effects on the US economy. Indeed, according to the Fed funds futures, investors have further ramped up their bets with regards to additional monetary easing by the FOMC. The next 25bps cut is now fully priced in for September, while a third one is factored in for October. Remember that on Friday morning, a third 25bps cut was seen in January 2020. There is also a 26% chance for a 50bps cut at the upcoming gathering.
After a strong sell-off yesterday, where the S&P 500 lost around 3%, the index made its way to levels last time seen in June. During yesterday’s last trading hour, the buyers tried to push the price back up to recover some of the losses, but the move was not significant in comparison to the huge drop that the index experienced during the whole session. The S&P 500 moved all the way to the 2777 hurdle, from which it rebounded and pushed back to the upside during the after-hours. The index is already quite overstretched to the downside, and as we can see, the cash index started correcting higher. There is a possibility to see some more upside but given the current short-term downtrend, S&P 500 might reverse to the downside again, hence why we will remain somewhat bearish for now.
If the index makes a move a bit higher, but struggles to overcome the 2866 zone, which is the low of June 13th, this is when the sellers might take the opportunity to step in again and push the price back down. Initially we will target the 2840 obstacle, a break of which could open the door back to the above-mentioned 2777 hurdle, which is yesterday’s low. If that area is not enough for the sellers, the S&P 500 may slide a bit further, targeting the 2763 area, marked by the high of June 3rd.
We will abandon the short-term bearish case only if we see the index traveling above the resistance area between the 2910 and 2914 levels. This way, we could aim for the 2935 hurdle, marked near Monday’s high, which could help stall the price for a while. The S&P 500 might even correct slightly to downside, but if it remains above the 2900 area, the buyers could jump in again and lead the index higher. If they manage to push the price beyond the 2935 obstacle, the next potential resistance could be seen around the 2960 level, marked by the high of August 2nd. That level also coincides with the 200 EMA, which might be an important obstacle on S&P’s way up.
Apart from developments surrounding the yuan and the US-China trade conflict, we also had an RBA rate decision today during the Asian session. The Bank kept interest rates unchanged at +1.00% and noted that they will continue to monitor developments in the labour market closely and ease policy further if needed to support sustainable growth and achieve their inflation target. In our view, the message remains the same. The door for further easing was kept open, but policymakers may not be in a rush to cut rates at their upcoming gathering. They may prefer to monitor data before they decide whether and when to act.
The Aussie gained around 20 pips at the time of the release, perhaps as the statement increases the chances for the RBA to stand pat in September as well. According to the ASX 30-day interbank cash rate futures yield curve, the probability of policymakers staying on hold in September is at around 56%, while a cut is almost fully priced in for October. That said, the Australian currency was quick to give back the decision-related gains and to trade near its pre-decision levels as the outcome is far from suggesting a change in the RBA’s future plans.
Staying in the monetary-policy world, tonight, the central bank torch will be passed to the RBNZ. Last time they met, officials of this Bank decided to keep rates steady, after cutting them to 1.50% in May, and signaled that more easing may be underway, with the forward guidance appearing twice in the statement. Since then, market participants have ramped up their expectations with regards to a policy move as early as at this meeting, with the probability for a 25bps reduction standing at 100% according to New Zealand’s OIS (Overnight Index Swaps).
Thus, bearing in mind that a 25bps cut is a “done deal” in the eyes of investors, if indeed this is what the Bank decides to do, attention will quickly turn to the accompanying statement, the updated economic projections, as well as the press conference by Governor Adrian Orr. Market participants will be eager to find out whether more cuts are underway, and if so, when is the next one likely to be delivered.
Although it came back under selling interest, perhaps due to the uncertainty surrounding the US-China trade front, the Kiwi jumped overnight after New Zealand’s employment data for Q2 showed that the unemployment rate slid to 3.9% from 4.2%, the economy added 0.8% qoq jobs after a 0.2% slide, and the Labor Cost Index accelerated to +0.8% qoq from 0.3%. The data may not stop RBNZ policymakers from cutting rates tonight, but it may give them a reason to turn data dependent and not rush into another cut in their next meeting. Signals that officials are not in a rush to cut again may help the Kiwi gain, despite the widely anticipated 25bps cut. On the other hand, willingness to deliver another cut as soon as at the next gathering could add pressure to the currency, but the big negative surprise could be a “double cut” of 50bps tonight.
Yesterday, AUD/NZD dropped heavily, where it managed to reach the 1.0263 hurdle, which was last time tested on January 2nd. That said, today, the bulls were quick to jump in and drive the pair back up, almost managing to recover all the losses made yesterday. Overall, we can see that the rate is still balancing below a medium-term downside resistance line taken from the high of May 8th. But if to consider the strong recovery which we are seeing right now, there is a chance AUD/NZD might continue with the correction up until it hits that downside line. If the line is able to keep the rate down, we might see the bears stepping in and pushing the pair lower, hence why we will stay cautiously-bearish for now.
As mentioned above, if the rate continues climbing higher, it may end up testing the 1.0428 hurdle, marked by the high of August 5th. Slightly above it runs the aforementioned downside line, which could help hold the pair down. If so, the sellers could quickly take advantage of the higher rate and send AUD/NZD lower, potentially falling below the above-mentioned 1.0428 hurdle, and aiming for the 1.0385 obstacle. If the selling doesn’t end there, the next target could be the 1.0360 zone, which is the low of August 1st. This is where the rate may stall for a while, until the bulls and the bears decide who takes control from there.
Alternatively, if the aforementioned downside resistance line fails to keep the rate down and breaks, this might be a good sign for the buyers, especially if the pair moves also above the 1.0455 barrier, marked near the high of August 1st. At the same time, AUD/NZD would be placed above its 200 EMA on the 4-hour chart and such a move might clear the way to the 1.0493 obstacle, marked by the high of July 12th. If the bulls are still feeling comfortable, this could lead to a break of that obstacle and we may see a test of the 1.0545 level, which is the high of July 5th.
The only releases worth mentioning ahead of the RBNZ decision are the US JOLTs job openings for June, which are expected to have risen somewhat, and the API (American Petroleum Institute) weekly report on crude oil inventories, which no forecast is available.
As for the speakers, St. Louis Fed President James Bullard will step up to the rostrum.
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