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Equity markets consolidate after a volatile week, USD lower, Russian rate decision

At the end of what was a particularly volatile week, equity returns are mixed in Asia as traders adjust their positions ahead of next week’s FOMC meeting. Chinese mainland shares are in red this morning. However, the Shanghai Composite is on the cusp of ending the week in positive territory after falling almost 5% between Monday and Tuesday. It is up 0.43% on Friday while the Shenzhen Composite edges lower by 1.06%. The People’s Bank of China lowered the USD/CNY fixing to 3.3719 from 6.3772 while, in the meantime, Huang Yiping, the China central bank’s member, declared at the WEF in Dalian that “There will be no excessive depreciation (of the yuan)” adding, “The most important thing is to stabilise the economy”. Further devaluation of the yuan is less likely as Beijing still has plenty of room for regular monetary easing, such as RRR adjustments and interest rate cuts.
Elsewhere, the Japanese Nikkei slid 0.19%, while the Topix index edged slightly higher by 0.05%. The South Korean Kospi retreated 1.06% while in Hong Kong the Hang Seng gained 0.50%. Further south, Australian shares continue losing this week’s gains, retreating 0.47% while in Wellington shares are down 0.40%.
It was a quiet Asian session in the FX market. The US dollar weakened against most majors. In New Zealand, the kiwi is gaining ground against the greenback as traders digest the recent rate cut from the Reserve Bank of New Zealand. NZD/USD is up 0.93% since yesterday, back above $0.63, as business manufacturing PMI expanded to 55 in August from 53.7 a month earlier. Food prices contracted -0.5%m/m after increasing 0.6% in July.
Yesterday, the Brazilian real fell 1.80% against the US dollar and 2.35% against the euro as traders priced in Brazil’s downgrade to junk status by Standard & Poor’s. In addition, consumer prices rose 9.53%y/y in August, slightly short of the anticipated 9.54%. On a month-over-month basis, inflation rose only by 0.22% versus 0.23% median forecast and 0.62% in July. 
In the US, the last batch of economic data indicates that import prices remained under pressure in August due to low commodity prices and a strong dollar. The import price index fell 1.8%m/m versus -1.06% consensus and -0.9% previous month. EUR/USD continues to move higher and validated a break of the resistance lying at 1.1262 (Fibonacci 50% on July-August debasement), maintaining a strong short-term bullish bias. On the upside, the closest resistances stand at 1.1368 (Fibo 38.2%) and then 1.1714 (high from August 24th), while on the downside, the previous resistance standing at 1.1155 (Fibo 61.8%) is now support.
In the equity market, futures are trading in positive territory prior to the European open. The Xetra Dax is up +0.30%, CAC +0.54%, Footsie +0.25% and SMI +0.42%. EUR/CHF is testing the strong resistance at 1.10 and will need a fresh boost to break through. USD/CHF is taking a breather and consolidates below 0.98. The dollar has risen more than 5% against the Swiss franc in 2 weeks.
***Yann Quelenn, Market Analyst, Swissquote: “The Central Bank of Russia is meeting today and will likely decide to maintain its key rate unchanged at 11%. Officials are concerned about the still very high Consumer Price Index which stands at 15.8% Year-on-Year. For the time being, there is no clear downside trend in inflation and the central bank is looking for more inflation supporting data to continue its easing cycle. There is not much room for Russia as high inflation and negative growth prevents any change in interest rates. The annualized Q2 GDP printed at an alarming -4.6%.
Inflation is driven by the weakening of the Russian currency. The USDRUB is currently trading around 67 rubles for a dollar and this undoubtedly means inflation for Russia as imported prices rise. In addition, Russia is suffering from lingering low oil prices. The OPEC oversupply and the fear that Iran will flood the market are two factors weighing heavily on prices. However, we believe that Russia was well aware of these issues even before they happened. The deal signed in 2014 between Russia and China to bypass the U.S. dollar was clearly an early indication. Since then, the USDRUB has almost doubled in a year. The currency war is definitely on.”***
Today traders will be watching: Unemployment rates and Q2 GDP final estimate from Sweden; industrial production from Italy and India; PPI and Michigan sentiment index from the US.

Friday, 11 Sep, 2015 / 11:39

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