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Chinese Yuan May Join IMF’s Reserve Basket

Published 11/30/2015, 06:47 AM
Updated 07/09/2023, 06:31 AM

Chinese yuan may join IMF’s reserve basket The Executive Board of the International Monetary Fund is broadly expected to include the yuan in its Special Drawing Rights (SDR) basket at a meeting later in the day. The inclusion would represent recognition that the yuan’s status is rising along with China’s place in global markets. Many emerging market economies have strong trade linkages with China and the addition of yuan would mean that their central banks could have an alternative to dollars and euros in their FX reserves. However, even if the IMF gives the go-ahead, the yuan won't be added to the SDR basket until September 2016. The pace of flows related to the yuan’s rise as a reserve currency will be gradual in our view, and much will depend on the weighting the yuan will be assigned. In the preliminary report in July, IMF staff estimated the yuan would have a weight of about 14% to 16%. While there is little uncertainty of the expected approval, the main focus will be the final weight the yuan will get.

• Today’s highlights: During the European day, the German flash CPI for November is coming out. The forecast is for the CPI rate to have risen to 0.1% mom, from 0.0% mom in October. Even though this is just a moderate improvement, a rise in the inflation rate of Eurozone’s growth engine could indicate a rise in the bloc’s CPI rate to be released on Wednesday. This could support the EUR at least temporarily.

• From Sweden, we get the GDP data for Q3. Expectations are for the quarterly growth rate to decline, while the annual rate is forecast to rise. Following Friday’s slowdown in retail sales, a mixed GDP report could give additional reasons to the Riksbank to reconsider the magnitude of its current policy approach.

• In the US, pending home sales for October are due to be released. Expectations are for the figure to rise1.0% mom, a rebound from -2.3% in September. This may add to the recent strong housing data and support the greenback further. The Chicago Purchasing Managers’ index for November is also due out.

• As for the rest of the week, we have a very eventful schedule ahead of us with several central bank meetings, important economic indicators including the US nonfarm payrolls, and an OPEC meeting. On Tuesday, the RBA meets to decide on its benchmark interest rate. At their last meeting, Bank officials kept the Bank’s key policy rate unchanged as was broadly expected and they noted that the prospects for an improvement in economic conditions had firmed a little over recent months. As a result they remained on hold, though the outlook for inflation may afford scope for further easing of policy, should that be appropriate. However, following the recent comments by the RBA Governor Glenn Stevens that the markets should “chill out” on prospects for another rate cut, we don’t expect the Bank to act at this week’s meeting.

• On Wednesday, the highlight will be the Bank of Canada rate decision. At their last meeting, Bank officials decided to keep the benchmark rate unchanged as was widely expected, but in the statement accompanying the decision, they warned that lower oil and other commodities prices will weigh more than expected on Canada’s economy. This has led to a modest downward revision to the Bank’s growth forecast for 2016 and 2017. Having that in mind and that oil prices have continued trading lower since then, I would expect the Bank to lower rates in the foreseeable future, if not at this meeting. I expect them to maintain their dovish stance and to repeat that the “the past depreciation of CAD is roughly offsetting disinflationary pressures from economic slack, which has increased this year.” This could add selling pressure to the loonie.

• As for indicators, Eurozone’s preliminary CPI for November is due to be released. Expectations are for the bloc’s inflation to have accelerated from October. Although this could prove EUR supportive, the market reaction could stay muted as investors will most likely remain focused on the ECB meeting the following day.

• From the US, we get the ADP employment report for November, as usual two days ahead of the NFP release. The ADP report is expected to show that the private sector gained 189k jobs, more than it did in the previous month, when the print hit 182k. Although this would still be short of the crucial 200k level, Fed officials have stated over the previous weeks that now that the labor market is improving, a below 200k reading could still warrant a rate hike.

• On Thursday, all eyes will be on the ECB policy meeting in what is going to probably be the most highly anticipated Bank meeting after the US Fed gathering in mid-December. The market is already pricing in a 10bps deposit rate cut, with some participants calling for an even more aggressive 20bps reduction. An increase in the size of the Bank’s monthly purchases, as well as an extension in the duration of the program is thought to be a closed deal. As such, the Bank will have to deliver measures over and above current market expectations to avoid an upward movement in the euro, in our view. In the last few weeks, ECB President Mario Draghi and several Bank officials have already prepared the market for another rate cut and an increase of the current stimulus package. If the ECB only delivers a rate cut with no increase of the size, this could disappoint investors and we could see the common currency strengthening. We should bear in mind however the well know rhetoric of ECB’s Draghi to do whatever it takes to support Eurozone’s economy and by that, he could always surprise the markets and bring EUR/USD closer to parity.

• Finally on Friday, the main event will be the US employment report for November. The report is expected to show a 200k increase in payrolls, down from the astonishing print of 271k in October. The unemployment rate is expected to remain unchanged at 5%. While the payrolls number is expected to decline significantly, it is still expected to achieve the 200k barrier. It is reasonable to assume that despite the decrease, if the forecast is met, the strong employment data will raise the likelihood for a Fed rate lift-off. Canada’s employment report for October is also coming out.

• Besides the employment reports, members of the OPEC will meet on Friday to decide on a strategy to protect their market share and to stabilize the oil price. If the members decide to reduce their output, we could see oil prices moving higher.

