Thankfully for regional risk, the PBoC engaged the yuan airbrake yesterday afternoon and at least for the time being, with the help of Chinese state-owned banks who were seen selling dollars to prop up the Chinese currency, its restoring a sense of calm in regional markets.
China remains at the epicentre of FX markets. While yesterday's price action was fast and decisively USDCNH lower, market conditions ahead of the 4th of July and Friday NFP, combined with the start of U.S.-China trade tariffs, leave traders more concerned about jettisoning risk which could have contributed to the amplified price action. Despite reassurances from the PBoC governor not to use the yuan as a weapon in any trade dispute, markets still remain very bearish on China.
Concerns well over and above trade tensions are also part of the mix, as waning growth momentum has contributed to diverging economic indicators versus the US, suggesting Tuesday’s interventions could be little more than a short-term reprieve. And ultimately, unless there’s compromise in the trade dispute, the yuan should remain under pressure.
US markets reversed an early bounce to end lower Tuesday, driven by weakness in technology stocks. Facebook (NASDAQ:FB) stumbled after confirming it faces investigations by the SEC and the FBI on its release of consumer data to Cambridge Analytica while a Chinese court temporarily banned Micron Technology (NASDAQ:MU) chip sales in the country.
All this should set the stage for Asia markets to open lower today, as investors continue to ponder the negative regional impact of trade tension and growing concerns about global growth prospects.
Oil market
WTI hit $75 for the first time since November 2014 as risk sentiment stabilized. Libya’s NOC declared force majeure on loadings from Zueitina and Hariga ports on Monday, resulting in ~850k bpd of supplies being disrupted. But prices came off the $75 level hard, triggered initially by rumors of a US Strategic Petroleum Reserve (SPR) drawdown. The commodity then spilled lower after Saudi Arabia said it’s prepared to use its spare production capacity, estimated at 2million barrels per day, to balance the global oil market, all but confirming President Trump’s weekend tweets that he asked Saudi Arabia to increase oil production.
But at the end of the day, WTI is heading higher after American Petroleum Institute (API) reported another massive draw of 4.5 million barrels for the week ending June 29, but inventories at Cushing the delivery hub for NYMEX WTI fell 2.6 million barrels.
On the back of the force majeure in Libya and the supply outages in Canada the markets are staggering tight over the short run, and despite suggestions of more supplies coming to market, traders continue to buy dips as increased barrels may only act to prevent a more rapid increase in prices given the global economies insatiable demand for oil.
Gold Market
The market was caught in well-oversold territory after the PBoC, for the time being, stemmed the relentless US dollar rally after avowing to keep the RMB exchange rate stable. Short covering rallies should not be confused with trend reversals and provided traders continue to view escalating trade tensions will reduce the US trade deficit thereby benefiting the dollar, gold will continue to remain out of favor. Heading into the July 4th US holiday overnight gains should consolidate as traders could stay sidelined until Friday NFP and more clarity is offered on the trade front
Currency Markets
The dollar bull continues to run over one weak currency after another. After a shortened holiday week inspired a USD correction lower, given that near-term long dollar positions are a bit cleaner, what’s the next currency that falls under the greenback crosshairs?
AUD: Yet another episode of Turnaround Tuesday as the markets bounced off AUD .7325 lows but the pace of play is entirely governed by the proceedings in China. As usual, the RBA comes and goes with little fanfare and while moves to .7400 will likely be faded, FX traders are still holding out for better levels post today's Retail Sales and Trade data.
MYR: Little reprieve for the beleaguered ringgit as the 1MDB scandal once again rears its ugly head. It’s just not 1MDB hotting up, but with Ex-PM Najib Razak reportedly arrested, this investigation could open a massive can of worms as this probe and ensuing court battle could run deep while exposing an underbelly of corruption, bribery and government fraud. Unquestionably, this should not go over well with offshore investors and will keep the MYR on the defensive.
EUR: It will take colossal data surprise to get the markets out the EUR 1.1550-1.1750 funk.