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From the Floor: Dollar pushes back against yuan — #SaxoStrats

  • Pressure on USDCNH eases, returning pair to 6.85 area — Hardy
  • Mexico's intervention on USDMXN 'fails to impress' — Hardy
  • Dollar direction awaiting possible nonfarm payrolls catalyst
  • Equities stalled but momentum still upward — Garnry
  • European equities proving 'resilient' — Garnry
  • Mining stocks start year in strong mode on strengthened gold
  • Lagging silver indicates market yet to fully buy into sector rally — Hansen
  • Oil cuts agenda could see Kurdistan controlled part of Iraq break deal — Hansen
  • Bonds rising ahead of NFP — Boye


By Martin O’Rourke

Natural order

After that violent downward lurch in USDCNH midweek to the sub-6.800 level for an approximate 3% two-day fall in the pair, there was some sense of the natural order being restored overnight that helped the pair back to the 6.8500 zone.

“The pressure on USDCNH definitely eased overnight, but we can probably expect this focus on the offshore yuan issue to return depending on what nonfarm payrolls does today,” says John J Hardy, head of forex strategy at Saxo Bank. “We’re at a stage where we are weighing the Trump theme versus this temporary but very large one-off move in USDCNH.”

Beijing Friday set the fix 0.9% higher at 6.8688. USDCNH was at 6.88486 at 0755 GMT.

USDCNH back to 6.85 area

Source: SaxoTraderGO

“China releases its foreign reserves data Saturday after the $70 billion draw in November,” says Hardy. Tomorrow’s figure will no doubt give some indication as to how much Beijing has reached into its coffers, particularly over the last two days.

 If this is one intervention that has achieved its immediate short-term objective, it is an altogether different picture for Mexico’s peso which, despite a $1bn injection of cash from Mexico’s central bank, still hovers close to that record all-time high.

“The central bank was selling dollars to banks during the Asian session ahead of Trump’s inauguration and it is definitely signalling further discretionary intervention,” says Edmund Liu, reporting out of Saxo Bank’s Singapore hub.

Signal or not, the move did not impress much, says Hardy. “It did not even drive into the lower areas of the range and I think they are going to have to try a different approach here.”

USDMXN intervention fails to give the needle a sizeable shift

Source: SaxoTraderGO

All this of course against a weaker dollar overall that has found difficulty gaining traction so far in 2017 ahead of Trump’s entry into The White House on January 20. “The dollar bulls are on their last legs here,” says Hardy.

 That dollar weakness has seen USDJPY back at the 116.0 mark and EURUSD in and around the 1.06 zone.

“With EURUSD, the influence of the USDCNH intervention is quite evident,” says Hardy. “In the chart here, the consolidation in interest rates correlates to a consolidation in dollar matching one-to-one more or less,  but then we get the massive USDCNH issue. If we get a strong NFP data day, then maybe we see the refocus.”

The interplay of EURUSD and USDCNH

Source: Bloomberg

Europe's boon

Equities momentum was stalled in the US overnight after a disappointing ADP report, but upward momentum remains in focus, says Saxo Bank’s head of equities strategy Peter Garnry.

Garnry is particularly bullish on Europe: “The European macroeconomic environment is improving dramatically as demonstrated by the realtime GDP tracker Eurocoin rising to 2.4% for December, the best in more than five years.”

“The European equity market is more resilient to a weaker dollar and rising euro,” says Garnry. “I think the euro would have to go much stronger to derail the positive sentiment in European equities.”

One segment that has got off to a flyer in 2017 is gold mining which has risen 5.5% since January 1. “I think this is maybe getting ahead of expectations so this could be a good short bet at some point.”

Gold is of course the key to that particular segment, and the precious metal continues to find solid ground above the recent resistance of $1,173/oz. Gold was at $1,174/oz at 0755 GMT.

“Gold’s enjoyed its best week since April but while there is a lot of talk about China capital outflows, the Indian cash crunch, a protectionist Trump and the inflationary impact of his policies, it is still the correlation to USDJPY and US real yields that remain the key,” says Saxo Bank’s head of commodities strategy Ole Hansen. “The key support is at $1,162/oz.”

Hansen’s scepticism on gold is supported by silver’s failure to get fully on board the bandwagon. “Silver struggling to keep up could indicate that the real money is not yet convinced on the sector.”

The era of the oil cut is now well and truly with us after November’s big deal between Opec and non-Opec members, but already concerns over compliance are coming to the fore with Iraq and Libya the focus.

“The Kurdistan-controlled part of Iraq is unlikely to feel bound by the terms of the agreement,” says Hansen. “And in Libya, production is still rising.”

Brent was at $56.59/barrel at 0755 GMT.

And finally…

German government bonds might be rising and US Treasuries 10-year yields may have come off those highs of a month ago to reside at around the 2.37% area in expectation of a ‘soft’ nonfarm payrolls number, so even an as-expected NFP at around the 170,000 area could spark a potential selloff, says the fixed income desk’s Michael Boye.


Time for a bit of calm over China? Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank


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