The Market

EUR/USD trades somewhat lower

EUR/USD Hourly Chart

• EUR/USD traded somewhat lower on Friday, but the decline was limited above the support barrier of 1.0565 (S1). The short-term trend remains negative in my view and therefore, I would expect a clear move below 1.0565 (S1) to open the way for the next support obstacle of 1.0530 (S2), defined by the lows of the 13th and 14th of April. Taking a look at our short-term oscillators, I see that the RSI moved lower but rebounded somewhat from slightly above its 30 line. The MACD, already negative, has fallen below both its upside support and trigger lines. These indicators detect downside momentum, but the fact that the RSI has turned somewhat up makes me believe that an upside corrective bounce could be looming before the next bearish leg. Today we get the German preliminary CPI data for November and expectations are for Germany’s inflation to have increased after staying unchanged in October. This is another reason I believe EUR/USD could correct a bit higher. In the bigger picture, as long as the pair is trading below 1.0800, the lower bound of the range it had been trading since the last days of April, I would consider the longer-term outlook to stay negative. I would treat any possible near-term advances that stay limited below 1.0800 as a corrective phase.

• Support: 1.0565 (S1), 1.0530 (S2), 1.0500 (S3)

• Resistance: 1.0630 (R1), 1.0670 (R2), 1.0710 (R3)

GBP/JPY tumbles and hits 184.30 again

GBP/JPY 4 Hourly Chart

• GBP/JPY tumbled on Friday, hit once again the support zone of 184.30 (S1), and then it rebounded to hit resistance at 184.90 (R1). Today during the Asian morning, the rate turned down again and is now ready to challenge once more the 184.30 (S1) line. The short-term trend remains negative in my view and as a result, I would expect the bears to take control at some point and drive the battle below 184.30 (S1). Something like that could initially aim for the 183.90 (S2) line, marked by the lows of the 27th and 28th of October. Looking at our oscillators though, I see signs that a minor bounce could be looming before sellers decide to shoot again. The RSI has turned up again, while the MACD, although negative, stands above its trigger line. What is more, there is positive divergence between the RSI and the price action. On the daily chart, the break below the uptrend line taken from the low of the 30th of September make me adopt a flat stance as far as the longer-term picture is concerned.

• Support: 184.30 (S1), 183.90 (S2), 183.60 (S3)

• Resistance: 184.90 (R1), 185.35 (R2), 185.75 (R3)

AUD/USD hits support slightly above 0.7160

AUD/USD 4 Hourly Chart

• AUD/USD slid on Friday, falling below the support (now turned into resistance) of 0.7210 (R1). The decline was stopped slightly above the next hurdle at 0.7160 (S1) and then the rate rebounded somewhat. Following the completion of an inverted head and shoulders on the 18th of November, I still believe that the short-term outlook remains cautiously positive. After all, the rate is still trading above the uptrend line taken from the low of the 10th of November. However, our short-term momentum studies provide evidence that further downside correction could be on the cards before the bulls decide to take control again. The RSI fell below its 50 line, while the MACD, already below its trigger line, has just turned negative. Switching to the daily chart, I see that AUD/USD still oscillates between 0.6900 and 0.7400 since mid-July. As a result, although the short-term uptrend may continue, I would hold a flat stance for now as far as the broader trend is concerned.

• Support: 0.7160 (S1), 0.7120 (S2), 0.7070 (S3)

• Resistance: 0.7210 (R1), 0.7240 (R2), 0.7285 (R3)

Gold is headed towards 1050

XAU/USD 4 Hourly Chart

• Gold tumbled on Friday, falling below the support (now turned into resistance) barrier of 1065 (R1). Subsequently, the metal hit support slightly below the 1055 (S1) line and then it rebounded somewhat. Today, during the early European morning, it is testing again the 1055 (S1) line, where another dip could challenge the psychological barrier of 1050 (S2). As long as the metal is trading within that channel, I would consider the short-term picture to stay cautiously negative. Our short-term oscillators reveal strong downside speed and support further declines. The RSI edged lower and fell below its 30 line, while the MACD, already negative, has fallen below its trigger line and points south. On the daily chart, I see that the plunge below the upside support line taken from the low of the 20th of July has shifted the medium-term outlook to the downside. As a result, I believe that the metal is poised to continue its down road in the foreseeable future.

• Support: 1055 (S1), 1050 (S2), 1042 (S3)

• Resistance: 1065 (R1), 1074 (R2), 1080 (R3)

WTI slides to test the 41.70 line

WTI 4 Hourly Chart

• WTI traded lower on Friday, breaking below the support (now turned into resistance) line of 42.50 (R1) to reach the next support of 41.70 (S1), defined by the low of the 25th of November. A break below that line would confirm a forthcoming lower low on the 4-hour chart and could turn the short-term picture back negative. Our short-term oscillators have now turned negative and they look able to move below their upside support lines any time soon. These indicators reveal downside speed and corroborate my view that WTI could trade lower in the short run. On the daily chart, WTI has been printing lower peaks and lower troughs within a downside channel since the 9th of October. Therefore, I would consider the medium-term outlook to be negative as well and I would treat any possible near-term advances as a corrective move of that down path.

• Support: 41.70 (S1), 41.25 (S2), 40.50 (S3)

• Resistance: 42.50 (R1), 43.30 (R2), 44.00 (R3)

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY

MARKETS SUMMARY

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