By Stephen Innes
A very typical July 4th with a whole lot of nothing going on due to the US holiday and prices virtually stopped dead in their track once NY took over the trading books from London.
But this sense of calm belies the nervous undercurrent of unease as traders continue to lose sleep about the event risks that lie ahead. Of course, NFP will be a significant focus for Fed watchers, but the US is also scheduled on Friday to impose tariffs on USD34bn of Chinese goods. China has said it will not retaliate unless the US goes ahead, but it looks like trade tensions may continue to escalate as the US is unlikely to back off.
In the meantime, the RMB complex remains at the centre of discussions as the markets iron out the PBoC intentions while factoring in both China economic slowdown and of course trade concerns.
We shouldn't put a great deal of weight on price action over the past 48 hours as traders were doing little more than reducing overweight positions in markets, where liquidity density was running as much as 50% below average. So, it's not too much of a stretch to suggest that lower liquidity likely contributed to the amplified price action on the CNH where quite frankly yuan bullish sentiments are not that convincing.
Local traders will continue to take cues for the daily yuan fix. But with the PBoC making significant efforts to convey just how comfortable they are with a weakening yuan, it's not a massive leap of faith to suggest USDCNH will move higher on a further repricing of China's economic woes, escalating trade tension or even a more robust NFP. There is, however, a limit to which Beijing's policymakers will tolerate and that limit, according to Reuters, is 6.9000: "Policymakers believe some yuan depreciation is okay, but they don't want to see it falling below 6.9. Appropriate currency depreciation is needed given that the economy faces downward pressure," one policy insider said."
Big Trouble in Big China as authorities continue to grapple with pulling back stimulus created by a state-run banking machine which operated with wanton disregard for risk management. Add in the prospects of an economic slowdown, escalating trade wars all wrapped in a shrinking population, and it does suggest the biggest credit bubble in history is in danger of bursting. China risk continues to be well underpriced from my chair and suggesting at a minimum the yuan will resume trending lower as the markets continue to de-risk Asia.
"REDUCE PRICING NOW!" tweets President Trump with oil prices touching a three-year high as the US enters peak driving season amid poky global supplies. But with contentious midterm US elections looming, the President continues to strong-arm Saudi Arabia to increase oil supplies which at least for now is containing price action below WTI $75 per barrel.
However, the lack of supply in the US and abroad should continue to eclipse a Saudi pledge to boost output.
A softer US dollar has aided gold as the Chinese yuan stabilises thanks to PBoC support. However, the shiny metal could struggle ahead of Friday's Key NFP data as a solid print should then trigger a return to the dollar bull market as it could be argued the dollar or gold has not completely priced in the entire Fed dots plot projections.
Gold, however, remains a bit of a conundrum as political instability and escalating trade war triggers a buy signal, yet the steady US dollar strength continues to nip those ideas in the bud. And while the recent move higher does hint that gold's fortunes are turning, I think all that we have established is a near-term bottom which coincides with the Dec. low 1236.35 while 1261 will offer stiff resistance until the USD buckles.
Besides the focus on the RMB complex, The FOMC minutes from the June 13 meeting will attract some attention. But the event is unlikely to offer much dollar support ahead of the release as the bar for a hawkish surprise will be high after Chair Powell was dialling the hawkish rhetoric after the last policy meeting.
EUR: ECB sources reminded the markets that not everyone is a dove on the bards, suggesting some members are uneasy about the market underpricing a possible rate hike as early as 2019.
MYR: The ringgit will continue to take its cues for the broader regional risk sentiment