Forex Today - Focus shifts from the Majors to the Chinese Yuan and EM

Market Analysis /
Greg McKenna / 16 Aug 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

And, for a deeper dive into more currencies and the charts please see my daily markets video.

QUICK SUMMARY

The Turkish Lira stabilised after Qatar curried favour (it’s trying to find someone in the region to be friends with) with a $15 billion investment in Turkish banks and finance, and while the USD has stabilised against most majors – except the Yen which is naturally stronger – the ructions in China stocks, the collapse in the Yuan to 6.93/94, depending on whether its on or offshore. 

So, as I noted the Yuan is under pressure with USDCNH +0.6% at 6.9438. That rise has proved more telling than the Turkish lira’s rally. That’s because the supply of lira for traders to flog has been restricted by the central bank. That means USDTRY is down 7% at 5.9ish but USDZAR is up 2.4% at 14.58, USDMXN is up 1.7% at 19.19. Even the Korean won has lost half a per cent with USDKRW at 1133. The MSCI EM currency index continues to tumble.

The Majors have been more circumspect. After plumbing new lows for this run yesterday afternoon we’ve seen stability and a few little gains against the USD. EURUSD is at 1.1344, basically flat. GBPUSD is down 0.23% at 1.2694, while the Yen has gained as risk aversion has risen 0.4% to 110.65 in USDJPY terms. The Aussie climbed off the mat at 72 cents and is at 0.7235 down 0.12%.  The Kiwi is at 0.6565 down 0.1% and the CAD has taken as belting as oil fell and has lost half a per cent with USDCAD up at 1.3129.

BIGGER PICTURE

The USD has stalled against the majors.

That’s a warning that perhaps this move might be running out of steam and need fresh catalysts to drive the dollar further. The back end of the month is a lot more barren on the data front so there is every chance we do see some sort of give back. It becomes a question of time frames in that regard.

I could easily see 1.28 for Sterling, 1.1400/50 for the Euro and so on for the other majors. The Yen is a little different because it has a mild safe-haven bid in case – yes in case, it hasn’t happened yet – stocks go offered and markets go into a real funk.  So I’ve taken a little profit on my positions this morning.

More medium term the outlook remains the same as far as I can see it.

That is the USD’s advance will continue because the Fed is continuing to shrink its balance sheet while at the same time as it will be continuing to raise rates. Just check out the increases in trucking costs I picked up from the Daily Shot on Twitter. One sector sure but indicative that price pressures are rising. Surely wages will follow eventually? At least that’s what I reckon the Fed will be thinking.

Source: Twitter Screenshot
Source: Twitter Screenshot

For the moment though it might be time for a little rest in the USD’s run, we’ll see. Overall I’m still a USD bull.

A big part of that is the mess that is the EU and its competing forces of nationalism and internal divisions. 

Remember Tuesday when I noted that Caludio Borghi said the ECB needed to "guarantee" the Italian/German bond spread or "the euro will be dismantled"? Here's the latest update of that spread via the Daily SHot again. 

Source: Twitter Screenshot
Source: Twitter Screenshot

As long as last night's low at 1.1300 holds EURUSD could be in for a bonce to 1.1442 or maybe 1.1479. Some say maybe even 1.18 :S

Anyway, here's my Double Bolly Band chart

Click on me, I'll expand
Click on me, I'll expand

DATA:

On the day the big one here in Australia is employment. The market is expecting another 15,000 new jobs after last month’s huge 50.900 increase. But I noticed the big lift in the Westpac unemployment expectations index in yesterday’s Consumer Sentiment survey. Do they know something? We’ll know at 11.30am this morning – standby.

Offshore we get Chinese FDI, UK retail sales, EU trade, and then housing data, jobless claims and the Philly Fed index in the US.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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