Forex Today - No trouble in China reserves knocks the USD in overnight trade

Market Analysis /
Greg McKenna / 08 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 USD came under some pressure overnight.

Chinese foreign exchange reserves weren’t the event they might have been given they actually rose – again not a typo - from $3.112 trillion to $3.118 trillion. So the USD index has again backed off the top of the range and is down 0.2% this morning at 95.17. The Euro is up 0.4% however at 1.1597 while the Pound is largely unchanged at 1.2940 as Brexit worries continue to dominate traders thinking. USDJPY is at 111.37 even though yesterday’s wages growth data – 21 year highs -  does suggest the BoJ will eventually tweak policy properly.   

Of the commodity bloc the Aussie’s 0.5% gain left the CAD and Kiwi behind. USDCAD is actually up 0.4% to 1.3051 while the Kiwi is at 0.6735, up just 0.05%.

BIGGER PICTURE

So China’s FX reserves data was not the issue for markets, not the USD positive, it could have been.

Indeed the increase from $3.112 trillion to $3.118 trillion was a better than expected outcome and suggests that for the moment there is no capital flight. Of course, we shouldn’t judge China, it’s economy, markets, and currency in the same way we do countries without central planning and with free-floating currencies. It is not that. So we shouldn’t be surprised the urge for capital to exit is suppressed.

But the lack of a bearish Yuan catalyst become a USD sell point overnight.

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

Oh, and Bloomy has an article suggesting Chinese authorities have been leaning on banks to avoid Yuan market “herd behaviour”. It’s clear they don’t mind the USDCNY rally but they are concerned by the pace of the Yuan’s falls. That's be reflected in the USDCNy and USDCNH price action the past couple of days.  

It really is my contention that the lack of bad news in those China reserves data was an important turning point for the USD over the past 24 hours. We were all ready for a decent downward adjustment which didn’t come. The relationship between the Euro and Chinese Yuan (offshore in this case) is not perfect but you can see the directional connection. Especially over the last day’s rally.

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

That the weak German data didn’t hurt Euro is interesting.

But the reality is we are still seeing ranges trade. GBPUSD is lucky the USD is a little weaker as it enabled it’s fall to go into hiatus. But the Brexit pressure remains. We now wait for PPI and CPI data in the US on Thursday and Friday night’s. An upward surprise and we might finally be off to the races. Otherwise, my first thought after last Friday’s non-farm’s that it was a range reinforcer for the USD remains the right one.

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

 

DATA:

On the day we get the BoJ summary of opinions, bank lending and trade data from Japan. Home loans and Westpac Consumer confidence are out here in Australia while RBA governor Phil Lowe will be speaking at the Annika Foundation lunch at 1.05pm AEST today – more colour on that inflation and unemployment change in his statement yesterday I’d bet.

Chinese trade, exports, and imports for July are also out around the same time Lowe will be speaking. Tonight it’s fairly quite in the US with mortgage applications and then EIA inventory data out for oil and energy markets.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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