China's PBOC revalues Yuan higher by the most since June 2017
Summary
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USDCAD: Dollar/CAD is having a rough start to the month of December. Last week’s inability for traders to hold gains into the mid-1.33s, and the somewhat negative December seasonals we talked about, was a bit of a negative omen heading into the weekend, and then we got the upbeat news about an alleged 90-day truce between the US and China on tariffs at the G20. Oil market headlines have been bullish so far this week, with traders continuing to talk about Alberta’s unprecedented 8.7% cut to oil production and OPEC’s 1.3M barrel per day cut (expected to be announced in Vienna on Thursday). Bond traders are fretting about a possible recession after the 2s10s yield spread contracts to just 13bp. Finally, we have a surging Chinese yuan to contend with, after the PBOC lowered the USDCNY fix last night by the most since June 2017. All this is keeping USDCAD under pressure here, as traders now prepare for the Bank of Canada’s interest rate decision tomorrow (no change expected). Liquidity may also come at a premium tomorrow as US stock and bond markets will be closed for a national day of mourning for former President George H.W. Bush, who died on Friday. USDCAD is currently bouncing off chart support in the 1.3160-70s here and we think this could extend a little more should oil traders want to take some profits here.
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EURUSD: Euro/dollar is galloping higher this morning as the world watches the Chinese yuan surge. It makes us wonder what really happened during the meeting between Trump and Xi at the G20 over the weekend. The media is still trying the digest the differences in the official communiques from both countries; Treasury secretary Mnuchin and economic advisor Kudlow dialed back expectations when they spoke yesterday, and senior Chinese officials have been rather quiet since the G20 summit. Some rumors are now spreading that China would buy US treasuries and strengthen the Yuan (as part of the truce) and since the PBOC revalued the USDCNY fix sharply lower (Yuan higher) last night, there’s been broad USD selling across the board. EURUSD has now rallied back above the 1.1400 mark, and last week’s bullish outside day pattern on Wednesday now looks like it was the positive harbinger. The BTP/Bund spread trades steady at +285bp this morning as Italian bond traders eagerly await the country’s revised budget. Italian PM Conte said to expect something in the coming hours and “my objective is to avoid Italy being penalized in a way hurts our country and risks also hurting Europe”. While we think the chart technicals for EURUSD have improved here, we’d like to see a close above the 1.1450s before becoming more bullish. ECB President Mario Draghi will be speaking at an event in Frankfurt at 3:30amET tomorrow. Fed chairman Powell’s speech before the Joint Economic Committee tomorrow has been cancelled due to the national day of mourning.
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GBPUSD: Sterling is recouping yesterday’s losses today, but from some odd headlines. Bloomberg reported that Britain could be able revoke Article 50 unilaterally, according to an advisory opinion from the European Court of Justice (ECJ). More here. Traders are celebrating this “ability to cancel Brexit” headline, oddly enough, but we don’t think there’s much behind it. The market is extremely glittery as traders await this weekend’s debate between Theresa May and Jeremy Corbyn and next Tuesday’s massive parliament vote on the tabled Brexit draft (which could be historic). We think GBPUSD continues to chop around the 1.27-1.28 range for the time being. The funds remain net short GBP (long USD) as of Nov 27th, but this net position is now half of what it was at its extreme in September.
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AUDUSD: The Aussie benefitted handsomely from the supposed truce in the US/China trade war; gapping higher to start the week. However, the market now struggles with new chart resistance in the 0.7370-80s and traders have failed to break yesterday’s highs despite the plunge in USDCNH today (surge in Chinese yuan). This technical failure has invited some sellers in now, and we’re starting to wonder if the market might want to fill Sunday’s opening gap before thinking about further upside. The unfilled portion of the chart gap is approx. 0.7310-0.7345. The Reserve Bank of Australia (RBA) kept interest rates on hold last night and there was very little change in the dovish tone of forward guidance; all as expected. Tonight brings Australia’s Q3 GDP figures (7:30pmET) and tomorrow night we’ll get a look at Australia’s Retail Sales and Trade Balance data for October. The funds reduced their net short AUD (long USD) position to 54k contracts during the week ending Nov 27th, as the month long purge in positioning continues.
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USDJPY: Dollar/yen is getting hammered this morning as the US 10-yr yield collapses back below 3%, USDCNH plunges, and traders continue to fret about yield curve inversion. An inverted yield curve (short rates higher than long rates) has preceded a number of previous recessions in the US and, with 10s over 2s trading at just +13bp, the thought is that the bond market is sending a signal that the Fed will have to pause on interest rate hikes in 2019. USDJPY has smashed below chart support in the 113.30s, and this has now seen a swift move down to the next major support level in the 112.70s. Some buyers are stepping in here as the broader USD bounces in early NY trade, but we think sellers will lurk on rally attempts. The funds remained net long USD (short JPY) going into Nov 27th.
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About the Author
Exchange Bank of Canada (EBC) is a Schedule 1 bank based in Toronto, Canada. EBC specializes in foreign exchange services and international payments providing a wide range of services to financial institutions and corporations, including banknote foreign currency exchange, travelers' cheques, foreign currency cheque clearing, foreign currency bank drafts, Global EFT and international wire transfers through the use of EBC's innovative EBCFX web-based FX software www.ebcfx.com.