Another day, another Chinese devaluation as China looks to boost exports and their slowing economy. However, they are at the same time concerned with allowing the market to set the exchange rate on the yuan. Wednesday afternoon, the central bank stepped in to prop up the currency over fears of a free fall, only to follow this early morning with another slight devaluation. This illustrates how difficult it is for a central bank to have control over currency levels while still engaging in the free market, particularly for a sovereignty like China, which has always set the rate for the yuan at predetermined desired levels. What it means for the markets is continued schizophrenic multi directional volatility as market participants attempt to price in China's every move.
For the crude and refined product markets, the price discovery is reacting very dramatically, trading in virtual lockstep with the equity indices. This risk off type of reaction is to be expected, but with the price hanging on the precipice of 6 year lows, it could force a move that is not fundamentally justified, yet occurs nonetheless. At the end of the day, China will continue to adjust monetary policy as best she can to ensure that exports and manufacturing remain strong. The question really becomes first whether that is possible and second if it is too late. The market tends to over react, particularly when trading at extremes. The idea of a fairly priced yuan should bring about stability at some point, though the transition from manipulated price fixing to a fairly priced rate will obviously be a volatile one.
Inventories are strong, but so is demand, says the IEA. This should keep the price relatively stable once the dust has cleared on the China devaluation. Those looking for 10 to 15% devaluation would seem to be more fringe radicals, as yesterday's supportive action would indicate. Otherwise, global demand remains strong, which should, at some point, provide the support needed for a corrective rally off of these 6 years lows.
Natural gas inventories featured the first larger than expected build in the past 5 or 6 weeks, leading to a modest pull back from the mid 2.90's as the seasonal bid seeps into the price discovery. As a result, the market is trading toward the low 2.80's, possibly paving the way for an opportunistic long play in the coming sessions.
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