Yesterday China carried out its biggest FX reform for more than 10 years. It devalued the CNY by 1.9% but more importantly USD/CNY will be determined by the market from now on. While Chinese authorities mentioned that this one was a “one off” move, the authorities followed with another devaluation the next day by a further 0.1% devaluation. This was done in order to make Chinas currency weaker, so that exports increase. China’s exports fell 8.3%y/y, completely missing an expected 1.5% drop, and imports fell for the ninth month in a row in July (-8.1% y/y). Clearly the domestic economy is struggling from a lack of demand, both from within China and globally, and a relatively strong currency. They need it weaker.
Why does this matter for FX?
– China accounts for 45 – 50% of global metals demand, so the obvious impact is a weaker CNY makes commodities more expensive to import.
– While the move makes Chinese products cheaper to import, Chinese will find it more expensive to invest overseas. Countries such as Australia, New Zealand, Korea, Japan, and all its neighbors will suffer from less demand for their products. The currencies of these countries may suffer for a prolonged period
– Probabilities for a FED rate hike in September have been somewhat lowered as the FED may be concerned over global growth and inflation pressures. (Hence the higher EURUSD)
Why has China acted now? Because Japan has collapsed the value of the yen and then Europe collapsed the value of the EUR.
Today the market will decide how to absorb yesterday’s shockwave while some focus will also be given to unemployment data from UK and industrial production from the EZ.
Trading Quote of the Day: Manage the risk and the profits will take care of themselves
GOLD
Pivot: 1101.00
Likely Scenario: Long positions above 1101.00 with targets @ 1126.50 & 1135.00 in extension.
Alternative scenario: Below 1101.00 look for further downside with 1093.70 & 1083.50 as targets.
Comment: The RSI is mixed to bullish.
OIL
Pivot: 44.4
Likely Scenario: Short positions below 44.4 with targets @ 42.5 & 41.9 in extension.
Alternative scenario: Above 44.4 look for further upside with 45.15 & 46.55 as targets.
Comment: As long as 44.4 is resistance, likely decline to 42.5.
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