Home Chinese investors remain edgy

So much for a summer slumber.   Despite the Chinese yuan fixing with just a modest revaluation last night, the stability in the yuan did little to bolster investor confidence in China during the trading session.   Better than expected housing numbers in July sparked concern from the investing public that Beijing may limit its future interventions, slightly diminishing the chances of further interest rate or reserve requirement cuts.   The initial weakness in equities escalated to the order book going figuratively bid-less after it was rumored there was little buying support from government agencies on the drop.   After the dust settled the Shanghai Comp finished its session down 6.1%, while the offshore USDCNH is modestly softer on unassertive yuan strength.

As far as the majors go, the British pound is the stark outperformer during the overnight session, leaping past some technical hurdles and pushing higher against the greenback after inflation data for the month of July was firmer than expected.   The year-over-year rate for headline inflation ticked up to 0.1% from a flat reading the month prior, with core prices also gaining nicely compared to the reading registered in June.   The warmer than expected inflation reading coincides with yesterday’s comments from the Bank of England’s Forbes, who was quoted as saying keeping interest rates abnormally low risks distorting market conditions and that rates would have to begin to rise well below inflation nears the BoE’s 2% target.   The pound is the best performing of the majors ahead of building permit data out of the US, with upward momentum in GBPUSD hitting its highest levels since June.

Heading into the North American open, the pessimistic sentiment witnessed in Asia as part of the fallout from the collapse in Chinese stocks has permeated west, though the magnitude of the decline is of a lesser degree and price action resembles some close similarities to what was witnessed yesterday.   S&P futures are marginally lower ahead of the opening bell, while hydrocarbons remain under pressure and unable to generate any positive upward momentum.   The consolidative pattern in USDCAD that has played out since late July is continuing, though an apex could potentially be nearing, with a break to either the topside or downside providing good technical support for direction of a new trend.   Further pressure on the hydrocarbon market combined with stronger data out of the US that is supportive of a Fed rate hike in September would likely see USDCAD test the high from early August, but continued failure to sustain the upward momentum in the pair and a delay of rate hikes in September could set the pair up to see an additional consolidative leg lower.

In respect to today’s economic data, the US housing numbers released earlier this morning illustrated a mixed bag that will likely do little to sway the Federal Reserve’s September decision either way.   Building permits declined slightly more than expected for the month of July, though on a comparative basis the 16.3% drawdown from June stood out.   Housing starts managed to fair slightly better, with the number of new homes beginning construction edging up by a modest amount, though the June number was also upwardly revised from 1.17mln to 1.20mln.   There has been a bit of chop in the currency markets post release, but the loonie has remained relatively unchanged on the day while the DXY basket still trades in positive territory.

Further reading:

Oil prices continue to take hits from multi-factor market pressures, S&P 500 to break lower?

US housing data comes out mixed – USD eventually rises

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.