PBOC currency intervention an effort to stimulate flagging Chinese economy; IMF says global growth to be slowest since 2009

By Ian Dobbs*:

The major news of the past week was the Yuan devaluation by the People’s Bank of China.

It was a big surprise to markets and it’s still not completely clear as to their motivation.

If you believe the PBOC it was an adjustment away from a fixed peg (against the USD) to more of a ‘managed float’ in which market forces play a bigger part.

The other school of thought is that it was just another effort to stimulate growth from the central bank, and this raises serious concerns about the health of the Chinese economy and global growth in general.

The fact the devaluation came only days after terrible Chinese trade data suggests the latter.

An article out last night from the state-owned China Securities Journal suggested the PBOC may look to stimulate further by cutting the required reserve ratio.

They last cut the RRR on June 28th when they also cut interest rates.

This would back up the view that the Chinese authorities are still very concerned about the economy and that would suggest continued pressure on commodities, and by extension commodity currencies.

It’s fair to say that global growth is struggling at the moment and this is keeping inflation very subdued.

The IMF believe the world’s economy will expand at the slowest pace since 2009 this year.

In this environment it’s going to be a very difficult decision for the Fed to hike interest rates, despite their desire to do so.

Major Announcements last week:

  • The Chinese Yuan is devalued by just over 4%.
  • UK Claimant Count -4.9k vs +1.4k expected
  • UK Average Earnings 2.4% vs 2.8% expected
  • US Retail Sales 0.6% as expected
  • NZ Retail Sales 0.1% vs 0.5% expected
  • Eurozone GDP 0.3% vs 0.4% expected
  • US Consumer Sentiment 92.9 vs 93.5 expected
  • Japanese GDP -0.4% vs -0.5% expected

NZD/USD

Despite all the volatility seen last week in the wake of the Chinese Yuan devaluation the NZD has ended up largely unchanged from this time last Tuesday. The currency did briefly trade to fresh cycle lows at 0.6477, but it quickly recovered back above the 0.6500 level. Since then we have seen the NZD chop around in a sideways range above 0.6500. Tonight’s dairy auction will draw a lot of attention, although indications are we won’t see a big decline again this time. It seems that expectation has helped to support the New Zealand dollar to a degree in the past 12 hours. Some very mixed data from the US has also failed to support further US dollar buying at this stage, although there is plenty to digest over the coming days. Building permits, housing starts, inflation, the Fed minutes, the Philly Fed manufacturing index, existing home sales and manufacturing PMI are all set for release this week. Barring some big data surprises I would expect the NZD to continue to trade within the broad 0.6500 to 0.6700 band we have seen dominate for much of the past month.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6577 0.6500 0.6700 0.6477 – 0.6645

NZD/AUD (AUD/NZD)

The past week has seen this pair trade nicely between the two initial support and resistance levels of 0.8850 and 0.9000 (1.1299 and 1.1111). In the first half of last week the cross tested the NZD top of that range, driven largely by volatility in the wake of the Chinese Yuan devaluation. As the week wore on the New Zealand dollar underperformed, most notably on Friday after disappoint NZ retails sales data was released. This helped to dive the pair down to support at 0.8850 (resistance at 1.1299), which contained the New Zealand dollar weakness. In the past 24 hours or so we have seen a bounce from that support level, no doubt helped by expectations that tonight’s dairy auction won’t produce another big decline. If that is indeed the case, the cross could easily drift back up toward 0.9000 (1.1111). For the time being look for a repeat of last week’s range. If we do get a break out in either direction there is much stronger support around 0.8750 (resistance 1.1429), and much stronger resistance around 0.9160 (support 1.0917).

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8929 0.8850 0.9000 0.8847 – 0.9009
AUD / NZD 1.1199 1.1050 1.1300 1.1100 – 1.1303

NZD/GBP (GBP/NZD)

Like many New Zealand dollar pairs, this cross has seen a continuation of recent range trading, albeit with some notable volatility thrown in the mix. Support toward 0.4150 (resistance toward 2.4096) was tested in the immediate aftermath of the Chinese Yuan devaluations, but that level managed to contain the downside. In the past 24 hours we have seen a recovery back above 0.4200 (below 2.3810), no doubt helped by expectations that tonight’s dairy auction won’t produce another big decline. From the UK tonight we have inflation data to digest, with another flat reading forecast, then later in the week UK retail sales will draw focus. Expect a range of 0.4150 to 0.4300 (2.4096 to 2.3256) to dominate trade this week.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4220 0.4150 0.4320 0.4164 – 0.4251
GBP / NZD 2.3697 2.3148 2.4096 2.3523 – 2.4010

