Soft Deval of Yuan Spooks FX

Market Drivers June 27, 2018
Risk off as USDCNY at 6-month highs
Equity flows drive FX
Nikkei -0.31% Dax -.73%
Oil $70/bbl
Gold $1255/oz.
Bitcoin $6075

Europe and Asia:
No Data

North America:
USD Durable Goods 8:30

USDCNY hit 6-month highs in Asia session trade, breaking above the 6.6000 barriers and spooking the FX markets as the soft devalultion of the currency appears to be another salvo in the trade war between China and US.

Equity markets across the world were lower, with DAX particularly hit hard as it dropped by -0.75% causing risk off flow in high beta currencies with all the major FX pairs save for the yen, lower against the buck. The EURUSD was hit especially hard with the pair dropping towards the 1.1600 figure once again as it touched low of 1.1621 in morning London dealing.

Despite yesterday’s relief rally caused a massive backpedal on the part of the Trump administration, investors are growing increasingly more concerned that rhetoric could turn to policy and irreparably damage the highly interconnected global trading system dampening growth worldwide. So far there have been no new negotiations between US and China and markets are fearing that the two nations could settle into a low grade war of attrition that will erode investor confidence and weigh on risk assets for a considerable period of time.

On the eco front the calendar was barren in Europe, although later on investors will look at BOE Financial Stability report to gauge whether the central bank is seriously considering hiking rates later this summer. Any modestly hawkish remarks by Governor Carney could help pop GBPUSD which dropped below the 1.3200 in risk-off selloff once again.

In US today the only report of note will be US Durable Goods orders, but the focus in FX will be squarely on equities. If stocks remain weak, expect further risk-off flows as trade war tensions will continue to be the dominant theme of the day and further weakness in high beta FX could take EURUSD to 1.1600 and GBPUSD to 1.3150 as the day proceeds.