Oil still skidding
The whipsaw movements in oil markets are causing a bit of an existential crisis in currency markets, though Asian trade has seen the volatility calm overnight. Oil prices are higher, for no other reason than they were seen to be oversold in the past few days, and most currencies that had fallen against the USD have stabilised as a result.
Of course, with the European Central Bank last week and the Federal Reserve meeting next week, this was supposed to be the week of calm that allowed us all to consolidate and get things in order for the end of the year. The disappointment of Draghi and the losses that many investors and traders probably suffered, as well as the inability to make anything back on Friday’s US jobs number given its consensus reading, has thrown a strange light on trading.
Indeed, these moves are a likely symptom that people are starting to pull away from 2015 and be done with it. I certainly would not mind if the Federal Reserve meeting was tonight instead of next Wednesday. The weakness in trade means increased volatility as liquidity dries up; large moves could only be just around the corner.
Chinese movements reminiscent of August
The country that has my focus for this idea is China. Trade and reserve data this week has been shown to be poor but the most interesting story is the movement in the Chinese yuan. The People’s Bank of China have once again moved the reference rate for CNY against the USD into weaker territory and it currently sits at the worst level since 2011.
There are two things to think about here; firstly, are the PBOC simply trying to get ahead of the Federal Reserve given the consensus view that rates will start to rise next week and pain exists if rates go too high too soon? Or is this a move by the Chinese authorities to once again weaken the yuan following its ascent into the IMF’s SDR basket?
As onshore yuan has weakened, the divergence between onshore and offshore CNY has been maintained at around a per cent. This is a clear sign of additional capital flows out of China with yuan depreciation still seen in forward markets – the 12 month price in USD/CNY is 6.6935, 4.2% higher than current spot.
In any case, if we cast our minds back to August when the Chinese ‘devalued’ the yuan there was a 4-5 day lag between the currency move and a corresponding slump in global shares. A slump that prevented the Fed from raising rates in September. A Christmas re-enactment is a very definite possibility.
Single currency the single winner
The main beneficiary of all of this uncertainty has been the euro. A strong trade surplus, growth confirmed at 0.3% yesterday and most importantly an ECB that has been pulled away from the stimulus machine in the past week have come together to bring EUR/USD and wider euro crosses higher.
The Day Ahead
Today is one of the quieter days of the week with tomorrow’s Bank of England and Swiss National Bank meetings set to dominate. Overnight tonight we have the latest Reserve Bank of New Zealand meeting with OIS swaps predicting a 70% probability of a rate cut tonight.