Yuan Wobbles Creates New Troubles

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Market Drivers October 26, 2018
Yuan nears the key 7.0000 level
Aussie at fresh multi-month lows
Nikkei -0.40% Dax na%
Oil $66/bbl
Gold $1232/oz.
Bitcoin $6550

Europe and Asia:
No Data

North America:
USD GDP 8:30
USD U of M 10:00

The yuan fell to a 10 year low in Asian session trade coming within reach of the key 7.0000 level as USD/CNY closed at 6.9510 at the fix, rattling capital markets in Asia and sending AUDUSD to fresh multi-month lows.

The decline in the yuan has been persistent ever since the Trump Administration has escalated the Trade War rhetoric between the two nations and today’s weakening will only exacerbate the situation as the Trump Administration will view the price action as an attempt to offset the costs caused by tariffs.

Given the fact that US Goods Trade deficits widened for the fourth month in a row, the Trump Administration’s policy on trade is clearly not working and today’s action on USDCNY exchange rates will only make markets more nervous that further retaliation will follow soon.

The Aussie was the prime victim of the all risk off flows in Asia, dropping 50 pips to a new 32 month lows as it inched ever closer to the psychologically key .7000 level and any further declines in US equities today could tip it through that figure as the day proceeds.

With no data out of Europe, the focus today will be on US GDP which is expected to print at 3.3% versus 4.2% the quarter prior. Although a slowdown is expected the real question will be if even the more muted projections will miss their target. As we noted earlier the rise in US goods deficit along with a slowdown in retail sales indicates that the US economy may have decelerated at a faster pace than originally thought. A miss in GDP data would confirm the thesis that Q2 was peak growth and would embolden bears to sell equities into the weekend close. That, in turn, should weigh on risk sentiment and could trigger moves in USDJPY below 112.00 and push Aussie through the .7000 support as the day progresses.

Boris Schlossberg
Managing Director

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