In FX – A Quiet End to a Volatile Week

Market Drivers December 16, 2016
USDCNY at highest since 2008
EZ CPI in line
Nikkei 0.66% Dax 0.03%
Oil $50/bbl
Gold $1135/oz.

Europe and Asia:
EZ CPI -0.1% vs. -0.1%

North America:
USD Building Permits/Housing Starts 8:30

After a very volatile week of trade that saw massive gains for the dollar across the board, the last trading session of the week was decidedly more subdued as profit taking helped some of the majors rebound against the buck.

The EUR/USD saw a mild bid in morning European trade, rising to a high of 1.0472 after making fresh multi-multi month lows at 1.0366 yesterday. The eco data from the region was very supportive with Trade Balance missing its mark at 20 Billion EUR versus 29 Billion eyed and the CPI data was only in line at -0.1% as expected. Overall inflation on a year over year basis as 0.6% – still well below the ECB’s 2% target, which suggests that ECB will have to maintain its QE program for the foreseeable future.

In Asia USDCNY rate hits its highest level since 2008 financial crisis as capital outflows continue to plague the Chinese economy. Bloomberg is reporting that Chinese authorities now are clamping down on M&A deals for fear that some of the business transactions are simply a hidden way to ferret assets out of China. The persistently low value of the yuan could prove to be destabilizing for the Chinese economy especially if it continues to persist into 2017, putting stress on already vulnerable financial system. However, as some analysts have pointed out, yuan’s weakness is only prevalent against the greenback. The broader yuan basket has remained essentially steady providing a measure of support to the unit.

With little on the economic docket for the rest of the day, FX markets will likely take their cue from fixed income movements. After a massive surge in rates that saw 10 year top 2.60% yesterday, bonds are little better bid today with yields sliding to 2.56%. The rally in yields has been breathtaking in its ferocity and with the end of the year approaching, some of the shorts may begin taking their profits. Therefore it is not unreasonable for the 10 year yield to slide back towards the 2.50% level which was former resistance and will now become support. That in turn means that USD/JPY could see a correction as well towards the 115.00 figure over the next several days.