Dollar little changed as China tensions ease further

On Tuesday, the negative impact from the China crisis on global markets eased. However, the risk-on recovery was uneven across markets. Equities rebounded nicely. Oil initially rallied sharply, but gave back all gains later on in the US session. Similarly, core bonds were at first sold, but recouped losses and US Treasuries even closed handsomely higher. The dollar hovered on both sides of the opening levels to close nearly unchanged. EUR/USD declined from the 1.09 area early in European trading, up from an Asian start around 1.0856, to close the session at 1.0858 (unchanged for the day). USD/JPY tested the 118 area, but failed to sustain above that level. The pair ended the day at 117.65, even marginally lower from Monday’s 117.76 close.

Overnight, most Asian equity markets show decent gains. Chinese indices underperform and are nearly flat. . Investor sentiment improved further as the Chinese December trade surplus was much bigger than expected. The PBOC kept the yuan fixing little changed for the fourth day in a row. The off-shore yuan gained again a few ticks. There is also market talk that Chinese authorities instructed local banks to limit yuan outflows and to diminish positions in off shore yuan in order to stabilize the currency market and to limited the spread between the on shore and the off shore yuan. Oil rebounds slightly after setting a new correction low (WTI <$30/pb)yesterday. The dollar records modest gains against the yen and the euro. USD/JPY trades currently in the 118.25 area. EUR/USD is changing hands in the 1.0834 area. Commodity currencies like the Aussie dollar and the Canadian dollar try to move away from the recent lows, but the gains are limited (especially for the cad), as commodities remain fragile.

Today, there are again few important eco data. The EMU production data are the exception to the rule, but a bit outdated (November series). So USD trading will again be driven by global market sentiment and by central bankers’ comments (ECB’s Lautenschlaeger and Fed members Rosengren and Evans) and the Beige Book.

In a day-to-day perspective, uncertainty on China will likely ease further, a moderate dollar positive. However, yesterday’s price action illustrates that a rebound in equities is no guarantee for higher core bond yields nor for big USD gains. So dollar gains might stay modest even if the equity rebound continues.

In this respect, it will be difficult for the dollar to break the downside of the 1.07/1.10 short-term trading range short-term. The China crisis is (temporary?) easing but might easily resurface, as Chinese authorities’ policy response still relies on ‘artificial’ measures limiting market activity. In this context, we still look/prefer to sell EUR/USD higher in the trading range (closer to 1.10/1.11).

From a technical point of view, EUR/USD failed to regain important resistances at 1.1087 (breakdown) and 1.1124 (62% retracement from the October high). Last week, EUR/USD failed to sustain below 1.0796 support (07 Dec low). Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.1004 (reaction top) is a first reference. Next resistance comes in at 1.1060/1.1124 (15 Dec top/62% retracement) The picture for USD/JPY remains negative below 120. Next support comes in at 116.18 (August low). The pair moved into oversold territory and now tries to put a bottom in place .

Cable sets another multi-year low

The constructive global risk sentiment didn’t help sterling yesterday. On the contrary, cable touched another multi-year low in the 1.4350/55 area, the lowest level since June 2010. EUR/GBP also returned north of 0.75 even as EUR/USD declined on the global risk-on rebound. The UK production data were to blame. Manufacturing production even dropped -0.4% M/M and -1.2% Y/Y. The production data confirm the dichotomy in the UK economy. Decent domestic demand is partially offset by mediocre production and external trade. The data reinforced market expectations that the BoE will be soft at tomorrow’s policy meeting and that and that sterling won’t get additional interest rate support anytime soon. EUR/GBP closed the session at 0.7516 (from 0.7467 on Monday). Cable ended the day at 1.4448 (from 1.4543).

There are no important eco data in the UK today. So, the focus will be on tomorrow’s BoE policy meeting, BoE Minutes and on global market sentiment .
Yesterday’s data reinforced the case for a soft BoE assessment. A sustained GBP rebound will also remain difficult unless there is progress in the Brexit debate or unless risk sentiment improves. That said, quite some bad news should already be discounted after the recent GBP decline. Especially cable was hit very hard. Was yesterday’s sell-off in cable some kind of a short-term exhaustion move? Some short term consolidation might be on the cards especially if global market sentiment improves and the oil decline halts. The medium term picture of sterling against the euro remains negative as the pair broke above the 0.7493 Oct top. Next resistance stands at 0.7593 (Feb 2015 top). Sterling is moving into oversold territory against the euro and the dollar, but it is no good enough a reason to rush into sterling longs yet.

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