Markets are set up for another turbulent day with risk aversion being the main theme of trading. There wasn’t a nuclear hydrogen test from Korea this time, but China devaluing its currency by 0.5% had investors fearing that the second largest economy is escalating a trade war against its competitors.
CNY vs CNH spread
The Peoples Bank of China have been devaluing the nation’s currency steadily for the past 2 weeks, however this time the move was the biggest since August and comes one day after the spread between offshore and onshore exchange rates hit a record high. The response was heavy on Chinese equities, and the stock exchange experienced the shortest session ever as trading was halted 13 minutes into the session when markets fell by 5% and completely shut down after resuming trading for 1 minute only as it dropped by another 2%.
The Chinese turmoil heavily effected oil prices with both benchmarks falling to levels last seen in 2003. To add salt to the wound EIA data released yesterday showed U.S. gasoline inventories rise by 10.6 million barrels. Meanwhile, conflicts between the two major OPEC members, Saudi Arabia and Iran was thought to be playing a supporting role to oil prices but the fact is tensions aren’t going to disrupt supplies, it will only reduce the chance of cooperation between OPEC members to decide on certain output levels, thus keeping prices under pressure. Calling a bottom for oil is not an easy task, in fact, it is impossible, and although being bearish for the first quarter of 2016, it seems prices are getting too low too fast. Testing levels below $30 is a very possible case scenario but not sustainable, thus bullish long-term traders who are still on the sidelines are likely to jump in soon.
Japanese Yen remains the king, USD/JPY traded at lowest levels since the black Monday Aug 24, 2015, and if markets turmoil resumed the safe haven the currency still has potential to go higher. FOMC minutes raised some concerns yesterday as decisions were not unanimous but a “close call” and inflation remains the major hot topic. Although the Fed won’t be taking action in the Jan 27-28 meeting, traders will be focused on tomorrows non-farm payrolls report for an indication on whether the U.S. can handle another hike in Mar 17-18 meeting. ADP report yesterday surprised to the upside adding 257,000 jobs vs expectations of 192,000, and although ISM non-manufacturing index showed unexpected weakness the employment component was strong enough printing 55.7 versus 55 in November. A strong release from tomorrows NFP is required to stop the USD/JPY from falling further.