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With the spot price closing at CNY 6.3982, representing a very modest 28 pip discount to yesterday’s fixing rate, in theory we should see today’s move being not too aggressive. This should provide a platform of support for corporates highly leveraged to the Chinese consumer, as well as a number of Asian emerging market currencies. However, the probability of less volatility in the Chinese currency should provide support to increased expectations around a September rate hike from the Federal Reserve.
It seems the capital markets have had its moment of uncertainty and the PBoC seems to have provided just enough clarity around the direction of the CNY to appease. As we have seen time and time again, when there is low visibility on the macro horizon, traders and investors will cut back on risk.
It is interesting then to see the implied probability of ‘lift-off’ from the Fed in September is now closer to 50% again, helped also by a good US July retail sales report. The doves will point out that the ‘retail control’ group (the element that feeds directly in GDP) only increased 30 basis points, therefore the impact this will have on growth is less pronounced, however at the margin it is still a reasonably upbeat number. The fact the market is pricing 57 basis points (or 0.57%) of tightening over a 12-month period and 122bp over 24 month period seems fair at this stage.
Asian trade today should start on a flat, if not modestly negative note and we should see volumes fall 10-20% below this week’s average.
Locally, the Australian market will the key focal point to watch today with RBA Assistant Governor Christopher Kent scheduled to speak at 10:15am AEST in Brisbane. The AUD will naturally be in focus and I would pay close attention to AUD/JPY given the potential for a calming of markets on an expected less pronounced China ‘fix’. The pair seems to find good supply above the 92 handle, so a convincing break above strong horizontal resistance at ¥92.69 would inspire a move into the 94-95 JPY region.
The ASX 200 is being called down 23 points (or 0.4%) at 5365 on the open, so the downtrend continues, with index printing a new lower low. The bears will clearly be eyeing a move into the January pivot low of 5267 into next week and you can see how pronounced the move lower has been by the fact that the market simply can’t break above the five-day moving average. Every time we test the short-term average, supply comes into the market. On this ground, unlikely rallies into 5,400 look like selling opportunities, although we would need to see some inspiration today for that to occur. Judging by the fact Asian markets look set for a sanguine open and we only have James Hardie and Automotive Holdings reporting, I can’t see the market bouncing too hard on the open.
Immediately, one can focus on the energy space with Brent and WTI oil prices called down 1.5% and 3% respectively from yesterday’s ASX 200 cash market close. WTI prices especially can’t catch a trick and look set for its ninth consecutive week lower – a fate not seen in 25 years! Iron ore on the other hand has pushed higher and this seems to be supportive of BHP, RIO and FMG on open. I would expect some modest selling of financials, given the weaker opening call.
The market internals don’t give me the confidence to call a bottom in the index move either. The ASX 200 is not technically oversold, with 32% of stocks trading above their 50-day moving average. This level has fallen from around 60%, when the index was closer to 5700 at the start of August, so this shows the sell-off has been broad-based. However, I like to see the percentage of companies above their 50-day moving average fall into the 20-25% region so we could see a bounce.