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Will RBA Buckle Under Yuan Weakness?

  • Kathy Lien
  • 7 August 2018

Daily FX Market Roundup 08.06.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

The new trading week started with the U.S. dollar extending its gains.Although the greenback retreated during the NY session, the reversal did not occur until after EUR/USD hit a 1 month low and GBP/USD a 10 month low. The European currencies were hit the hardest but none of the majors escaped the dollar's rally. Trade tensions and Yuan weakness are the primary reasons why investors are buying dollars. After rising briefly after the People's Bank of China hiked reserve requirements for FX forwards Friday, the Yuan resumed its slide.   We've gotten messages from our readers who are confused about why USD/JPY is rising and not falling on trade tensions and why the price gold is sliding and not strengthening. The general belief is that the Japanese Yen should rise on risk aversion but the Yen is not behaving like a safe haven currency because Japan is heavily exposed to the trade war. China has been weakening its currency and the following USD/JPY and USD/CNY chart shows that USD/JPY is the poster child for the trade war. USD/JPY (the orange line) has been moving in lockstep with USD/CNY (white line) with the weakness of the Yuan leading to weakness in the Yen. Gold isn't rising because the dollar is strengthening, causing prices to fall.  Looking ahead, there are no major U.S. economic reports scheduled for release on Tuesday but with U.S. - Chinese trade tensions running high, the focus will be on the headlines.

 

 

The Australian dollar is in play tonight with a Reserve Bank monetary policy announcement. AUD/USD has been trading in a tight .7318 to .7464 range for the past month and is prime for a breakout. However it is not clear whether this month's RBA rate decision will be enough to take the pair out of this range. When the RBA last met, they talked about progress in the labor market and pickup in inflation. Since then, we've seen even stronger job growth and rise in consumer confidence. Inflationary pressures eased slightly but still remain strong on a quarterly and annualized basis. The bad news is that manufacturing and service sector activity weakened and although the trade surplus increased significantly in June, it most likely worsened over the past month with the Chinese Yuan falling to a 6 month low against the Australian dollar. So far, the RBA has refrained from commenting on slower growth in China and trade wars but U.S. - China trade tensions pose a serious risk to Australia's economy that cannot be ignored. If Governor Lowe finally addresses it, AUD/USD will see fresh 1 year lows. However if they choose to ignore external risks once again and keep most of the policy statement unchanged, AUD/USD could head back to 75 cents. NZD/USD should remain weak ahead of RBNZ while USD/CAD traders eye Tuesday's IVEY PMI report.

 

 

The worst performing currency today was sterling as talk of a no-deal Brexit grows.Over the weekend, UK Trade Minister Fox said "the intransigence of the commission is pushing us towards no deal" and today, UK Government spokesman James Slack said Prime Minister May believes no deal is better than a bad deal. While they are still confident that a Brexit deal can be reached, the government is preparing for the possibility of no agreement. BoE Governor Carney acknowledged this risk last week and the broader government is starting to do so as well. GBP/USD fell to an 11 month low on the back of these headlines and with the 1.30 support level broken, the next stop for the pair could be its 1-year low of 1.2775.

Meanwhile significantly weaker than expected German factory orders drove EUR/USD to a one month low.The pair fell for the 5th consecutive trading day after investors learned that manufacturing orders dropped by the largest amount in 4 years. Despite the weakness of the euro, demand from non-eurozone nations fell sharply on trade uncertainty. On a year over year basis, sales fell for the first time since July 2016. This decline reflects the fall in investor confidence and business expectations. Given this drop, tomorrow's German industrial production and trade balance numbers could also take a hit. With this in mind, EUR/USD ended the day much closer to its highs than lows so a further recovery is possible before we see a deeper correction.

 

 

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BKForex Advisors LLC will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on BKForex Advisors LLC. BKForex Advisors LLC do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

 

About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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