Trading news

Yuan strength moving forward, Commodity currencies outperform G10, USD broadly lower, Canada set to remain in technical recession

It’s done. The IMF has decided to include the yuan in its Special Drawing Rights basket. The Chinese currency would occupy a 10.92% weighting, more than the Japanese yen and the pound sterling. The People’s Bank of China set the reference rate higher to USD/CNY 6.3973, while the offshore rate (USD/CNH), which is not subject to trading bands, recovered in the Asian session after falling 0.65% the previous day. On the data front, the manufacturing PMI came in on the soft side earlier tonight, proving once again that the sector is going through difficult times as the usual growth drivers are having trouble keeping up. The official purchasing managers index slipped to 49.6 in November from 49.8 in the previous month. On a more positive note, the non-manufacturing PMI printed higher to 53.6 from 53.1 in October, confirming that the two sectors are moving in opposite direction as the first one needs to reduce overcapacity, while non-manufacturing industry is expanding at steady pace. The Shanghai Composite was up 0.32% and the Shenzhen Composite fell -0.24%. Hong Kong’s Hang Seng surged 1.78%
**Peter Rosenstreich, head of market strategy: "As we expected the IMF voted to add the yuan to the Special drawing rights. The current basket is made up of USD, EUR, GBP and JPY. This will be the first change to the SDR's composition since 1999 and will take effect on Oct. 1st 2016. The yuan will have a roughly 11% weighting in the basket. PBOC Deputy Governor Yi Gang after the IMF executive boards vote stated that China will continue to reform to make the yuan more “freely tradeable.” He went on to suggest that yuan would be "basically stable at equilibrium level" and further deprecation should not be a concern. We are one of the few analysts on the street to forecast yuan strength moving forward. The rationale is based on two critical components. Firstly, the inclusion of the yuan in the IMF SDR, which should lead to asset manages including the currency in their diversification strategy. Also, the decision will provide more confidence to the market on this historically volatile and managed currency. Secondly, our view is based on expectations that China economic conditions are stabilizing. Recent incoming China data on exports, housing and domestic consumer have been positive, suggesting the worst part of the downside is over. Moreover, massive fiscal and monetary stimulus will provide a boost domestically. Finally, in our view the Fed tightening is unlikely to have a profound effect on the yuan's managed price.”**
On the equity front, stocks are trading in positive territory across Asian regional markets. South Korea’s Kospi is recovering from yesterday’s losses as exports contracted less than expected in November, printing at -4.7%y/y compared to -9% consensus. The index is up 1.60%. In Japan, the Nikkei gained 1.34%, while the broader Topix index surged 1.37%. USD/JPY dropped as much as -0.50% to 122.64 before recovering to 122.90 in late session. However, looking at the big picture, the pair remains within its 2-week range as investors await the Fed to raise rate.
AUD/USD’s positive trend is gaining momentum and is testing the hourly resistance standing at 0.7283 (high from November 25th) as the RBA left its cash rate unchanged at 2%. On the downside, the closest support can be found at 0.7159 (low from November 23rd). We remain bullish on the Australian dollar and expect further appreciation of the Aussie against the USD as the economy stabilises. Australian shares were up 1.93%.
In Europe, equity futures are blinking green across the screen, following Asia’s lead. The Footsie was up 0.61%, the German DAX gained 0.18%, the CAC 40 0.27%, while the SMI rose 0.14%. The broader Euro Stoxx 600 jumped 0.42%. On the FX market, EUR/USD is going nowhere, trading around 1.0580, while the cable continues to rally as it added 0.75% from yesterday’s low. GBP/USD will find a first resistance at 1.5136 (high from November 25th). Overall, we have the feeling that there is further room on the downside as the monetary policy divergence between the BoE and the Fed will add pressure on the pair. The pair already tested the support standing at around 1.5027-1.50 and will likely try to break it to the downside again.
**Yann Quelenn, analyst: “Major headlines this week focus on the ECB but this is also a very busy week for Canada with Q3 GDP released today and the rate decision of the BoC Tomorrow. The country is for the time being in technical recession (two consecutive quarters of economic contraction), which is set to stop temporarily. For the first two quarters, GDP shrank 0.8% and 0.5 quarter-on-quarter respectively.
There are big expectations concerning the annualized Q3 GDP data, which should be released around 2% on a net improvement of the balance on trade in goods and services. Canada’s trade deficit also narrowed in September to $1.33 billion from $2.53 billion in August due to the retracement of commodity prices this summer. Unfortunately, commodity prices have fallen since then and Q4 should weaken due to renewed downside pressures on the trade deficit. Lingering low commodities prices have not stopped to weighing on the Canadian economy. At the same time, when commodities collapse, Canada holds it breath, the Bank of Canada has already cut rates twice this year in an effort to offset the effects of the oil decline.
We remain bearish on the loonie, which is holding above 1.3300 versus the greenback. On the medium term, we target the USDCAD to target 1.3500.”**
Today traders will be watching manufacturing PMI from Sweden, Norway, Turkey, Spain, Switzerland, Italy, South Africa, France, Germany, the euro zone, the UK, Denmark, Brazil and the US; unemployment rate from Germany, Italy and the euro zone; Q3 GDP from Brazil, Italy and Canada; trade balance from Brazil; ISM manufacturing from the US

Tuesday, 01 Dec, 2015 / 10:03

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