Forex Market Commentary
The initial reaction of the Yuan devaluation was 
pandemonium in the currency markets. The people's bank of China (PBOC) made its move to defend its economy from the growing fear of deflation. Asian currencies were worst hit as the Yuan devalued against the USD with the Korean, Singapore and Aussie dropping 1%. However when the dust settles what will become very clear is that the IMF will no longer look to China for reliability in the management of it's currency given the sudden dramatic devaluation without the cooperation of major trading partners. The PbOC cut the Yuan daily-fixing rate by a record 1.9 percent only just a week after the International Monetary Fund debated then delayed an overall decision to endorse the Yuan as a reserve currency but estimated that this could happen by mid next year. That faith at the IMF has all but been shattered now by an act more likely to be seen as the beginning of an international currency war. The move by China has also cast some serious doubt on the general health of what is now the world’s second-largest economy should China have needed to act so dramatically as it did today.
pandemonium in the currency markets. The people's bank of China (PBOC) made its move to defend its economy from the growing fear of deflation. Asian currencies were worst hit as the Yuan devalued against the USD with the Korean, Singapore and Aussie dropping 1%. However when the dust settles what will become very clear is that the IMF will no longer look to China for reliability in the management of it's currency given the sudden dramatic devaluation without the cooperation of major trading partners. The PbOC cut the Yuan daily-fixing rate by a record 1.9 percent only just a week after the International Monetary Fund debated then delayed an overall decision to endorse the Yuan as a reserve currency but estimated that this could happen by mid next year. That faith at the IMF has all but been shattered now by an act more likely to be seen as the beginning of an international currency war. The move by China has also cast some serious doubt on the general health of what is now the world’s second-largest economy should China have needed to act so dramatically as it did today.
Firstly, in the equities markets, today the Dow took a tumble in the opposite direction having gained +241.79 on Monday, but come Tuesday the Dow fell 212.33 points down to 17402.84. The SSE in Shanghai closed at 3,927.91 and the Nikkei closed at 20,480 down 100 points on the day as did the EuroSTOXX50 close 64 points down at 3611.00. All in all global equities had a bad day and this may only be the beginning of a re-adjustment in equities given the Chinese Yuan devaluation that is going to affect the major world exporting nations in the months ahead. Not too mention that this has been the most aggressive Yuan devaluation by Chinese policy makers at the PBOC since the 1990's. All week we had this whisper going round the currency dealer rooms but nobody took any stock in the rumor. Now we have it: the sudden event sprung upon us much like the Swiss SNB market move iat the beginning this year. the cut of 1.9% valuation was massive to say the least. Now the question begs of itself: is this really a "one-off" as the Chinese central bankers really claim or is this the gauntlet thrown in the first to herald a new currency war between the world's leading exporters: China, Japan, Europe and USA? Since the burst of the credit bubble in 2008 the global economy has been languishing unable to match the pace of the early 2000's and today the slow down in China is pretty evident across the board. No longer do we see 10% and greater GDP growth figures? China's costs of production re rising, wages are rising and an overtly hyped up property market looks to be tottering on the brink of collapse? Would Chinese policy makers accept the Credit Suisse forecast last week of annualized 6.9% economic growth? Hardly likely; hence the Yuan devaluation to spur the battered Chinese economy to restore confidence in the Chinese equities and property market. the real problem at heart is gthe risk of deflation and policy makers took a long hard look at the July export figures and realized something had to be done immediately. with 3.6 trillion USD in currency reserves China has a lot of room to play. However, China has also got to understand that a shock to the fledgling equities markets could lead to capital outflows and so a really tough balancing act must be found to lower the Yuan, increase price competitiveness in exports and at the same time encourage international investors to keep investing in Chinese equities.
As yet we are unable to see the big move on the USDX. big specs are still holding off and looking for that long awaited milestone of an official US rate hike of 25 basis points. But the US Fed is all to aware of the growing pains in the US equities markets. The ugly head of deflation is a paramount concern that can lead to capital flight to safe havens.
The EUR/ USD rose again but not for any fundamental cheer of economic data inspiring traders to invest in Euro equities and bonds. No, this is more of a case of more short covering as net shorts in the market clear out and big specs continue to wait on the fence for the next big push. more likely that big push will be a dramatic re-run of the short pressure experiences since last August 2014. With a possible German slow down and increased ECB bond buy back program really the EUR/ USD hasn't got a fundamental leg to stand on to justify per se investment to see it rise to the 1.13 again. More likely we will see another tsunami of shorts and it is very likely that the Yuan devaluation yesterday may become the first domino in that sequence of events that may trigger a large short position given a September rate hike.In view of the fears of Chinese deflation crude oil lowered on the WTI to $43 once again and investors nervous of a possible Chinese equities meltdown sought flight to safety with the gold bullion market bid up to the 1100 region once again.
Alwarys look to support and resistance band lines as the key to understanding in the long and short term where prices are converging. Professional technical traders use 50 day and 200 day medium and slow moving averages as fundamental cornerstones for interpreting the direction of price action.
USDX
US Dollar
97.172 -0.033 -0.04%
Support 95.830 Resistance 98.530
97.172 -0.033 -0.04%
Support 95.830 Resistance 98.530
EUR/USD
1.10442 +0.00483 +0.44%
Support 1.08123 Resistance 1.12003
1.10442 +0.00483 +0.44%
Support 1.08123 Resistance 1.12003
Crude Oil
43.5t5 +0.47 +1.05%
Support 44.56 Resistance 48.40
Gold
1108.935 +9.750 +0.89%
Pieter Bergli - DeLoren Trust Holdings
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