China shook the markets once more last week as the People's Bank of China (PBoC) devalued its currency heavily on three consecutive occasions. The decision caught most market participants by surprise and volatility was out of control across the board. China does not let its currency trade freely in the financial markets unlike its counterparts but on the 11th of August, something happened which had not been seen in almost two decades. The PBoC decided to set target rates consecutively to 1.9% and 1.6% in addition to allowing market forces to determine the value of the CNY.
Problems were already at bay in the world’s second-largest economy since the stock market crash in July. With an influx of negative economic data and a potential of an economic slowdown, the CNY should have fundamentally been trading lower. This was not the case because the single currency was pegged to the USD, something which has been rising considerably due to the positive sentiments in the States. There was a situation where prices were trading far above what the PBoC thought the intrinsic value should have been. This inflated value hit exporters hard by making their services more expensive overseas. Market forces which were meant to bring the CNY lower were absent and money was leaving the country due to the worries of the economy.
In the perspective of the PBoC, it only seemed logical to intervene and inorganically bring the value of the CNY down but this short-term fix may have induced a longer term problem as the effects rippled globally. China’s trading partners have already tasted a slight hint as to what may come. Theoretically a weaker yuan could reduce the exports of U.S goods to China which is already down this year. In the shorter term, a 2 percent drop in the CNY may not be a big deal, but the fear of a greater drop over the coming months is what spooks most investors.
The results of China’s short-term move to save itself does not end here. A cheaper CNY will damage U.S exporters and more than likely compress U.S inflation.... a value already below the annual 2% FED target. Talks are already in play that the FED hike in September may be postponed due to the situation of China, but nothing is on paper yet. No matter what dimension one looks at this situation, this is in fact very serious. This devaluation most likely seemed like a distress signal from Beijing policymakers suggesting that growth in China may be far weaker than the 7% growth which official figures suggest.
The complications do not end here. Deflation is a topic which most attempt to avoid comes into the picture. China’s action may be the early signs that the demand in the global economy is in fact trickling away. Periods of persistent falling prices in commodities can seed to a reduction of spending and investment which indubitably has an effect on wages and consumer spending. This probable deflationary pressure will affect Greece as it is in the circle of most vulnerable countries that are heavily in debt. Consumer demand and confidence are already weak in this healing nation, as of now it currently suffers from its own domestic deflation, if such does truly materials Greece may be back to square one with the Euro heavily weighed down once more.
Since the abrupt decision made by the PBoC to weaken the Yuan significantly, the USDCNY has rallied to the upside. Prior to the move, this currency pair was flat but as of now prices have rallied over 3800 pips to the upside. Fundamentally prices may still trade higher as the weak CNY should aid the USD bulls. The daily timeframe suggests that prices may bounce from the monthly pivot of 6.420 before a potential incline to the 6.500. Lagging indicators such as the MACD and 20 SMA do suggest that USDCNY has some energy to still trade up. Some news releases on Wednesday and Thursday should promote some volatility. A move and daily close below 6.380 invalidates this bullish outlook.
The EURUSD was bearish today with prices dipping back below the weekly pivot of 1.108. This short-term bearish move may be a correction in the bigger picture because overall we are still bullish on the EURUSD because of the break and daily close above the previous lower high of 1.1130. Prices reside above the 20 SMA and some support may be still found around the monthly pivot. The MACD points to the upside with price action looking healthy. The USD has been quite sensitive as of late with any news releases which have anything to do with employment. Wednesday and Thursday should give more light.
The situation with China has scorched the Australian economy some more. This can be reflected with the weakening AUD last week when markets saw the CNY depreciate across the board. In a fundamental sense, sentiment remains bearish on the AUDUSD as pressure from China and the falling prices of Gold weigh hard on the AUD. Technically things are looking quite flat. Some support can be found at 0.7260 and resistance at 0.7420 which is also the monthly pivot. The best strategy may be to trade the breakout/down above or below these identified levels of support and resistance.
EURAUD remains in a technical uptrend which is currently respecting an upward trend line. The higher low of 1.473 holds as the bullish trend defining level. As long as prices keep above here then the penultimate bullish target of 1.5400 may be realistic. Prices are currently above the 20 SMA and above the monthly pivot. Some support should be expected here before a further incline to the upside. The fundamental weakness of the AUD should help the EURAUD bulls take control once more after this short-term correction comes to an end. A move below 1.473 invalidates this daily bullish outlook.
Nothing much has happened with the USDJPY on the daily timeframe. The Japanese economy continues to take a beating with an economic slowdown. It looks like Abenomics have done little to pull Japan out of the deep hole which is a loss of consumer confidence, spending and business investment. USDJPY has ranged around the 124.50 for an extended period of time. Some support can be found around 123.0 and resistance around 125.0. The best strategy looks to be the breakout/down. Both leading and lagging indicators also suggest that there is a lack of direction as of now on the USDJPY.
This is an interesting pair, the battle of who is weaker is apparent on the charts. Whilst the AUD takes a hit from China and Gold, the CAD takes a bigger hit from the plunging prices of Oil. Technically things are slowly moving to the side of the bulls. Prices are trading above the weekly and monthly pivot, the MACD trades to the upside and we are also above the 20 SMA. Resistance can be found around the 0.9750 level. A breakout will create a new lower high just above the 0.9500 support. A move back below the 0.9600 will suggest some bullish weakness.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.