European stocks look set to edge lower at the start of the week, tracking weakness in China overnight ahead of the decision from the IMF on Monday whether to include the yuan in its basket of global currencies.
On Monday the offshore yuan opened at its lowest level in three months. The dollar is rising in line with expectations for a Fed rate hike but the yuan is pegged to the dollar. The result is that the offshore yuan is constantly weakening to the lowest extreme in its currency band. Having started at three month lows, the offshore yuan appreciated sharply on suspected government intervention in order to maintain stability before the IMF decision.
Given the heavy-handed government intervention in Chinese markets of late, from the currency devaluation to disallowing institutions from selling shares, there are fears the IMF maybe bending the rules to accommodate the world’s second largest economy into its Special Drawing Rights.
It’s a week full of important acronyms with the IMF SDR to be followed by the ECB, NFP and OPEC, each of which could change the course of markets.
EUR/USD has been tanking as traders pile in on the ‘US divergence’ trade. The extent of this divergence will get a big test this week. First the ECB will set policy on Thursday and then non-farm payrolls will give the last major snapshot of the US labour market before the Federal Reserve sets policy later in the month.
As we approach 1.05 in EUR/USD, the divergence will have to become clearer to avoid a repeat of the reversal that took place in March just as calls for parity were getting he loudest. Either side of the trade will be important. Euro weakness and dollar strength will depend on extent of ECB stimulus and the implied pace of tightening from the Fed based on the US jobs report.
European Central Bank stimulus will also have implications for other asset classes. The Swiss National Bank broke its currency peg ahead of the introduction of QE in the Eurozone. The SNB has fewer options this time, but may be forced to intervene ahead of Thursday’s ECB meeting.
German CPI is expected to have risen 0.1% in November, up 0.3% year-over year. Inflation does appear to be ticking back up so the risk is that the ECB adds QE just as the 2014 Oil price drop is coming out of the annualised figures.
EURUSD – Last week the euro had its lowest weekly close since April. The short-term trend is unmistakably lower but as the pair approaches 1.05 and multi-year lows there is an increasing risk of a short-covering rally.
GBPUSD – Cable ended the week right at the lowest for the month and lies just above the 1.50 psych level that was resistance in March. The pair remains within a downward sloping channel. A return to the lower trendline of the channel could mean a drop to 1.4950 whereas a rebound could reach back to 1.5350, the upper trendline.
EURGBP – euro-sterling has avoided a weekly close below 0.70 and close last week higher for the first time in seven weeks. The weekly candle is an inside bar suggesting indecision at the bottom of its long term trading range.
USDJPY – dollar-yen has held the 122.20 support from November 16. At the same time the RSI has made a new low indicating a positive reversal that could mean a break above resistance at 123.70 towards potential resistance from an unconfirmed trendline connecting the June 5 and August 12 peaks.
Equity market calls
FTSE100: to open 13 points lower at 6,362
DAX: to open 21 points lower at 11,272
CAC40: to open 15 points lower at 4,915
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