GBP bounce could be temporary event; market ignores 6% drop in China's stockmarket; US durable goods orders data challenges view of slumping manufacturing sector due to strong USD

By Jason Wong

Currency markets have been fairly range-bound overnight, with not much news to trade on. Commodity currencies were generally stronger, while the Yen is the weakest major.

There’s a mild risk-on appetite, with European equities (circa +2%) playing catch-up to the strong recovery in US equities in the closing hours of yesterday’s trading. The S&P500 has traded in a tight range and is currently up slightly.

Thankfully, the market ignored the earlier 6.4% plunge in China’s Shanghai composite index. It’s somewhat surprising the authorities didn’t support the market, with the spotlight on China today as it leads the G20 meeting of Finance Ministers and central bank governors in Shanghai.

China outlined what it plans to present at today’s G20 meeting in Shanghai – plans for fiscal stimulus to boost growth and maintaining a relatively stable currency measured against a basket of currencies, and not just the USD. The latter objective is noble, but the market is alert to the risk of China losing control of the destiny of its currency, should capital outflows continue at their current rapid pace.

The CAD heads the leaderboard, rising by 0.9% against the USD, which is interesting, as oil prices are down slightly. The fact that oil prices have been fairly range-bound in February, perhaps forming a base, has been giving traders more confidence in CAD over recent weeks and it has appreciated strongly since reaching a nadir in mid-January.

The NZD and AUD are also well supported. NZD has traded in a very tight 0.6550-0.6750 range over the last few weeks and it currently sits up 0.6% at close to the 0.67 handle.

The NZD has outperformed the AUD over the last day and a half, with NZD/AUD now back up to around 0.93.

Weak wage data on Wednesday and weaker capex outlook data yesterday have negatively impacted the AUD. Before that data, traders had been thinking that the long anticipated rise in AUD/NZD was about to gain momentum, but the Australian data have put that idea on hold for now.

The USD measured by the DXY index has been range bound. US durable goods orders were much stronger than expected, with a broadly based increase, challenging the view that US manufacturing is slumping because of the strong USD. This boosted the USD, but gains were not sustained.

EUR and GBP are up slightly against the USD. The intense selling pressure on GBP has come to a halt over the past 24 hours, with GBP/USD settling around 1.395. However, this might represent only a temporary pause, before more selling comes ahead of the June referendum on Britain’s EU membership. The options market (based on 6-month risk reversals) suggests traders are positioning themselves for a further drop in GBP. The premium to protect against a GBP decline is at its highest level in 6-years.

The Yen has weakened by 0.5%, taking USD/JPY up to around 112.75. The Yen has been the most volatile major currency in February and it seems to spend most of its time at either the top or bottom of the daily leaderboard.

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Daily exchange rates

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