Shanghai index down 32% in 1-month; risk aversion drives JPY higher; FOMC minutes fail to inspire; spike in NZD/USD surprises

By Raiko Shareef

Currency markets continue to take a back seat amid sharper moves in other asset classes. The Chinese equity tumble remains front of mind.

The USD is broadly lower, thanks to gains in both EUR and JPY. The FOMC Minutes this morning passed with little fanfare.

The Shanghai Composite index closed 5.9% lower yesterday, taking the total decline from 12 June to a cool 32%.

However, many companies have placed themselves on trading halts, while the free-fall of others were held at the 10% daily limit.

Excluding those two camps, investors could sell only 28% of the Chinese market, according to Bloomberg.

The rout continues to have predictable effects on other markets. Commodities have been particularly hard hit, with iron ore prices down an eye-watering 10% to $44.6. Unsurprisingly, the AUD is among the worst performing major currencies, having dipped through 0.74 yesterday evening.

JPY continues to reflect the risk-negative stance across markets, outperforming its peers against the USD. It sits 1.7% stronger at 120.50.

The FOMC’s June Minutes failed to inspire much reaction early this morning, and understandably so. Its decision in mid-June pre-dates the recent deterioration in Greece and China. As it happened, policymakers were already leery of the possible risks stemming from both nations at the time of the meeting. If anything, developments since then might suggest a later lift-off might be prudent.

But San Francisco Fed President Williams (an FOMC voter) poured cold water on such suggestions, in separate comments. In his mind, the risks from China and Greece do not alter his view of two 25bp rate hikes in 2015.

Perhaps the most curious feature of the currency landscape is NZD/USD’s punchy gain, despite subdued risk appetite.

We suspect this was more driven by investor positioning on NZD/AUD, rather than any broader inclination to bid NZD.

The cross snapped through resistance at 0.90, with the next barrier just below 0.91. The momentum in the cross should help support NZD outperformance in the near term.

A light data calendar today, with the AU labour market report, and Fed speakers Brainard and George highlights.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.