Increasing concerns over liquidity and earnings in China have put the brakes on equity markets in the region. The Nikkei and Shanghai indices began the week under pressure and fell almost one per cent each by Tuesday, despite Wall Street shares rallying for five straight sessions. The S&P 500 recorded its longest winning streak since October.
The largest manager of distressed debt in China said its bad-loan ratio increased “signific-antly”, adding to concerns as the business environment sours. China’s yuan fell to its lowest point in 14 months after the People’s Bank of China lowered the official midpoint on the currency’s trading range, revealing its intention to weaken the currency to curb an economic slowdown.
The situation in China further dampened an overall risk sour sentiment. Apart from China, investors remained concerned over the situation in Ukraine.
Both the US and Russia continued to urge each other to ease tensions, and Washington repeated its threat to impose more sanctions “in days” if Moscow doesn’t stick to an agreement they reached last week. Over the weekend, three people were killed following a gunfight, highlighting the fact that the crisis in the region is far from being muted.
Despite the tensions, safe-haven currencies and assets got less of a boost from the situation in Ukraine. Only crude oil seems to continue to be supported, and is hovering near six-week highs above $104 per barrel.
The Japanese yen started the week on the back foot after data showed the trade deficit in Japan mounted to its second largest level on record, dented by soft exports in March. USD/JPY rose to 102.72 on Tuesday, its highest since April 8. The news from China lent support to the yen as forex investors in Asia sought safe-haven assets and the pair eased to 102.41.
Meanwhile, the euro slipped to a two-week low on Tuesday against the dollar and fell against the yen on growing expectations that the European Central Bank will eventually introduce new measures to try and stem its rise. Mario Draghi is expected to give a speech in Amsterdam today, which will likely be scrutinised by traders following last weekend’s speech, where he clearly hinted at the single currency’s excessive strength as a trigger for more stimulus.
EUR/USD eased to 1.3785 in very low liquidity trading at the start of the week. Flash PMI surveys from the common currency area and the German Ifo institute’s business sentiment gauge were eagerly awaited to give a clearer direction to the single currency.
Forex investors will more likely be keen to keep pushing the pair higher to test Draghi’s resolve and seew if he is willing to put his money where his mouth is. The pair may grind higher towards 1.3900 until Draghi speaks in Amsterdam, and may extend higher if he doesn’t offer more hints on further easing.
EUR/JPY traded in a converging range for the better part of the last two months. Despite consolidating above the 140 level, the pair struggled to reach a higher high above March’s peak of 143.79. The pair is supported above 140.50, but a fresh bout of weakness, if the ECB moves towards easing, will likely push the pair consistently below the 140 mark.
Also in Europe this week, Portuguese yields slid back to eight-year lows on Tuesday as Lisbon prepares to sell bonds via auction after three years this week. Portugal’s bonds outpaced the major eurozone government bonds on Tuesday, as the 10-year yields fell one basis point to 3.73 per cent, just up from an eight-year low of 3.66 per cent touched last week.
The antipodean currencies continued on their strong showing this year. The Aussie gained against all but one of its major rivals before the release of consumer inflation data yesterday, which was expected to surprise higher.
A strong CPI reading will add to pressure on the Reserve Bank of Australia to move towards a tightening outlook.
AUD/USD bounced back after a slight retreat in the last couple of days, recording its largest gain in two-weeks and breaking a small down-trend channel line. It hit 0.9370 on Tuesday after touching its lowest since April 8 by 0.9315. The pair is expected to resume its uptrend and test the 0.95 level in the near-term.
Kiwi also bounced back on Tuesday after retreating from multi-year highs in the last few days. Traders anticipated a rate hike yesterday by the Reserve Bank of New Zealand and pushed it back above 0.8600.
Upcoming FX key events
Today: German Ifo Business climate index & US Durable Goods Orders.
Tomorrow: UK Retail Sales & US PMI flash composite.
Technical key points
EUR/USD is neutral. EUR/GBP is neutral. USD/JPY is bullish, target 105.50, key reversal point 101. GBP/USD is bullish, target 1.6900, key reversal point 1.6250. USD/CHF is bearish, target 0.8575, key reversal point 0.9000. AUD/USD is bullish, target 0.9540, key reversal point 0.8900. NZD/USD is bullish, target 0.8850, key reversal point 0.8400.
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Emman Xuereb is a trader at RTFX Ltd.