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Commodity currencies slid amid revived Chinese fears, US 2016 outlook negative, Chicago PMI at its lowest level since 2009

 
- China’s collapse during first day since the end of the ban on shares trading signals that further downside adjustments are still to come
- We expect pressure to remain high on commodity currencies especially the Aussie and the Kiwi as traders supported them during the last weeks of 2015 in spite of lacklustre fundamentals
- JPY may further climb against USD should it break a strong support lying at 118.07  
- Tensions between Iran and Saudi Arabia may further push oil prices higher
- Safe haven assets are benefiting from the risk off environment with gold and Swiss Franc rising
- Our 2016 US outlook is negative as fundamentals are still not satisfying
- Current U.S. growth is artificial and delivered by the Fed’s monetary policy to keep the dollar attractive for investors
- Over the medium-term, we target 1.0500 on the EURUSD as we believe that Eurozone uncertainties will weigh more on the currency but as long as the dollar situation is in control (by the Fed), there’s little likelihood of this currency weakening
 
After a period of lethargy, the hallmark of year-end trading sessions, financial markets woke up with a start on Monday as Chinese markets halted stock trading after a drop of 7% in the CSI 300 Index. In Shanghai, shares fell 6.85%, while in Shenzhen stocks dropped 8.19% as fears deepen over China’s slowdown and the end of the ban on share sales for major stakeholders. China’s December official manufacturing PMI (49.7 versus 49.8 expected) showed that further downside adjustments are still to come as the country’s economy continues its transformation. The Caixin manufacturing PMI for December printed at 48.2 this morning, below 48.9 consensus and previous reading of 48.6. On the bright side, the non-manufacturing official gauge jumped to 54.4 from 53.6 in the previous month.
 
In the Middle East, tensions between Iran and Saudi Arabia escalate as Saudi Arabia cuts its diplomatic ties with Iran amid an attack on its embassy in Teheran. The attack came after the execution of a Shiite cleric by Saudi Arabia. The uncertainty in the region has pushed crude oil prices higher as the Brent rose more than 1% and tested the $38 resistance.
 
Commodity currencies fell the most in overnight trading as risk off sentiment spreads outside of Chinese borders. The Kiwi dropped by 1.80% to reach $0.6745. NZD/USD and is currently testing the support implied by the lower bound of the 1-month uptrend channel at around $0.6750. The Aussie was the second worst performer as it fell by 1.30% in Sydney, reaching $0.7198. We expect the pressure will remain high on commodity currencies, especially the Aussie and the Kiwi as traders supported them during the last weeks of 2015 in spite of lacklustre fundamentals.
 
In Japan, the yen is on fire rising more than 1.30% against the US dollar, reaching it higher level since October 16th. The JPY is currently trading at around 118.95 against the greenback amid better-than-expected manufacturing PMI for December. The measure rose to 52.6 compared to an earlier estimate of 52.5. USD/JPY will find a strong support at 118.07 (psychological threshold and low from October 15th), if broken the next support area can be found between 115.50 and 116.20 (low from December 2014 and August 2015). On the upside, the 123.76 (high from November 18th) will act as resistance.
 
***Yann Quelenn: “December's Chicago PMI, one of the final pieces of data to be released in 2015 dropped unexpectedly to 42.9 from 48.7 in November. Chicago’s economic activity shrank despite the general optimism on the U.S economy. At the same time, initial jobless claims increased by more than 7% in the final week to 287k in December, while consensus was a very limited increase, around 1%.
 
Our 2016 US outlook is negative. The fundamentals of the world’s first economy are still unsatisfactory. Despite the low official unemployment rate of 5%, we believe it is important to put this figure into perspective remembering that the allowance period is very short with the unemployed exiting the official data pretty quickly. Long story short, we think that US unemployment figures are largely underestimated.
 
We reaffirm our belief that QE has not done its job of pushing the U.S. economy back onto a path of real and sustainable growth with decent inflation. Current U.S. growth is in fact artificial, delivered by the Fed’s monetary policy. The recent Fed rate hike is, according to us, a simple gesture to keep the dollar attractive for investors. With most of the world trades in dollar, maintaining confidence in this currency is actually the Fed’s primary mission. We remain, nonetheless bearish on the EURUSD as we believe that Eurozone uncertainties will weigh more on the currency and as long as the dollar situation is kept in check by the Fed, there’s no way for this currency to weaken. Over the medium-term, we target 1.0500.”***
 
In Europe, stock indices fell deep into negative territory as Chinese fears spread. Futures on the DAX were down 3.04% and dropped 1.32% on the Footsie. The SMI was down 1.55%, while in France, the CAC dropped 1.68%. On the other hand safe haven assets benefited from the risk off environment as Gold rose 0.95%, while the Swiss franc appreciated 0.65% versus the dollar and 0.10% against the single currency.
 
Today traders will be watching CPI report from Turkey and Germany; SNB’s total sight deposits from Switzerland; manufacturing PMIs from Canada, Italy, France, Germany and the euro zone; mortgage approval and manufacturing PMI from the UK; Markit manufacturing, ISM Manufacturing and Prices paid and construction spending from the US; trade balance and manufacturing PMI from Brazil. 

Monday, 04 Jan, 2016 / 11:58

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