Dollar and Yen strengthen amid yuan scare

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After a very quiet final week of 2015, global markets have kicked off 2016 with a bang. China is back in the news as equities around the world are selling off on much weaker than expected manufacturing and PMI reports. Safe haven currencies such as the big dollar and yen are experiencing a nice bounce this Mondaymorning and markets should brace for a volatile start to the new year.

Things really kicked off late last night as it was reported China’s factory activity contracted a dangerously sharp pace last month. The Caixin Manufacturing PMI slipped to 48.2, below the key 50 level promoting economic expansion. This worrying result triggered a massive sell-off in equities with the Shanghai index losing more than 7% by Monday’sclose. Something extra to consider was government imposed restrictions on “selling stock” by large institutions that had been put in place during the summer’s slide lapsed in the new year, so there was ample sellers lining up for any reason to act. Elsewhere in Asia, PMIs in South Korea and Taiwan nudged back above the 50 mark, but those increases were likely a result of greater domestic demand than anything export related. The Japanese yen rose more than 1% as investors flocked into safe haven assets as the New Zealand and Australian slumped in the face of rising oil prices. New unrest in the middle east could ignite a rally in oil over the coming weeks.

Despite some better than expected data in Europe, the single currency slumped with equities, still reeling from China’s data dump. Euro-area manufacturing improved in December, suggesting factory activity performed better over the last year as a whole. Markit’s Manufacturing PMI rose to 53.2 from 52.9 in November, but the euro remains depressed, trading along similar levels to Friday’sclose. Tomorrow, Euro-area inflation will be released and traders are hoping to see prices rose 0.3% last month, which could give the euro some increased demand. Today, it was reported German prices rose 0.2% in December, although the result was largely ignored. The British pound is once again losing ground to the greenback, as manufacturing data in the UK missed the mark, coming in at 51.9 versus 52.5 expected. Sterling is almost 5% below last month’s highs and remains offered as EUR/GBP recovers to test its best levels since October.

Here in the US, the big dollar is higher as economic data kicks off before 10am with the Markit and ISM manufacturing PMIs. Investors and traders are optimistic that manufacturing activity rose in December, further supporting the Fed’s decision to begin normalizing rates for the first time since 2006. Oil prices have jumped 1% overnight, finding a boost in the wake of the breakdown in diplomatic ties between Saudi Arabia and Iran. Some are speculating that this new difficultly could result in supply restrictions, and prices could have jumped even higher had the big news from the Asian session not been divulged. This will be an interesting story to keep an eye on over the coming days and weeks. The top tier data calendar is back loaded this week with December non-farm payrolls to come Friday. It is expected that the American economy added 205k jobs during the final month of 2015.

The Canadian dollar is on retreat again, slipping with other commodity and risk-based currencies. Still trading above multi-year lows, the Loonie shall remain exposed to the broad market. Relative uncertainty concerning the situation between the Saudis and Iranians could ignite an oil rally, so keep an eye on this as it will affect the Canadian dollar. This week is rather quiet on the data calendar. This morning we have a look at the RBC Manufacturing PMI for December (49.2 exp) but all eyes will be on Friday’s employment report. After a very poor November result (-35k jobs), markets are hoping to see that Canada added 15k jobs last month.

Further reading:

EUR/USD: Get Ready For ‘Groundhog Day’ – Barclays

EUR/USD – Trading the Eurozone CPI Flash Estimate

Get the 5 most predictable currency pairs

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