FX Goes Nowhere Fast in Directionless Friday Trade

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Market Drivers Aug 14, 2015

CNY Stabilizes for first day in four
Greece passes the bailout vote
Nikkei 0.37% Europe -0.49%
Oil $42/bbl
Gold $1116/oz.

Europe and Asia:
NZD Retail Sales 0.1% vs. 0.5%
GBP Construction Output 0.9% vs. 2.4%
EUR GDP 0.3% vs. 0.4%

North America:
USD PPI 08:30

CAD Manufacturing Sales 08:30

USD U of M 09:55

For the first time in four days the CNY reference rate was higher as USD/CNY ended the session just below the 6.4000 mark with many traders suspecting that state banks were ordered to buy the yuan any time the pair breached that level.

After three straight days of devaluation the PBOC may have decided to set a new boundary for the yuan as it tries to create a controlled descent for the currency. For the week the yuan declined by nearly 3% – its biggest move in years.

Whether the PBOC can continue to manage its devaluation is such controlled manner remains to be seen. The new more market oriented dealing structure for the currency will truly be tested only when the market is able to react to economic news from the region. If for example next months GDP data surprises to the downside tt will be interesting to see what the PBOC will do. Will they the pair float more naturally and assume greater selling flows or will the central bank intervene heavily to stabilize any descent?

Regardless of what happens next the market is convinced that the yuan devaluation is not the final policy step from PBOC and that the central bank is likely to resort to further easing measures over the near term horizon.

Elsewhere the EUR/USD got a temporary boost from news that Greek Parliament passed the bailout deal, but rally was short lived as sellers materialized ahead of the 1.1200 level and pushed the pair back to 1.1125. After staging its massive short covering rally two days ago, the EUR/USD has remained in a steady 1.1100-1.1200 zone with markets still uncertain about the timing of Fed’s interest rate move.

Yesterday’s US Retail Sales numbers which finally printed within consensus estimate were a small boost to the dollar bullish view, but markets appear to be more focused on the global economic slowdown problems cause by China as well as lack of any inflation pressures in the system. Today the market will get a look at the PPI reading with analysts forecasting a drop to 0.1% from 0.4% the month prior. With oil price sharply lower, input costs are likely to have declined and if PPI does print in line it may keep the dollar rally contained.

Boris Schlossberg
Managing Director

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