Article / 04 August 2015 at 8:00 GMT

From the Floor: Beijing cuts shorts

Head of Editorial Content / Saxo Bank
Denmark
  • Beijing moves to limit SHCOMP short selling
  • AUD soars on strong data, central bank statement
  • USD risks consolidation as September rate hike recedes from view
  • CAD manufacturing PMI one to watch this afternoon: Hardy
  • Greek equities recover somewhat after opening sharply lower Monday
From the Floor

By Michael McKenna

Stopping shorts

While the Shanghai Composite may be trying its fundamental best to complete a head-and-shoulders pattern and reverse lower, Beijing is having none of it. In fact, when From the Floor caught up with Saxo Bank's Christoffer Moltke-Leth in Singapore this morning, he told us that the Chinese government has come out with a new set of measures designed to limit the benchmark equity index's decline.

Essentially, said Moltke-Leth, Beijing is placing yet more restrictions on short-sellers. According to Bloomberg, the new rules mean that investors who borrow shares to short must now wait one day to pay back the loans, a measure that prevents short-sellers from covering their positions within the same trading day.

The government obviously hopes that this newest measure will limit volatility, and the SHCOMP rallied by over 3% on the news. 

Bottom's in?

Another Asian-session rally was seen in the AUD, where strong data and a less-dovish central bank combined to boost the currency to 0.7384 against the US dollar.

With June retail sales up by 0.7% (well beyond the 0.4% consensus view) and improved trade balance data, it came down to the Reserve Bank of Australia to confirm the rally, and confirm it did.

According to the RBA, the Aussie dollar is currently "adjusting to commodity price declines", but the key change came in the last part of the central bank's statement. Until today, the RBA had for months maintained that the AUD needed to be lower, lower, lower... but the most recent statement dropped that line and the bulls rushed in.

After a long decline, the AUD is showing signs of life:
AUDUSD
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Source: Saxo Bank 

Saxo Bank head of FX strategy John J Hardy says that the Little Battler could squeeze yet further on the news with 0.75 and even 0.76 possibly coming into view if the USD continues to weaken.

Greenback in the red

At present, the USD is looking soft after a raft of recent data – last Friday's Employment Cost Index release, most notably – took the wind out of the greenback's sails.

Anxiety over soft economic data is also weighing on investors' hopes for a September rate hike from the Federal Reserve, with Moltke-Leth stating that the market is now pricing in only a 38% chance of a September move.

Over at Saxo's FX Options desk in Copenhagen, trader Jeppe Norup confirmed the market's emphasis on US data by noting that one-month vols are higher "across the board" as the new contract's expiry data falls just after the key August nonfarm payrolls release in early September.

Oil slips lower

Of course, fears of delayed normalisation from the Fed are not the only factor keeping markets up at night as the ongoing rout in commodities is weakening currencies from the loonie to the rouble and boosting bonds in the process.

According to Saxo Bank fixed income trader Michael Boye, last night's 5% drop in the Brent crude price (and corresponding WTI weakness) saw US 10-year yields hit two-month lows – a phenomenon that has replicated itself across the board.

"All in all, we're seeing core yields trade lower" says Boye, adding that markets are bracing for "less aggressive tightening" of monetary policy in light of soft global data.

Another factor for bonds traders to watch is the Athens Stock Exchange, which opened 25% down yesterday after having been closed since the Greek crisis' height five weeks ago. The day's trading, however, saw it recover somewhat, with the Athens exchange ending Monday's session down a "mere" 16% – a move that Boye tells us saw both US and Eurozone bonds trade higher in sympathy.

(The German 10-yr bund, for example, sits at 154.75 at press time, giving an effective yield of 0.67%...)

The loonie bin

Finally, while we have noted that oil's decline has hit the commodity currencies hard, Hardy tells From the Floor that today's Canadian Manufacturing PMI may have the potential to provide the loonie with another driver beyond WTI crude.

Noting that a prolonged period of loonie strength (until the oil collapse that began last summer) saw manufacturing flee Canada, Saxo's FX strategy head wondered if today's release might signal some recovery on the back of weaker energy prices.

With oil prices trending up very slightly in morning trading, the CAD might be one to watch if the data are strong.

Canadian loon
Like its namesake bird, the Canadian loonie has struggled to take flight of late. 
Can today's manufacturing PMI give it a boost? Photo: iStock 

Michael McKenna is a consulting editor at TradingFloor.com

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Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

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