EU Open - Yuan strengthens as China is considering options to support the currency

Markets Overview:

  • Equities: Nikkei (+2.51 %), Hang Seng (-0.30 %), CSI 300 (+0.65 %), KOSPI (+0.08 %), ASX 200 (+0.06 %)
  • Commodities: WTI Crude $52.72 (+0.75 %), Brent Crude $55.87 (+0.72 %), Natural Gas $3.31 (-0.48 %), Gold $1162.79 (+0.34 %), Copper $250.30 (+0.56 %)

What traders are talking about:

Dollar regains strength

The US Dollar strengthened yesterday following stronger than expected manufacturing data. The ISM Manufacturing PMI arrived at 54.7 vs. 53.6 expected, while the Markit Manufacturing PMI came in at 54.3 vs 54.2 expected. Further, all components of the ISM PMI showed growth and exceeded market expectations.

In Asia, the Greenback failed to extend gains, but remained well bid. The best performing G10 currency was the Australian Dollar, which is still struggling with 0.7245 resistance, but managed to caught a bid despite the rise in the USD yesterday.

Decent volatility was seen in USD/JPY, which fell sharply in yesterday's US session after the rejection off 118.65 resistance. Despite this, it quickly recovered and reached a high of 118.20 in Asia.

Yuan rallies

The PBoC set today's reference rate at 6.9526 vs. 6.9498 previously. However, the offshore Yuan rallied following speculations about China looking at plans to support the currency (more on that below). USD/CNH fell from 6.9680 to 6.9365.

China considering options to support Yuan

According to Bloomberg, China is preparing plans to support the Yuan and curb capital outflows. The authorities have used stress tests, models and field research, and financial regulators have ordered some state-owned corporations to sell foreign currencies and convert some holdings into Yuan, according to Bloomberg's sources.

The Yuan has been under increased pressure following a rise in the US Dollar and concerns from investors about US-China trade due to the threats made by President-elect Donald Trump.

ANZ expects more Yuan volatility

China has recently changed the composition of its RMB basket and increased the weighting of emerging market currencies. This will lead to more volatility, Australian-based bank ANZ says: "Given a higher weighting of inherently volatile EM currencies, we expect higher volatility in the USD/CNY fixing and spot rate, with uncertainty in US policy (particularly US-China relations) already likely to boost volatility in 2017."

Chinese consumer confidence rises

The Westpac China consumer sentiment index for December arrived at 116.6 vs. 114.9 in November. Westpac noted that it is up 2.5 % from a year ago, but still below its long run average of 120. Further, the bank noted that "while there have been several setbacks along the way and progress has at times been disappointing the picture at year end is of a more comfortable consumer".

Kuroda optimistic about inflation

Bank of Japan Governor Kuroda spoke overnight and said that the central bank will continue its easing programme, but that the Japanese economy is at a critical point to finally end deflation.

Better than expected Japanese Manufacturing PMI

The December manufacturing PMI print arrived at 52.4 vs. 51.9 expected. Markit noted that operating conditions improved at the sharpest rate since December 2015 and that production & new orders both expanded at the quickest rate seen over 2016.

FOMC Minutes

In the European session, the focus will be on the services PMI prints out of the Euro Zone countries, followed by Euro Zone inflation data. However, the main event of the day will be the release of the FOMC minutes from the December meeting. Most traders will be looking for hints about the potential policy changes under the new Trump administration, as well as the rationale behind the hawkish shift in the dot plot. While the release of the FOMC minutes have been rather a non-event in the past two years or so, this one has the potential to move the markets more significantly.

Economic Calendar:

  • 08:45 GMT - Italian Services PMI
  • 08:50 GMT - French Services PMI
  • 08:55 GMT - German Services PMI
  • 09:00 GMT - Euro Zone Services PMI
  • 09:30 GMT - UK Construction PMI
  • 10:00 GMT - Italian CPI
  • 10:00 GMT - Euro Zone CPI
  • 19:00 GMT - FOMC Meeting Minutes

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