Euro Gives Up PBOC Fueled Gains

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Market Drivers for November 19, 2013
PBOC chief says will widen yuan band causing dollar to sink
EZ ZEW in line
Nikkei -0.25% Europe -.59%
Oil $93/bbl
Gold $1273/oz.

Europe and Asia:
AUD RBA Minutes – open to more rate cuts
EUR ZEW 54.6 vs. 54.6

North America:
USD Employment Cost Index 8:30

High beta FX spiked in late Asian trade on comments from PBOC chief Zhou the suggested China will undertake a series of reforms of its capital markets. Mr. Zhou stated that China will set up a managed floating yuan expanding the current tight currency exchange rate band. The country will also remove some restrictions on Qualified Foreign Institutional Investor program and will open up its capital account but impose temporary curbs if needed.

The announcement from Mr. Zhou indicates that China wants to liberalize its capital markets and make yuan much more fungible in global trade as the country attempts to transition its economy away from manufacturing and production towards services and consumption. China also clearly wants the yuan to become a competitive medium of exchange with the dollar and this announcement is just the latest in a series of policy moves to encourage this development in global capital markets.

The news caused a sharp sell off in the dollar as Mr. Zhou also stated that China will cut its ratio of US T bonds held to maturity. The euro catapulted to a high of 1.3544 while Aussie hit .9448 as the combination of low liquidity and Mr. Zhou’s comments created a sudden rally in early morning European trade.

However, the EUR/USD gave up most of its PBOC inspired gains and drifted below the 1.3500 mark by mid morning Frankfurt dealing. The German ZEW data printed at 54.6 as expected but the current situation reading slipped to 28.7 from 29.7 the month prior. Although sentiment remains positive there are clear signs of slowdown in EZ largest economy and the moment of truth for the currency may come later this week with the release of the flash PMI data and IFO survey.

The one unit that clearly benefited from Mr. Zhou’s comments was the Aussie, which earlier in the night dropped to a low of 9350 on the back of the release of the RBA minutes. The RBA suggested that it would consider another rate cut if conditions warranted. The news prompted a knee jerk sell off in the unit but there was nothing really new in the minutes as most of the comments were made in the RBA statement two week prior. Instead traders responded positively to Mr. Zhou’s pronouncements as Australia will likely be one of the prime beneficiaries of China’s capital market liberalization policies.

In North America the calendar is quiet for the second day in a row but there is a flurry of Fed speak with both Dudley and Evans scheduled to make remarks later today. FX therefore may continue to consolidate around current levels as traders seek more clarity from the eco data later this week. For now 1.3500 in EUR/USD 1.6100 in cable and .9400 in Aussie appear to be equilibrium levels and the markets may continue to trade around those barriers for the rest of the day.

Boris Schlossberg
Managing Director

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