Comm Dollars Crumble as Yuan Devalues

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Market Drivers Jan 06, 2015

Yuan devalues further sending commdollars into a tizzy
UK PMI services in line
Nikkei -0.99% Eurostoxx -1.34%
Oil $35/bbl
Gold $1083/oz

Europe and Asia:
GBP UK PMI Services 55.5 vs. 55.6

North America:
USD ADP 08:15

USD Trade Balance 08:30

CAD Trade Balance 08:30

USD FOMC Minutes 14:00

A very sharp decline for all commodity currency dollars in Asian and early European trade today as concerns over the China slowdown have now bloomed into a full blown panic. In Asian session trade the yuan was devalued further and in offshore dealing fell to a near record low of .6.6843. The next key level for the market is 6.7000 which would suggest that the unit is now in a full melt down as it yields to market pressures on fears that growth will be considerably weaker than the 7% projected by the Chinese authorities.

To add salt to the wound, the region also saw a flare up geopolitical tensions as reports swirled around that North Korea may have tested a hydrogen nuclear test, although South Korean intelligence stated that it did not detect any radiation. In any case the provocative move only added to the turmoil of the markets and send all the commdolls on a one way trip to the cellar.

Both Aussie and kiwi dropped sharply with the former losing one big figure as it hit a low of .7057 on fears that RBA will have to resume its rate cutting operations as the demand from China slows further. The Aussie will most likely find some support near the .7050-.7000 corridor but if the sell off in Asian markets continues this week the panic will no doubt spill over into the currency,

Meanwhile USD/CAD breached the 1.4100 level for the first time in more than 12 years as crude collapsed below the $35/bbl mark in overnight trade. The loonie is now trading in tandem with oil and if crude falls further as the day progresses could breach the 1.4200 figure on fears of massive bankruptcy risks to the Canadian drilling sector as panic spreads to that market as well.

In contrast the european currencies were relatively sedate with EUR/USD and GBP/USD contained to narrow 50 pip ranges for most of the night. The eco calendar brought us UK Services PMI which missed slightly at 55.5 versus 55.6 but was roundly ignored by the market.

The eco data may have more impact in North American trade where traders will get a glimpse of the ADP report projected to come in at 193K versus 217K the month prior. A solid number is unlikely to have much impact as market sentiment is clearly skewing negative right now given the concerns about China. However, if the number misses badly it will no doubt trigger another wave of risk aversion in FX and could send USD/JPY to a test of the key 118.00 support level.

Later in the day traders will also get the release of the FOMC minutes, but their tone may already be outdated given the turbulent market moves at the start of the year.

Boris Schlossberg
Managing Director

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