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by Charalambos Pissouros

Verbal Intervention Halts Yuan’s Tumble; GBP-Traders Wait for the UK Services PMI

Market 08

Swedish Krona the Big Winner after Riksbank; Aussie and Kiwi Gain on Chinese Yuan’s Rebound

The dollar traded lower against all other G10 currencies on Tuesday. It lost the most ground against SEK, NZD and AUD in that order, while it underperformed the least against EUR, CHF and JPY.

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The Swedish Krona was the biggest gainer, coming under massive buying interest following Riksbank’s policy decision. The Bank kept interest rates untouched as was widely anticipated and maintained the view that slow repo rate rises will be initiated towards the end of the year. However, apart from the usual dissenter, Deputy Governor Ohlsson, who supported raising the repo rate to -0.25%, this time around, we had another member with reservations. Deputy Governor Martin Floden advocated for a repo rate path with an initial increase of interest rates by 25bps in September or October.

The other two big winners were the commodity-linked currencies Aussie and Kiwi. The catalyst behind the rebound in those two currencies may have been the sudden reversal of the Chinese yuan. Both the Australian and New Zealand economies are heavily dependent on exports to China, and thus any developments regarding the Chinese economy could impact on those two nations, and thereby their currencies.

Yesterday, PBOC’s top officials vowed to keep the Chinese currency stable and pledged to not use it as a tool for fighting a trade war. “Recently the yuan’s exchange rate has shown some weakness. This is entirely due to changes in market expectations as external uncertainties rise rather than intended guidance of the central bank”, one official said. The yuan strengthened on the comments as they raised speculation that the Chinese central bank may be ready to intervene into the market in order to halt the plunge of the currency.

Remember that on the 24th of June, China’s central bank decided to cut its reserve required ratio by 50bps in order to release liquidity, with the yuan accelerating its slide. Back then, we noted that a weakening yuan would make it harder for the trade surplus China has with the US to be reduced, which could lead Washington to more threats and actions. Now, the Bank said that it will not devalue its currency in order to fight a trade conflict, but if the US-China dispute escalates further, it would be interesting to see whether and how the Bank will respond. A failure to curb further declines could revive speculation that the Chinese policymakers are indeed letting the currency to depreciate in order to defend against the tariff effects.

USD/CNH – Technical Outlook

Only two words that describe the recent sharp up-rise of the USD/CNH are “trade war”. The rate accelerated rapidly during the last three weeks, gaining around 5%, if we measure the distance from the low of 14th of June to yesterday’s peak. But during the Asian day yesterday, the bears jumped in and drove USD/CNH down sharply. Today, the slide continued, with the rate breaking below the steep upwards moving trendline taken from the 14th of June low.

As for the short-term scenario, we will stick to the downside, as the aforementioned upside trendline has been broken and we could see a bit of more retracement back down. The first good potential area of support to watch could be around the 6.6150 level, a break of which could open the path towards the 6.5935 area. If the bears remain in the driver’s seat, then a further drop to the 6.5575 could be possible.

The RSI is now slightly below its 50 zone and has the potential to move lower. The MACD is way below its trigger line and continues to head south. Both indicators are currently supporting the scenario discussed above.

On the other hand, a move back above the previously mentioned steep upwards moving trendline, could take the downside off the table for now and the rate could start aiming for the recent highs. The first obstacle for the pair to overcome could be the 6.6725 level. Above that lies the peak of the 3rd of July, near 6.7330, which is the highest point since July last year.

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GBP-Traders Fix Gaze on UK Services PMI

The pound traded mixed against the other G10 currencies yesterday. It gained versus USD, EUR, CHF and JPY, while it underperformed against SEK, AUD and NZD. The British currency traded virtually unchanged against CAD and NOK.

Today, pound traders are likely to lock their gaze to the UK services PMI for June. Expectations have now changed and suggest that the index ticked down after rising the previous two months. Specifically, the index is expected to have declined to 53.9 from 54.0 in May. On Monday, the manufacturing PMI ticked up to 54.4 from 54.3, while yesterday, the construction index rose to 53.1 from 52.5, both suggesting that the UK economy may have indeed started to turn the corner. However, the pound’s reaction was limited on both releases. We believe that investors may have preferred to wait for the services print today in order to get a better idea of how the economy performed during the last month of Q2, as the service sector accounts for around 80% of the UK GDP.

Following the upward revision in the final GDP data for Q1, a third consecutive increase in the services index could encourage market participants to place more August-hike bets on the table and perhaps help the pound break the 1.3215 barrier against its US counterpart. On the other hand, a slide in this PMI could disappoint somewhat those expecting the Bank to push the hiking button at its upcoming meeting and could inspire the bears to take advantage of Cable’s proximity to the 1.3215 zone.

Having said all these though, even if we get a strong print today and sterling recovers further, we will stay on guard as we approach Friday’s meeting between UK PM Theresa May and her senior ministers. May will meet with her ministers in order to find common ground on the content of a “white paper” document, which will include a new proposal on the UK’s trade relationship with the EU after Brexit.

Up until now, May’s advisors have come up with two proposals, but none of them gained the full support of her party. This is their third attempt, and with the clock ticking towards the 29th of March, the official date of the UK’s departure from the EU, another failure to agree on the matter could further increase investors’ anxiety over Brexit and could keep any pound gains limited.

GBP/USD – Technical Outlook

After a prolonged downtrend, which started on 17th of April, GBP/USD could potentially see a sign of recovery at lest for the short-term outlook. Judging by the 4-hour chart, the pair started creating higher lows, which are supported by short-term upside support line taken from the June 28th low. This suggests that the pair could break the key resistance of 1.3215, and may continue correcting higher for a while more.

For now, looking at the short-term picture, we will stick to the upside potential and aim for a break of the 1.3215 level. Further acceleration in the rate could lead to a test of the round 1.3300 zone, which acted as a good area of resistance recently, on the 22nd and 26th of June. This is where GBP/USD could stall for a while, as the bulls and the bears could start battling it out over who will be dictating the rules in the near-term. If the bulls take charge again and manage to break the key 1.3300 obstacle, this could signal a short-term trend reversal to the upside and could lead to a test of the 1.3450 hurdle that played out as a god resistance in the first half of June.

Our oscillators are currently in support of our upside idea, as the RSI is above 50 and pointing higher, and the MACD is not only above zero, but also above the trigger line.

Alternatively, if the aforementioned short-term upside support line breaks, then a drop towards the initial good area of support at around 1.3090, could become a reality. If this area is not able to withhold the rate from dropping further, then we could see a test of the lowest point of June near the 1.3050 mark. Slightly below that lies the important psychological 1.3000 level, which could get a touch as well.

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As for the Rest of Today’s Events

Besides the UK services PMI for June, we get the final services and composite PMIs for the month from several European nations and the Eurozone as a whole. As it is usually the case, the final prints are anticipated to confirm the preliminary estimates.

In the US, markets will stay closed in celebration of Independence Day.

 

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