 NZD/CAD

The broad range of 0.8500 to 0.8700 has contained this pair for much of the past month. Although the lower regions of that range were tested on a number of occasions last week, there was little in the way of follow through selling and this has only served to reinforce 0.8500 as a support level. In the past 24 hours we have seen some relative New Zealand dollar strength, no doubt helped by expectations that tonight’s dairy auction won’t produce another big decline. This has helped the pair recover back above 0.8600. Canadian data to watch out for this week all comes on Thursday and Friday in the form of wholesale sales, inflation and retails sales. Look for another week of ranging between 0.8500 and 0.8700.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8620 0.8500 0.8700 0.8517 – 0.8626

NZD/EURO (EURO/NZD)

The Euro was the stand out performer last week, making across the board gains. Positive developments on Greece’s third bailout helped as did the devaluation of the Chinese Yuan, which ultimately resulted in a reasonable amount of EUR buying. These factors helped to drive the NZDEUR cross down through support around 0.5950 (resistance EURNZD around 1.6807) where is has remained since. Friday’s release of disappointing NZ retail sales data also weighed This saw the pair trade to fresh cycle lows at 0.5848 (highs at 1.7100). We have seen a steady NZ dollar recovery since then, helped by a more optimistic expectation for tonight’s dairy auction. The critical 0.5950 (1.6807) level (now acting as resistance) has not been overcome. While below that level the risks remain skewed to the NZD downside. The market will need to break back above 0.5950 (below 1.6807) to relieve this pressure. European data to watch out for this week all comes on Friday in the form of manufacturing and service sector PMI’s.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.5940 0.5850 0.5950 0.5848 – 0.6012
EUR / NZD 1.6835 1.6807 1.7094 1.6634 – 1.7101

 NZD/YEN

There is little to say about this pair apart from its continuation to trade within the now well-defined 81.00 to 83.00 range. Support around 81.00 was tested on two occasions last week, once after the initial Chinese Yuan devaluation announcement then again after soft NZ retail sales figures on Friday. On both occasions the market recovered. Some relative NZ dollar strength in the past 24 hours is likely attributable to a more optimistic outlook for tonight’s dairy auction. The pair looks like it will head into that release close the middle of the recent range at 82.00. To draw focus from Japan this week we have the BOJ’s interest rate meeting and monetary policy statement on Thursday. Barring any big surprises from this week’s releases I can only conclude that a further period of 81.00 to 83.00 trading is likely over the coming days.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.90 81.00 83.00 81.07 – 82.64

AUD/USD

Although the surprise Chinese Yuan devaluation last week pressured the Australian dollar to fresh cycle lows against the USD, these levels were short lived. The pair quickly recovered back above 0.7350 where it spent the rest of the week drifting sideways in a relatively tight range. The immediate focus now turns to today’s RBA minutes which should confirm the bank’s current neutral stance. From the US recently we have seen some very mixed data which has failed to support further US dollar buying at this stage, although there is plenty to digest over the coming days. Building permits, housing starts, inflation, the Fed minutes, the Philly Fed manufacturing index, existing home sales and manufacturing PMI are all set for release this week. With little overall direction in the AUD at the moment, I favour buying into any periods of weakness, as the broader downside momentum has certainly waned recently and a broader correction higher toward 0.7550 could well unfold.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7367 0.7320 0.7550 0.7235 – 0.7439

AUD/GBP (GBP/AUD)                            

Aside from a dip toward recent lows in the middle of last week, trading in this pairing has been relatively quiet. The test toward recent lows around 0.4650 (highs around 2.1505) came in the wake of the Chinese Yuan devaluation announcement, but the cross quickly recovered and since then a tight range around 0.4720 (2.1186) has developed. The markets immediate focus is now on the Reserve Bank of Australia’s minutes set for release in the coming hours. These should confirm the bank remains very much in the neutral camp. From the UK tonight we have inflation data to digest, with another flat reading forecast, then later in the week UK retail sales will draw focus. Look for further ranging between 0.4650 and 0.4800 (2.1505 to 2.0833) over the coming week. With the longer term AUD downward trend looking like it’s entered a period of consolidation, we could easily see a move toward the upper AUD side of that recent range.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4730 0.4650 0.4800 0.4651 – 0.4768
GBP / AUD 2.1142 2.0833 2.1505 2.0972 – 2.1499

AUD/EURO (EURO/AUD)

