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IronFX Daily Commentary | 13/08/15

PBoC: There is no basis for further yuan depreciation China’s central bank said that there is no basis for further depreciation in the yuan and that they will try to keep the currency at a stable, equilibrium level as the currency weakened for a third day after Tuesday’s unexpected devaluation. The country’s strong economic environment, sustained trade surplus and deep foreign exchange reserves provide “strong support” to the exchange rate. The Bank intervened to ease the declines and control the pace of depreciation to limit capital outflows, therefore yuan opened only slightly weaker on Thursday. Chinese state-owned banks seems to have sold dollars to support yuan from falling sharply, and also put limit on some firms’ purchases of USD. This explains the weakness seen in the greenback in the last few days.

• Under a new methodology used to determine the fixing, market makers who submit contributing prices have to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates. The reform serves the long-term goal of building a more flexible and market-based exchange rate formation system. Nevertheless, the intervention risk remains high so we will be watching closely the yuan deviations, as it can diverge maximum 2% from its daily fixing before PBoC intervenes.

• The main gainer from China’s devaluation was euro amid speculation that investors unwind trades that used the single currency to buy yuan. In addition, the concern that China’s policy will discourage Fed from raising interest rates this year also caused some weakness in the dollar, which was lower against all of its major peers. But following the New York Fed President William Dudley comments, one of the most dovish members of the Committee, that the Fed is approaching the moment when it can start raising interest rates, USD could regain its lost glamour.

Today’s highlights: During the European day, the final German CPI data for July confirmed the preliminary reading and rose 0.1% yoy, in line with expectations. The reaction in the market was minimal.

• Sweden’s CPI and CPIF for July are also due to be released. Following the dip of the CPI back to deflation in June, another sign of weakness in prices could prompt the Bank to ease further its monetary policy. The Bank held out several times the possibility to act even between the ordinary monetary policy meetings, should the need arise. As such, any sign of softness in prices is likely to keep SEK under pressure.

• In the US, the highlight will be the retail sales for July. Retail sales unexpectedly declined in June and the May increase was revised down. This frustrated investors who have being looking for signs that the soft Q1 data was coming to an end. Nevertheless, given the strong 1st estimate of the US GDP for Q2 and expectations for a rebound in July’s retail sales, we would expect USD bulls to gain confidence again and strengthen the greenback on the news. Initial jobless claims for the week ended Aug.8 are also coming out.


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