After the China inspired falls of the last couple of days a rebound in the oil price yesterday could well see us open higher today in Europe after a late recovery in US markets. The key question remains though whether the rebound in the Crude Oil price is a temporary respite, or a sign that we may have reached a short term base.
The market reaction to the moves by the People’s Bank of China in the daily fixing does seem somewhat overdone, relative to other currency interventions by other large global central banks in recent times.
The recent response of Chinese officials to the recent turmoil in Chinese equity markets, has quite rightly come in for a lot of criticism in recent weeks, in terms of the heavy handed response to the sharp sell-off from the recent highs. Furthermore China’s official economic data has always been somewhat questionable in its accuracy about the overall health of the Chinese economy.
It has become increasingly apparent though in the past few months that Chinese exports and imports have been significantly affected by, not only the slide in commodity prices, but also the appreciation of the Chinese Yuan against the G10 basket of currencies, which has seriously undermined China’s export competitiveness.
The recent chatter surrounding events in China and the actions of the People’s Bank of China in unpegging its currency from its US Dollar trading band is always a guarantee that you will get a steady stream of people dusting off the good old currency wars playbook and giving it a good airing.
Certainly the effect on global stock markets has been sobering, sending share prices sharply lower of companies who do a significant amount of business in the world’s second largest economy.
The devaluation of the Yuan has certainly caused quite a few shock waves, with it falling to four year lows against the US dollar, but this is only significant in the context of the fact it has traded in a fairly narrow band in all of that time, and has now lost 5% in the last couple of days.
Contrast that with its performance against the euro and Japanese yen since May last year, and we can see that the euro and Japanese yen have seen their competitiveness boosted largely as a result of local central bank policy alone against a basket of currencies and against the Yuan by over 20% in that period alone.
This has been done by doing the exact same thing that the Chinese are being accused of doing now, by weakening their currencies to deal with a specific deflationary threat.
How many times over the past few years have we heard various European and Japanese policymakers complain about the high value of the euro, or the Japanese yen as both currencies pushed to multi year highs in the early part of this decade, and now all of sudden because China has decided that enough is enough after last weekend’s disappointing trade numbers, China is criticised for being a currency manipulator. Well to paraphrase Bruce Willis, in Die Hard “welcome to the party pal!”, this is what central banks do.
As a reminder since 2012 the Japanese yen has weakened from 80 to 120, against the US dollar, a decline of 50%,while since May last year the euro has declined from levels just shy of 1.4000 to 1.1200, a decline of 20% and even got as low as 1.05 at one point.
Managing a currency lower is nothing new, yet it seems as soon as China does it the old accusations of currency manipulator get bandied about like confetti, usually from the very people who are most guilty of it.
Unfortunately you reap what you sow, and what is happening now in China has come about as a direct result of the actions of the same central bank policies of the Federal Reserve, European Central Bank, Bank of Japan, and our very own Bank of England, amongst many others.
It is also entirely probable that in these attempts to try and stem the tide of deflation afflicting the Chinese economy that we could well see further Yuan weakness, and as a result see China export further deflation into the global economy, and in all likelihood delay the lift off in rates widely expected from the Federal Reserve later next month.
The recent US jobs report has certainly raised expectations of just such a rate move, but nagging doubts still remain about the wisdom of acting next month, given the low levels of inflation, as well as Deputy Fed chief Fischer’s comments earlier this week.
These concerns have been exacerbated this week, with the continued slide in commodity prices. Recent events would suggest that the Fed would be most unwise to act next month unless the data improves markedly between now and then.
The US consumer has certainly shown no signs of cracking open their wallets in recent months with retail sales for the year remaining fairly weak despite low fuel prices. After a surprise decline in June retail sales of 0.3%, expectations are high that we could see a strong rebound in July of 0.6%, due to expectations of a holiday season bounce.
This could be optimistic given that these sorts of bounces tend to happen in August, when retailers do big back to school promotions. That was certainly the case last year.
Greece also continues to bubble away in the background with reports that Germany is unhappy with the new €85bn bailout agreement, including raising questions about Greece’s debt sustainability, the role of the IMF in the context of whether it will even participate, and concerns about delays in the implementation of some planned reforms.
Getting agreement by the 20th August €3.2bn ECB payment deadline isn’t likely to be the smooth ride most people think it will be, and we could well get some more twists and turns along the way.
EURUSD – yesterdays, break higher has taken us above the 50 day MA and on through 1.1125 towards the July highs at 1.1215/20. A break through here has the potential to open up the 1.1400 area and the close above the 50 day MA could well be the catalyst that pushes the euro higher. Interim support sits at 1.1120, and below that at 1.1030.
GBPUSD – the pound is currently trading in a 220 point range between 1.5460 and 1.5680. We also have fairly solid support towards the converging 100 and 200 day MA at 1.5370. The high of the last five weeks at the 1.5680 level remains a key resistance on the upside. A move above 1.5700 has the potential to retarget the 1.5820 level.
EURGBP – continues to ratchet higher breaking above the 0.7120 area and could well head towards the 0.7200 area, trend line resistance from the May highs at 0.7480. Support is likely to come in now at the 0.7120 area, with a fall below signalling a retest of 0.7070.
USDJPY – Friday’s failure to break through the 125.00 area prompted a sell-off back which could well see a move back towards the 123.75 area, and then 123.00. Only above 125.00 argues for a retest of the highs at 125.85.
Equity market calls
FTSE100 is expected to open 44 points higher at 6,615
DAX is expected to open 156 points higher at 11,080
CAC40 is expected to open 77 points higher at 5,002
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