The US dollar remains bid at the end of the London close on a day of relative light economic news events. This week is central bank heavy so it may take a few more days before we get to a point where all the data is digested before a trend can emerge.
Market Wrap
Traders returned from their extended holiday and the US dollar caught a bid. One currency pair that I generally don’t talk about but is on the heatmap is the CNY, which has been relatively strong on a consistent basis. The offshore Chinese Yuan is a ticker symbol CNH.
Today we had some good news from China but of late the news flow has been more negative as the authorities clamp down on certain areas of the economy including the most polluting, in a bid to address global environmental concerns and to also put a lid on rising commodity costs. A closely tied economically to China is the Australian economy which exports massive amounts of coal and iron ore.
Using the CNHUSD and AUDUSD as a visual it is quite easy to see that the CNH and AUD can generally follow a similar path, but that the Australian currency was more severely affected by the lockdowns in March 2020 as China had already dealt with their covid shock. The move-in of these currency pairs since the FOMC June meeting this year couldn’t be more different with the AUD depreciating against the USD, whereas the CNH has maintained a high-level price. It transpires that many regions in China are having to deal with continued COVID-19 related disruptions, as is Australia, so the most logical analysis I can think of is that the PBOC is manipulating their currency against the US dollar by intervening in the forex markets. Whereas the Australian dollar felt the full force of the rising greenback.
In the overnight session, the Reserve Bank of Australia (RBA) decided against adjusting its monetary policy setting in September. Having previously said they would taper. Everything else about their loose monetary policy stayed the same, hence why we saw a drop in the AUDUSD today. Dynamic resistance is clearly at the daily 200 ema, so any eventual break above that will be the next bullish trigger.
"The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range," said RBA Governor Philip Lowe.
We also received Chinese trade data which showed their surplus grew to $58.33 billion in August. This is a good omen as we need them to export more. What is worrying is a little talked about problem brewing in the Chinese financial system. In a media report today, it was revealed that China Evergrande can no longer post their collateral as backing when trying to access overnight lending facilities. This is reminiscent of what happened to the Lehman brothers at the start of the GFC. What the world does not need now is a contagion effect of global banks and large money institutions going under if they are exposed to this financial toxicity. Today the stock exchange in China was halted as Evergrande bonds crashed. The Shanghai Stock Exchange said in a statement that it had suspended trading in China Evergrande Group's July 2022 corporate bond following "abnormal fluctuations." The exchange had also suspended trading in the bond on Friday.
So, something to watch out for and an added overnight risk for anyone who holds trades.
The UK government was out in full force today, raising taxes to pay for the pandemic created backlog that the NHS is still suffering from. Supposedly there is no other way to pay for the additional health services and that we will all pay our fair share in a +1% National Insurance levy. The rising US dollar probably weighed on the pound and GBPUSD fell out of this rising channel that we have been monitoring. As across most of the FX pairs, the pound ended relatively strong. Good news for the UK and probably why the Government announced the manifesto broken promises today, was because the BoE’s Saunders stated in a speech that the level of GDP is now fairly close to pre-pandemic levels.
The EURUSD could have been the main culprit for the strengthening US dollar index, as the EURUSD came back down to retest the breakout level of the falling wedge we have had on the charts for a couple of weeks. The double top will be a draw and the ECB meeting is the most likely catalysts that traders will use to test that double top. Depending on what occurs this week at the ECB will determine the direction of the EURUSD until we get to the FOMC meeting. Today’s moves will be attributed to the misses in the German ZEW and eurozone ZEW economic sentiment indicators.
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