Marius Paun | London, UK | Senior dealer | Friday, 09th August 2019
Gold prices continue to rally, moving above the psychological $ 1500.00 mark, as Sino-US disputes make the central bankers around the world rather edgy. A case in point, the New Zealand Central Bank cut its benchmark interest rate by 50 basis points from 1.5% to 1% versus expectations of only 25 basis points cut. The Reserve Bank of India and the Bank of Thailand followed suit. The precious metal reached $1510.00 although has since had a minor pullback on Friday morning, back below the $1500.00 mark.
China’s own currency, the onshore yuan fell to an 11year low, now costing more than 7 to buy one US dollar which indicates that the Chinese may not rush to support it any time soon, or at the least support it less than they have recently. The Trump administration was quick to label China ‘a currency manipulator’, leading to People’s Bank of China Governor Yi Gang saying his country ‘will not engage in competitive devaluation’ CNBC reports.
On the other hand, some analysts expressed views that allowing yuan’s freefall, Chinese government has in fact weaponized its currency as the trade war intensifies.
The US stock markets started the week on the back foot as Monday saw a selloff of more than 3% for each of Dow Jones, S&P and Nasdaq. Although a rally back was observed on Wednesday, it seems the US stocks are ending the week under renewed downward pressure.
Back in the UK the second quarter preliminary GDP figures showed a drop of 0.2% versus expectations for a flat result. In reaction to this first quarterly contraction since Q4 2012, the pound sterling fell below 1.21 vs the US Dollar. It seems that every central banker in the developed world is trying to devalue their respective currencies by slashing rates and/or other easing measures. But the Bank of England benefits from that, mainly on the Brexit saga and a slump in the GDP without much effort on their part elsewhere? Not bad.
ECB published the economic bulletin after its July policy meeting expressing concerns that the current climate of “prolonged uncertainty” is “dampening economic sentiment”. The manufacturing sector is one to keep an eye on. Market participants seem to anticipate weaker growth in the coming quarters, therefore leading to a potential restart of Quantitative Easing. Nonetheless, the EURUSD moved higher during the week hovering around 1.12 currently.
So, if the widespread consensus a few months back was that a deal between China and the US could be struck by the end of 2019, now that favourable outcome appears to be becoming increasingly doubtful.
Marius Paun | London, UK | Senior dealer | Wednesday, 07th August 2019
Last week US President Donald Trump announced 10% tariffs on the remaining $300 billion of Chinese imports. The move came after the Federal Reserve was less dovish than Trump’s liking (judging by his tweets).
In reaction, China’s Yuan weakened to a record low against the US dollar, as more than seven yuan are needed now to buy one greenback. As a consequence, the US Treasury was quick to label China a ‘currency manipulator, devaluing the yuan while maintaining foreign exchange reserves, despite using such tools in the past’. Now, it is acknowledged that China’s currency does not float freely but is managed as a matter of policy. By and large it only fluctuates within a predefined channel.
Nonetheless there is a widespread opinion that China has in fact kept the yuan strong, in the past, for two main reasons. Firstly, if China wants to keep growing by exporting to the world (Belt and Road Initiative is testimony to that) they will want to make yuan part of global currency reserves club (up there with the US dollars, euros, yens, pounds and so on). One cannot do that with a shaky currency.
Secondly, China is, and has been, worried for a while about capital flights. At any sign of currency trouble, investors (foreign or domestic) could decide to take their cash out of China. So defending the yuan is a way to discourage capital outflows.
But in order to do that China needs to sell US dollars. Ok, it has a trillion dollars in reserves, but why squandering these reserves to prop up your own currency, in the middle of a trade dispute. Especially when the other side desperately wants a weaker currency themselves. Does that mean the trade dispute might take longer than initially expected? We shall see.
Interesting to note is that a devalued Chinese yuan could export deflation all over the world. And that’s the last thing the West needs amid low growth, low interest rates and ongoing weak inflation.
From the technical analysis point of view, the chart shows the overall trend in USDCNH is bullish.
We saw a sharp rise above psychologically important 7.0 mark recently. That level proved good resistance in December 2016 as well as October last year. It managed to break above the sideways range of 6.68 – 7.0 where it has been fluctuating since March 2018. So the uptrend remains intact.
The price now sits comfortably above the 9 week (red) and 21 week (green)moving averages so a retracement to resistance turned support of 7.0 could be considered. We note that the 9 week moving averages has crossed above the 21 week moving averages in May this year which, in hindsight, proved good buying signal for USDCNH pair. Interestingly these moving average crosses were effective signals, both in January 2019, when they gave an indication of a bearish move, and end of May 2018, a bullish trend (blue circles).
There are a string of lower supports, which proved good levels, at 6.90, 6.85, 6.79 and 6.68 shown by the red stripes. We note that support around 6.68 mark also represents 50% Fibonacci retracement from a high of 7.13 to a low of 6.24 (February 2018) alongside 6.79 as a 61.8% Fibonacci retracement.