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Market sentiment has been steadily improving throughout the overnight session, spurred by a slightly positive close in China that put an end to three days in a row of losses as the Shanghai Composite closed up by 0.21%.   In a move by the People’s Bank of China to try and cull speculative positioning in the domestic currency market, overnight borrowing costs for the offshore yuan jumped dramatically overnight, which subsequently lead to a short squeeze in CNH as some weaker short positions were flushed from the market.   After yesterday’s comments from policymakers that market participants should be expecting greater stability for the yuan against a basket of currencies, and then today’s move to try and make shorting the domestic currency in the offshore market an onerous task, it appears as if the government is adamant about managing the depreciation of the currency as opposed to letting market forces purely dictate the path forward.   From history we’ve seen that central banks fighting the tide against depreciative forces can win a certain number of rounds, but usually go on to lose the battle if market forces continue to pile into the trade.

Outside of China, the other major mover in currency markets has been the pound, which is under pressure against the American buck this morning after a worse than expected manufacturing production report was released overnight. Manufacturing output decreased by 0.4% in November from the strong October reading, a sharper decline than analysts had been expecting heading into the release.   The pound is down close to a full big figure against the USD as interest rate hike expectations for the UK are pushed further out into the future.   Equities in the region are unfazed by the weaker than anticipated manufacturing report, with the FTSE gaining close to 1.5% as we go to pixels.

The data docket is sparse heading into the North American session, with the JOLTS report from November being the only marginally significant release ahead of Chinese trade balance numbers this evening.   With Chinese equities being able to stem their losses for the time being, oil has remained relatively stable during the overnight session, and subsequently investor confidence has perked up as we get set for the opening bell in North America.   S&P futures are well in the green and telegraphing a positive open at the time of writing, with front-month WTI managing to keep its head north of the $31 level and is helping the loonie cauterize some of the bleeding from yesterday’s whipsaw session.   Yesterday was a perfect example of the heightened two-way volatility that can be experienced in a trading session, with USDCAD covering 200bps of territory and illustrating the fleeting and shallow nature of loonie rallies in this period of uncertainty and pessimism towards crude oil.

Further reading:

USD will be king this year; GBP/USD 1.4250 the target, USD/JPY will trade higher

Flogging The Fallen EUR – Credit Agricole