A strong fix for the yuan has eased devaluation concerns, leading to relatively small losses in China, a rebound across the rest of Asia and a higher open expected for Europe.
Ordinarily, US markets closed for Presidents Day would leave European trading are a little on the quiet side but recent volatility could mean otherwise. There had been some expectation that Chinese markets could wreak havoc as the country plays catch-up with sharp declines in global stock markets after returning from Lunar New Year celebrations.
A bigger than expected decline in Chinese trade data was offset by soothing word over the weekend from PBOC governor Zhou Xiaochuan who played down forex fears. He said the central bank would keep the value of the yuan constant to a basket of currencies while allowing greater volatility versus the dollar. Chinese exports sunk -6.6% while imports declined a whopping -14.4% in January when gains of 3.6% and 1.8% were expected.
The Japanese Nikkei has jumped on Monday, erasing some of the dramatic -11% fall from last week as the yen softened against the dollar.
It became a run on the bank shares with queues of investors looking to pull out their funds. Years of earnings-crimping low interest rates and regulatory fines has seen the financial sector underperform the rest of the stock market. With stocks in the midst of a downturn, bank shares have fallen more than most and weak links including the likes of ‘CoCo bonds’ could remain under strain, making future bank CDS price spikes a more frequent occurrence.
A week choc-full of important UK macro data and a possible conclusion to Prime Minister David Cameron’s EU negotiations could be key for the direction of the British pound. UK CPI is released on Tuesday, UK unemployment and earnings data on Wednesday followed by UK retail sales on Friday.
FOMC meeting minutes on Wednesday will make for important reading given the question marks over the pace of rate rises in the US this year. The minutes could be a little stale since we’ve already heard from Fed Chair Janet Yellen in her testimony to the US congress and senate, but will give some colour to other opinions in the committee. In her speech Ms Yellen really didn’t deviate too far from the FOMC statement yet Fed funds futures are now pricing the next rate rise in 2018. The Fed essentially remain data-dependent so US CPI reported on Friday could be significant for the dollar.
The euro has been a beneficiary of risk-off in financial markets, trading at its highest since October against the dollar. European Central Bank president Mario Draghi’s last attempt to talk up the prospect of further easing at the ECB’s March meeting had the unusual effect of sending the euro higher so he may look to reassert his influence in his speech at 2pm GMT on Monday.
EURUSD – The euro has stalled just ahead of 1.14 with the daily RSI seeing a failure swing above 70. Assumption is still for a continuation of the trend towards the top of the long term range near 1.15.
GBPUSD – The British pound reversed strongly off the lows of last week to finish positively, suggest the previous week’s bullish engulfing candlestick can carry the pound higher. Another push through 1.46 could mean a bigger move towards 1.49.
EURGBP – The euro-sterling pair has stalled at the 50% retracement of the long-term decline since July 2013 as well as 0.79, suggesting a bigger pullback could be in order. 0.7715 then 0.7525 are potential support.
USDJPY – February has seen a dramatic decline so far, though last week closed well off the lows. A bigger retracement could face major resistance from former one-year support at 116.
Equity market calls
FTSE100: to open 73 points higher at 5,780
DAX: to open 127 points higher at 9,094
CAC40: to open 57 points higher at 4,052
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