See important Research Disclaimer.
A 2.5% decline in the Chinese mainland markets was not what the key officials had in mind yesterday amid further talk of stability and a potential end of the sell-off. On the daily chart, the CSI 300 seems to have established a short-term trading range of 3000 to 2600, and a break of this range would be very interesting. For now, I would look to work orders into these levels.
There has been a good level of focus overnight on the $93 billion drop in China’s FX reserves. This was certainly more aggressive than what the consensus had been calling for, although there had been calls from some circles for a much larger drop. Since this data has been compiled, the Chinese authorities would have been drawing down their reserves in even larger quantities. Also keep in mind that this figure is actually considerably larger, adjusting for moves in foreign exchange markets (namely the moves in the EUR).
With capital outflows from China and the wider Asia region firmly in focus, the use of FX reserves to stabilise foreign exchange rates has been significant and plays firmly into the idea that USD/CNY and USD/CNH are likely to strengthen over the coming six months. In fact, long USD/CNH seems to be one of the most compelling trades around, especially if one was prepared to hold for over a medium-term timeframe.
Recall, the People’s Bank of China (PBoC) still have much firepower to deal with this issue and they will continue needing to offset the negative impact of tightening financial conditions (when drawing down FX reserves) by easing monetary policy. Watch China’s August trade balance statistics today (no set time), with the market expecting the surplus to widen to $48 billion, with exports expected to fall 6.6% and imports 7.9%. Given what we have seen with the trade numbers from Korea, horrible numbers would not be a surprise and could be a source of volatility for markets in the afternoon – especially with the market already on edge about Chinese growth.
Although we are calling the ASX 200 to open on a flat note, with the ASX volatility pushing 30%, it would not be outrageous to think we could see an intra-day volatility pick up after the open of the Chinese markets.
Other factors to consider:
- At 09:05am, Reserve Bank of Australia (RBA) member Luci Ellis speaks on ‘Property Markets and Financial Stability’ which will be closely watched. At 11:30am we get NAB business confidence; with a market pricing at a 20% probability of an October rate cut, expect traders to continue searching for answers around the rate debate.
- Market internals in the ASX 200 have become quite compelling for the bulls again with a mere 18% of companies trading above the 50-day. When we saw the capitulation move on 24 August, this level got down to 12%. Interestingly, only 15% of the ASX 200 has a 14-day RSI (relative strength index) below 30; this figure was at 40% on the 24th. This suggests the internals look compelling for long positions, but are not flashing red by any means.
- Looking at the four hour chart, copper continues to work positively within its channel. As long as the trend holds, then a modestly positive bias is held. Actions from Glencore PLC to cut production at two of its African mines are naturally helping sentiment.
- The AUD has seen reasonable gains overnight, although the sterling was the currency to be long in. Long GBP/NZD was the trade of the day and had the biggest risk adjusted move. A break of NZD 2.4500 would keep the momentum going and trend followers should absolutely put this on the radar.
- GBP/AUD also looks extremely bullish on the daily chart and the bulls will want to see a break of supply around AUD 2.21. From a momentum perspective, I feel that this pair will trade into AUD 2.5000 next year. You could also make the argument that the fundamentals support this too.
- On the two-hour chart, AUD/USD simply can’t break US $0.6950 and seemingly finds a wall of supply into this area every time. The pair is grossly oversold, but the downtrend is strong and rallies will be sold. The question is: What can change this trend? When sentiment, price action and the technicals all suggest lower levels, it’s going to take something substantial. It seems like the hard part is picking your entry. I can’t see a move much higher than $0.7100 anytime soon.