Yuan Falls Again

  • The yuan continues to weaken today, prompting an extension of yesterday’s price action in global financial markets
  • Greece’s parliament will debate today the two bills that the government has submitted for a third aid package
  • The UK jobs data came in right on expectations at 5.6% for June, but weekly earnings missed estimates
  • Moody’s downgraded Brazil one notch to Baa3
  • China reported July retail sales and IP
  • Vietnam widened the dong trading band
  • Banco de Mexico releases its quarterly inflation report today and then its minutes tomorrow

Price action:  The dollar is broadly softer against the majors.  Sterling and the Aussie are underperforming while the Swiss franc is outperforming.  The euro continues its bounce and is trading around $1.1135, the highest since July 13.  Sterling is flat and trading around $1.5575, while dollar/yen is trading near 124.50.  EM currencies are broadly weaker, with IDR, MYR, and KRW underperforming despite a small bounce in CNY from the lows after the PBOC reportedly intervened.  The CEE currencies are outperforming.  MSCI Asia Pacific was down 1.5%, with the Nikkei down 1.6%.  The Shanghai Composite was down 1.1%, while the Shenzhen Composite fell 1.5%.  Euro Stoxx 600 is down 2.1% near midday, while Greek stocks are down 1.4%, breaking a string of four straight up days.  S&P futures are pointing to a lower open.  The 50- and 200-day moving averages have crossed to the downside for the DJIA, signaling further downside risks.  The US 10-year yield is down 4 bp at 2.10%, while European bond markets are mostly firmer too.  Commodity prices are mostly higher.

  • The yuan continues to weaken today, prompting an extension of yesterday’s price action in global financial markets.  The USD/CNY fixed 1.6% higher overnight at CNY6.3306.  The PBOC said that there’s no basis for continuous yuan weakness, and this was reinforced by PBOC chief economist Ma Jun, who said that the move should not be seen as a trend and that the reforms will improve flexibility to help the REER remain stable.  More importantly, the PBOC is said to have intervened by selling dollars to prevent a further yuan decline after spot almost reached 6.45 intraday, which helped push the pair lower to CNY 6.3858 (1% peak to trough move). Greater flexibility will probably translate into weakness for now, given how markets are interpreting this move.  Furthermore, the overall global backdrop argues for further EM weakness.
  • We are still not convinced that this is the beginning of an overt policy drive to regain competitiveness via nominal depreciation of the currency.  Markets, however, seem less convinced.  USD/CNY 12-month NDFs, for example, rose by more than the fixing or the spot moved today, up 2.0%.  The offshore yuan (CNH) continued to sell off.  The dollar rose to CNY6.5945.  It slipped to CNH6.50, but is back near CNY6.55 near midday in London.  The gap between the two (CNY/CNH) warns of further depreciation.
  • More broadly, the dollar has weakened against major currencies and strengthened against EM currencies. The EUR broke above the 50- and 100-day MAs today, rising 1% since the European open to $1.1130.  Some have suggested that the move was once again driven by short covering resulting from hedged long European equity trades.  The Scandies are also outperforming on the day.  On the other hand, EM currencies are still trading on the back foot with MYR and IDR down 1.5%.  In contrast, developed equity markets have underperformed those in EM.  Euro Stoxx is down 2.2% at the time of writing, compared with losses of around 1% for major EM Asian indices, including the Shanghai Composite.
  • Indeed, global equities are sharply lower.  Yesterday the Dow Industrials saw the 50-day moving average cross below the 200-day in what technicians call the “golden cross” or more ominously, the dead-man’s cross.  It is the first such turn since early 2012.   The S&P 500 averages have not crossed, but they are narrowing.  The 50-day average is near 2095 and the 200-day average is just below 2075.  The S&P 500 is presently poised to gap below the 200-day moving average at the open.  How the market trades around that gap will be important for the near-term technical outlook.  If the gap is not filled it will be seen as particularly bearish.
  • Today, Greece’s parliament will debate the two bills that the government has submitted for a third aid package.  The first is the infamous MOU (memorandum of understanding) with the creditors.  The second is a list of about 35 prior actions that Greece commits to implementing.  The vote is expected tomorrow.  The challenge lies not only with Prime Minister Tsipras securing parliamentary support, as the left-wing of his coalition cannot be counted upon, but also with Germany.  Reports indicate that as recently as the start of the week, German Chancellor Merkel was still pressing Tsipras to request a bridge loan.  Tsipras has little interest in doing so as it would likely require additional concessions.
  • Merkel is in a similar political position as Tsipras.  A faction of her own party is balking.  Like Tsipras, Merkel will likely be forced to rely on support from outside of her party to secure approval for the third aid package.   Greece needs funds by August 20, when the next ECB payment is due.  Many Germany parliamentarians are on summer vacation.  They are loath to cut it short, they say, on short notice and without adequate information.  Assuming the Greek parliament passed what it must, the focus will shift to when the German parliament will vote.
  • The UK unemployment rate came in right on expectations at 5.6% for June, but weekly earnings missed estimates.  Average earnings, an important factor in the BOE’s reaction function, came in at 2.4%, compared with 2.8% expected and 3.2% in May.  Jobless claims showed an increase of +1.0K vs expectations for a -4.9K decline.  All in all, the report does not appear to put any additional pressure for the BOE to hike rates, in line with the more dovish outcome of the last meeting.
  • Eurozone IP came in on the weak side.  June’s print was -0.4% m/m vs. -0.1% consensus and -0.4% in May.  Although weaker than expected, we note that the series is very volatile and not too far off from the average over the last 12 months, at +0.1%.  Q4 GDP will be reported Friday, and the IP data warns of downside risk to the 0.4% q/q consensus.
  • Late Tuesday, Moody’s downgraded Brazil one notch to Baa3.  The big shock is the stable outlook.  The fiscal and debt numbers are still getting worse, and so Brazil should be on review for further downgrade.  Our own rating model has Brazil at BB+/Ba1/BB+, so we think it loses its investment grade in 2016 from S&P.  With the stable outlook, Moody’s seems unlikely to cut again until 2016.  Fitch still has it at BBB and should be downgrading it soon.  However, it may be cautious like Fitch, and only cut to BBB- in the first go.
  • Meanwhile, China reported July retail sales and IP.  Sales came in close to expectations at 10.5% y/y, while IP was softer and came in at 6.3% y/y vs. 6.6% expected.  This follows weaker trade data out over the weekend, which already suggested downside risks to today’s data.  It does seem that some further slowing will be seen in the coming months, along with expectations of more stimulus measures.
  • Vietnam widened the dong trading band.  USD/VND can now move up to +/- 2% around the central bank’s fix, up from +/- 1% previously.  The central bank said in a statement that the move was meant “to help the dong be more flexible.”  The dong promptly weakened.  While this can be seen as a response to China’s move, we note that the dong has been devalued twice this year by 1% each time, so the policy stance for a weaker currency was already in place.
  • Banco de Mexico releases its quarterly inflation report today and then its minutes tomorrow.  July CPI data showed little in the way of price pressures still, despite the weaker peso.  Headline rose 2.74% y/y, down from 2.87% in June and the lowest on record.  Core CPI rose 2.31% y/y, matching all-time lows from April.  Data simply does not support a rate hike this year, despite Governor Carstens’ comments.