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Risk aversion dominates on Fed hike fears, yuan at 4.5 years low

Equity markets are likely to face a real test this week

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
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Positive Chinese data during the weekend was not enough to stop investors from dumping equities and move towards safe havens ahead of the most awaited Federal Reserve decision on Wednesday.

Equity markets are likely to face a real test this week and although the Fed spent long time preparing the markets for the first hike in a decade to an extent that traders and investors got bored of the rate story, the partially artificial inflated equity markets over the years seem not completely ready for the move. Although a rate hike does not necessarily mean a stronger dollar in the short term, the high volatility triggered will continue to benefit safe haven currencies and the Japanese Yen to lead the gains. 

The strong Tankan release early morning is just another reason to believe that the JPY will remain firm over the coming days. The quarterly central bank survey shown business confidence remained steady at 12 beating the 11 anticipated figure. The weak Japanese Yen and low oil prices have been net positive for corporates in Japan as big companies are looking to increase capex by 10.8% in current fiscal year. Although this does not mean the economy is completely out of the woods, the survey provided more indications to believe that Bank of Japan will hold off on expanding its stimulus programme at a meeting that starts just one day after the Federal Reserve decision. USDJPY at 122.20 likely to have short interest positions after being a strong support broken last week.

Chinese officials continued to drag the Yuan lower following a Friday announcement in which the central bank said it is heading to value the currency against a basket of currencies instead of the greenback.  These plans agree with our longer-term outlook that the Chinese currency will continue moving lower in the next 2 years. After climbing to 4.5 years low the USDCNY still has the potential to head north in mid-long term. With 6.8 being a possible target at which the pair traded for almost 2 years from July 2008 – June 2010, expect the offshore CNHUSD to follow the same path.

With no economic figures releases from the Eurozone, Euro traders will take their que from equity markets. If stocks extended last week’s selloff, this would lend EURUSD some support to re-test 1.10 levels. However, any movement in the currency pair would be limited as traders major focus will be on Wednesday’s Fed decision and it is not any easy guess how to position yourself ahead of the meeting. With market almost confident the Fed will trigger the first hike in a decade, it is all about the trajectory, economic projections, Yellen speech, and how dovish the anticipated rate hike likely to be.

Oil prices have not found a bottom yet as prices slipped further on Monday. Both of the oil benchmarks WTI & Brent have fallen every day since OPEC abandoned its output ceiling. IEA said in its monthly report that world oil markets will remain oversupplied, and Iran exports on track to reach 1.26 million barrel per day in December. With sanctions on Iran expected to be lifted early next year we can only expect the supply glut to be on the rise, therefore do not expect oil prices to recover soon.

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.