This pair remains trapped within a broad AUD downtrend that started toward the end of April. Fresh cycle lows traded last week, albeit briefly, in the wake of the Chinese Yuan devaluation announcements. We have seen a Australian dollar bounce since then, but it is yet to test key downtrend resistance now seen around 0.6720 (support 1.4881). Until that level is overcome the risks remain skewed toward further AUD weakness. The markets immediate focus is now on the Reserve Bank of Australia’s minutes set for release in the coming hours. These should confirm the bank remains very much in the neutral camp. European data to watch out for this week all comes on Friday in the form of manufacturing and service sector PMI’s.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6650 0.6530 0.6720 0.6536 – 0.6744
EUR / AUD 1.5038 1.4881 1.5314 1.4829 – 1.5299

AUD/YEN

Once last week’s volatility in the wake to the Chinese Yuan’s devaluation announcements settled down, this pair resorted to a very tight trading range around the 91.70 level. Near term direction is a very tough call. We have the Reserve Bank of Australia’s minutes out in the next couple of hours and these should confirm the bank’s current neutral stance. The market however is still pricing in a good chance of an interest rate cut from the RBA before the end of this year. That’s probably fair considering the current outlook for commodities and China, but it won’t take much of an improvement in Chinese data for the market to reassess its outlook. That would suggest there is potential for some Australian dollar upside over the coming months, barring a further deterioration in China. To draw focus from Japan this week we have the BOJ’s interest rate meeting and monetary policy statement on Thursday.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 91.70 91.00 93.00 90.54 – 92.69

AUD/CAD

The Australian dollar saw pressure in the middle part of last week on the back of the surprise Chinese Yuan devaluation announcements. These helped to drive the pairing down towards 0.9500, but since then the AUD has staged a solid recovery. This recovery was helped by disappointing Canadian data in the form of manufacturing sales released on Friday. With the pair currently trading around 0.9650 we can expect a range this week of 0.9500 to 0.9750. The markets immediate focus is now on the Reserve Bank of Australia’s minutes set for release in the coming hours. These should confirm the bank remains very much in the neutral camp. Canadian data to watch out for this week all comes on Thursday and Friday in the form of wholesale sales, inflation and retails sales.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9655 0.9500 0.9750 0.9511 – 0.9678

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Market commentary:

The major news of the past week was the Yuan devaluation by the People’s Bank of China. It was a big surprise to markets and it’s still not completely clear as to their motivation. If you believe the PBOC it was an adjustment away from a fixed peg (against the USD) to more of a ‘managed float’ in which market forces play a bigger part. The other school of thought is that it was just another effort to stimulate growth from the central bank, and this raises serious concerns about the health of the Chinese economy and global growth in general. The fact the devaluation came only days after terrible Chinese trade data suggests the latter. An article out last night from the state-owned China Securities Journal suggested the PBOC may look to stimulate further by cutting the required reserve ratio. They last cut the RRR on June 28th when they also cut interest rates. This would back up the view that the Chinese authorities are still very concerned about the economy and that would suggest continued pressure on commodities, and by extension commodity currencies. It’s fair to say that global growth is struggling at the moment and this is keeping inflation very subdued. The IMF believe the world’s economy will expand at the slowest pace since 2009 this year. In this environment it’s going to be a very difficult decision for the Fed to hike interest rates, despite their desire to do so.

Australia

Data from Australia last week played second fiddle to the Chinese Yuan devaluations which dominated markets. For the time being it looks like the ‘one-off’ adjustment has been completed and the PBOC now seem more comfortable with the level of their currency. Attention now turns to the Reserve Bank of Australia’s (RBA) minutes out this afternoon. These should confirm that the bank is very much in the neutral camp at the moment, although they wouldn’t hesitate to act again if conditions warranted. The RBA’s Assistant Governor Kent delivered a speech recently on the labour market. In it he said they expect unemployment to remain steady through 2016, then begin falling in 2017. He added there is slightly less spare capacity in the labour market than earlier anticipated. On the currency he said further pass through of the Australian dollar’s fall is still to come, and the impact of the currency’s decline on prices is helping to offset slow wage growth. Although the RBA are sounding very ‘neutral’ in all their releases, the market is still pricing in a very good chance of another interest rate cut before the end of the year. If the market is wrong, the AUD may not have all that much further to fall. For the time being however, with concerns around Chinese, and global, growth prospects weighing on the outlook for commodity prices, the risks for the AUD remain to the downside.

