Yesterday’s rally exceeded my expectations for the day as EURUSD blasted through the resistance at 1.1130. However, it still is inside the range I said I would expect to contain this week’s price action. I suggested in my report on Tuesday that EURUSD would not trade beyond 1.1189 resistance. There was a quick move some 25 pips higher but it was quickly rejected by the sellers and the pair is currently trading at 1.1119. EURUSD is now moving lower towards an intraday support area between 1.1030 and 1.1070. The next support level after this intraday support is the weekly high at 1.10996. This weekly high is fairly near to the support area above it and therefore adds to its significance. Nearest daily support and resistance levels are at 1.0934 and 1.1214.
The PBoC devalued the CNY for a third day, but at a decreasingly aggressive pace of 1.1%, comparing to 1.6% yesterday and the initial 1.9% devaluation of Monday. The central bank held a press conference to explain the devaluation — in contrast to the two previous occasions — arguing that there was no economic basis for the currency to continue depreciating, and that it would keep it stable. The PBoC had also intervened during its overnight session, when it trimmed losses in the CNY of nearly 2% to just 1%.
The central bank also said that the way the reference rate for the new session was modified would now incorporate the currency’s close from the previous session, as well as demand and supply conditions. All this mollified broader market concerns. Most other Asian currencies managed to rebound, and stock and commodity markets picked up.
Final German HICP inflation was confirmed at 0.1% y/y, CPI at 0.2% y/y, as expected. The breakdown showed seasonal price drops for clothes and shoes over the month, which were compensated by a rise in holiday related prices. The annual rate continues to reflect the impact of lower energy prices, with household energy down 5.7% y/y, a further acceleration in the pace of decline, driven by a 22.4% y/y drop in prices for heating oil. Headline numbers remain very low, not just in Germany, but deflation risks are now longer a major concern for the central bank, as core inflation starts to rise.
US Treasury posted a $149.2 bln budget deficit in July, a 57.7% erosion versus the $94.6 bln shortfall a year ago. Spending surged 21.2% y/y, while receipts rose only 5.1% y/y. The fiscal year deficit now stands at $465.5 bln, worsening 1.1% y/y compared to the $460.5 bln red ink for the same 10-month period of fiscal 2014. Also for the fiscal year to date, receipts are up 8.0% y/y, with outlays up 6.9% y/y. We’re still forecasting a $430 bln deficit for the current fiscal year, which compares to the -$483.3 bln for FY2014.
September liftoff is far from a done deal thanks to China’s devaluations and the broad impacts and implications rippling around the globe. For the time being we’ll maintain our call for a 25 bp hike in September. But the Fed funds futures market is now showing only about a 40% chance for action. Odds were closer to 70% after the July jobs report. Factors that have the potential to cause the FOMC to delay are the risks of global economic weakness, the renewed threat of disinflation with the plunge in commodities, potential devaluations of other Asian currencies, and the stronger dollar which could be a net headwind to US growth. It’s too soon for Fed officials to start making pronouncements on China, as indicated by Dudley earlier. While data will continue to be the Fed’s guiding light, policymakers have already shown their sensitivities to global dynamics, and overseas events could take precedence in the September rate decision if the markets become unglued.
Currency Movers Charts
In today’s trading we’ve seen EUR correcting lower while USD, CAD and GBP have attracted money and moved higher. NZD is a clear loser today even though there has been no major news on the currency. NZD performance against GBP and USD stand out from the others. GBPNZD is moving higher in an ascending triangle that has been formed below a major historical weekly resistance at 2.4146 while NZDUSD moves sideways at a weekly support at 0.6470. AUDNZD reacted higher from a support yesterday and created a pin bar but there has been much momentum today. This price action is also taking place at a weekly pivotal high at 1.1113.
Significant daily support and resistance levels for these pairs are:
Main Macro Events Today