Chinese stocks plunge 4% after Beijing retaliates

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SUMMARY

ANALYSIS

USDCAD

The safe-haven USD struggled to benefit from yesterday’s slide in US equities as traders had to deal with big USD-sell flows into the London fix and a breakout for spot gold above $1888, but some US/China negativity (both before and after Pompeo’s speech) and Intel’s negative earnings report seemed to help the dollar into late NY/early Asian trade.  Last night’s lower than expected USDCNY fixing price knocked the USD lower briefly during the 9pmET hour, but a 4% plunge for Chinese stocks (on the back of Beijing ordering the US to close its Chengdu consulate) helped it recover.  Broader market risk sentiment tried to recover in this morning after all the July flash PMIs out of Europe (Germany, Eurozone, UK) handily beat expectations, but there’s still a palpable sense of “risk-off” in the air as NY trade gets underway today and we think this is why USDCAD has been able to hold last night’s re-test of the 1.3380-1.3390 support level.

 The July flash PMIs for the US were just released and they missed expectations (see below).  We’ll be watching September WTI prices today as the market keeps threatening to give up Tuesday’s breakout gains above $41 (which would help USDCAD if it happens).  We’ll also be monitoring precious metal prices for another potential upside move (which could hurt the USD) as traders have largely ignored last night’s 12% increase to silver future margins at the CME and have bid gold up past $1900 this morning.

 IHS MARKIT U.S. MANUFACTURING SECTOR FLASH PMI FOR JULY AT 51.3 (CONSENSUS 51.5) VS FINAL JUNE 49.8

 IHS MARKIT U.S. SERVICES SECTOR FLASH PMI FOR JULY AT 49.6 (CONSENSUS 51.0) VS FINAL JUNE 47.9

USDCAD DAILY

USDCAD HOURLY

SEP CRUDE OIL DAILY

EURUSD

Euro/dollar is pivoting around the 1.1600 mark this morning as traders await the next catalyst for price action.  The July flash PMIs out of Germany and the Eurozone both came in well above expectations this morning (see below), but the better survey data is competing with negative US/China headlines and real “put your money where your mouth is” risk-off flows in China today.  While we don’t believe EURUSD deserves this valuation on the basis of the over-hyped EU recovery fund deal, we cannot argue with Tuesday’s decisive break above a thick band of chart resistance from 1.1450-1.1520 and the market’s increased positive correlation with precious metal prices (and therefore increased inverse correlation with US yields).  The market also lacks large topside option coverage (expiries) above 1.1600 going into August, which could allow it to keep trending higher.

 Eurozone Jul Markit Mfg Flash PMI, 51.1, 50.0 f’cast, 47.4 prev
Eurozone Jul Markit Comp Flash PMI, 54.8, 51.1 f’cast, 48.5 prev

Germany Jul Markit Mfg Flash PMI, 50.0, 48.0 f’cast, 45.2 prev
Germany Jul Markit Comp Flash PMI, 55.5, 50.3 f’cast, 47.0 prev

EURUSD DAILY

EURUSD HOURLY

SPOT GOLD DAILY

GBPUSD

Sterling/dollar is looking set to close out the week over 200pts higher compared to where it closed last Friday.  Key chart resistance in the 1.2630-50s gave way on the daily GBPUSD chart on Monday and it appears traders have not yet given up on the possibility of a firm NY close above the 1.2750s (which would be another bullish development should it happen).  The fact that sterling can rally despite this week’s clearly negative Brexit update tells us that the market is just not taking “no-deal” risk seriously (because it believes EU/UK negotiators will figure it all out at the 11^th hour like they did last year) or that it needs to weed out and correct overcrowded bearish-ness (because the Brexit news cycle has been so negative).  We wonder if the leveraged funds finally abandoned their net short GBPUSD position as of July 21…stay tuned for this week’s COT report later this afternoon.

 UK Jul Flash Composite PMI, 57.1, 51.1 f’cast, 47.7 prev
UK Jul Flash Manufacturing PMI, 53.6, 52.0 f’cast, 50.1 prev

 
GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar is marking time here as well this morning, similar to the euro/dollar market.  The fact that AUDUSD buyers defended Tuesday’s breakout level (0.7070-80s) was positive in overnight trade, but we feel more of them need to show up now or the market faces the risk of a downside correction.  Off-shore dollar/yuan’s rally today should be pause for concern here in our opinion.  We think a break above the 7.03 level (let’s say on continued China stock market selling) would pose a problem for the Aussie.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen got drubbed in NY trade yesterday when spot gold prices broke above the $1888 mark, and it’s getting hammered again this morning as XAU breaks above $1900.  Traders have shown a clear desire to follow the broader USD tone since the middle of last week, but we think today’s selloff is being exacerbated by the lack of liquidity (Japanese Health & Sports Day holiday), technical factors (USDJPY losing 106.60s support level), and the prospects for China’s equity market selloff spilling over into NY trade today (traditional risk-off).   

USDJPY DAILY

USDJPY HOURLY

US 10-YR YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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