New Zealand

The New Zealand dollar struggled throughout last week as the impact of the Chinese Yuan devaluations roiled markets. The general consensus, if here is one, is that it’s negative sign for Chinese growth and therefore commodity prices. The news didn’t get any better for the NZD with the release of Friday’s retails sales data. This was a big disappointment coming in at just 0.1%, the lowest level in nearly two years. The market was expecting a result of 0.5%, which in itself would have been a big decline from the prior 2.3%. This data only strengthens the case for another interest rate cut from the RBNZ next month. Tonight we have another dairy auction from Fonterra and there are some hopes that prices could stabilize, if not actually increase a touch. Fonterra’s recent announcement that it will reduce the amount of product put up for sale at the dairy auctions over the next 12 months is likely helping. Unfortunately for the dairy sector a broad based recovery in prices seems a fair way off at this stage. Producer prices and migration data will also draw attention this week.

United States

Some very mixed data from the United States over the past week is only serving to make the Fed’s September interest rate decision an even more difficult one. Retail sales were probably the highlight coming in on expectation at +0.6%. Friday’s release of consumer sentiment however, which printed at 92.9, was weaker than forecast and softer than the prior reading. Last night we saw the NAHB housing market index increase to its highest level since 2005, but countering this was the Empire State manufacturing index. Considered to be a leading indicator of the broader manufacturing sector, it declined to its lowest level since 2009. There is plenty data to digest over the coming week starting tonight with building permits and housing starts. Later in the week we get inflation, the Fed minutes, the Philly Fed manufacturing index, existing home sales and manufacturing PMI. The Fed have a dual mandate of employment and inflation and while the employment sectors suggests an interest rate hike is probably overdue, inflation remains stubbornly low. Tepid wage growth, the Yuan devaluation, declining commodity prices and a soft global growth environment all suggest a real lack of inflation pressure in the foreseeable future. As much as the Fed desperately want to move interest rates off the ‘zero bound’ where they have been for the past six years, they are going to struggle to justify it on the current inflation outlook.

Europe

The Euro had a good week last week helped by positive developments on the Greeks third bailout package along with buying interest created by the Chinese Yuan devaluation. However, data from Europe wasn’t so supportive. While the final reading of inflation came in as expected at 0.2%, the GDP result for the second quarter was softer than forecast at 0.3%. The market was looking for a reading of 0.4%. Growth in both the core nations of Germany and France disappointed which only serves to highlight the long slow road to recovery the region has to look forward to. This week we have manufacturing and service sector PMI’s to digest, although they’re not set to hit the wires until Friday. The economic calendar looks pretty light until then.

United Kingdom

Last week’s employment numbers from the UK raised the prospect the jobs market is levelling off somewhat after consistent growth in recent years. We will need to see more data before making that conclusion, but these recent numbers won’t be putting any pressure on the Bank of England (BOE) to raise interest rates sooner than expected. The unemployment rate remained steady at 5.6%, but somewhat disappointedly wage growth slowed from 3.2% to 2.4%. Tonight we get the latest reading of inflation and it’s expected to once again come in at 0%. That would mean five out of the last six months inflation has been flat or negative. The BOE’s Forbes said recently that the bank will need to hike interest rates well before inflation hits the 2% target, and that waiting too long to raise rates would risk undermining the economic recovery. He makes a valid point, but inflation at least needs to be heading in the right direction. There is no inflation pressure currently and recent developments with the Chinese Yuan and commodity prices suggest further downside pressure over the coming months. A Bank of England (BOE) interest rate hike at this stage is likely only going to come sometime well into the first half of next year. Other data to watch out for this week includes retails sales and public sector net borrowing.

Japan

Mixed data from Japan last week was completely side-lined by action in the wake of the Chinese Yuan devaluation. With the PBOC (People’s Bank of China) seemingly now comfortable with their ‘one-off’ devaluation attention is turning back to domestic data. Yesterday we saw Japanese GDP data for the second quarter and although it printed a touch stronger than expected at -0.4%, it really didn’t make good reading at all. Exports and consumer spending were both very weak and unless they see a turnaround in both those components the government may be forced to look at further stimulus measures. The Bank of Japan will probably now be forced to cut its growth expectations and if the third quarter also comes in weak, there is a very good chance we will see further monetary policy easing’s. We have the BOJ meeting and monetary policy statement this week on Thursday and the market will be paying very close attention to their projections.

Canada

Last week was a quiet one for economic data out of Canada. On the housing market we saw housing starts come in a touch softer than forecast, but countering this was the new house price index which increase by more than expected at +0.3% in June. On Friday evening we saw the latest reading of manufacturing sales and this was much weaker than forecast at 1.2%. The market was expecting a gain of around 2.3%. Despite the gain, manufacturing sales are still currently some 5% below the post-recession peak setback July 2014. Weak oil, and commodity prices in general, have played a big part in the disappointing manufacturing performance of late, but looking ahead the non-commodity export sector should see benefits from the declining Canadian dollar and strengthening US economy.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »