11/08/2015: Chinese yuan devaluation driving dollar strength

Market Overview

China is again dominating trading sentiment today after a “one-off” 2% devaluation of the yuan was announced by the People’s Bank of China was announced overnight. The PBOC has changed the way it calculates the yuan’s daily midpoint against the US dollar, now taking the midpoint of market maker quotes. This move has caused a 1.9% increase in the Dollar/Renminbi which is now at levels not seen since September 2012 having basically been flat-lined in the past 5 months. The move from the PBOC has come just days after a sharp decline in Chinese exports. The reaction across emerging market currencies has been for a sharp sell-off across the board. The move has also just put the brakes on a nascent recovery in commodities and equities sentiment has been hit. In other news, it would appear that Greece is close to agreeing the terms of the third bailout deal.

European equity markets have opened lower, hit by this news out of China. This comes despite a sharp rebound on Wall Street with the S&P 500 up 1.3% whilst Asian markets were mixed to lower. In forex trading, the dollar is having a strong start to the day, with the commodity currencies of the Aussie and the Kiwi especially being targeted by the sellers. Only the Swissy trading stronger against the dollar today. Commodities are paring their gains from yesterday with gold, silver and oil all lower.

Traders will be looking out for the German ZEW Economic Sentiment at 1000BST. After 4 months of deterioration, the expectation is for a pick-up in sentiment to 31.7 (from 29.7) which would be supportive for the euro and the DAX.

Chart of the Day – AUD/USD

I had been planning to talk about the Aussie as an improving chart, but that has been completely flipped on its head overnight by a reaction to the PBOC actions. On a technical basis this has resulted in a sharp bout of selling pressure on the Aussie and means that (despite being very early in the European session) there could be a bearish engulfing candle (bearish key one day reversal). This seems to have completely changed the near term outlook once more. The momentum indicators on the daily chart are now turning over ominously. The last time the Stochastics rolled over like this was in mid-June and preceded a 5 week sell-off, whilst the RSI has again failed at 50. The intraday hourly chart shows that the Aussie has also now broken a 7 day uptrend and also moved below the key near term pivot level at $0.7350 (which now becomes the resistance). The next key near term support is $0.7260 and with momentum  deteriorating there is an increasing likelihood of this being tested now.

AUDUSD   11082015


The rally on the euro in the past four days has once more unwound the single currency back into the band of resistance and so far the chart seems to be reverting to type. I have been saying for a while now that rallies back towards the resistance of the falling 144 day moving average (today at $1.10640) are a chance to sell. This is what we saw yesterday and with the dollar strengthening once more today this could be the latest lower high to be posted, at yesterday’s high of $1.1040. It would be in keeping with the corrective configuration on the RSI which on the past few rallies has consistently fallen over just above 50 before falling away again. The intraday hourly chart shows initial support coming in between $1.0925/$1.0950 and with momentum rolling over the sellers are gathering impetus again. Watch for the hourly MACD lines going negative and the hourly RSI dropping below 40 as a sign that the pressure to the downside is growing once more. Below $1.0925 re-opens the support around $1.0850 again. The outlook of this being a rally that should be sold into will be aborted only on a move above $1.1130.

EURUSD   11082015


I would say that the rally on Cable seen yesterday is rather in keeping with what has become rather a messy and unpredictable period of trading for the pair. Just when it seemed as though we were beginning to get some direction (which was looking to be a downside break), a sharp rally has been seen again to neutralise any sell signals that had been lurking. The choppy trading continues and we still wait for decisive direction. I continue to believe this will be a feature of the coming weeks and possibly months for this pair. There is little of any conviction in the daily momentum indicators, with the Stochastics having now turned up again. So once more, back on the intraday hourly chart we look at the ranging signals and therefore the Fibonacci retracements of $1.5188/$1.5928 with the two extremes of 61.8% at $1.5470, 38.2% at $1.5646 and trading around the 50% level at $1.5558.

GBPUSD   11082015


The pullback into support on Dollar/Yen may have gone possibly 30 or so pips more than I had hoped, but the effect has been still the same. The band of support held up the correction and the bulls have used this as a chance to buy. This is a good confirmation of the bullish breakout and the dollar has continued its strength today. The RSI is (currently) back above 60 which I see as playing out part of the confirmation and the Stochastics remain in positive configuration, whilst the pair continues to trade above all rising moving averages. I said in yesterday’s video that Friday’s correction had just breached what had become an uptrend in the past week, but this breach was brief enough and the reaction positive enough to go with the argument that the series of higher lows continues, with the latest now at 124.08 above 123.77 and this is now forming what I see as an uptrend channel on the hourly chart. A move back above the rebound high at 125.00 would continue the move higher towards the multi-year high at 125.85. The outlook for Dollar/Yen is positive.

USDJPY   11082015


A really interesting day for gold was a third consecutive positive trading day for the precious metal, something not seen for over a month. I spoke yesterday about the rally on silver that was developing and whether it had implications for gold, and it now seems as though gold is possibly going the same way. However, gold has not quite made a closing break above the near term resistance at $1105.60. The momentum indicators are improving for the near term but I believe that there needs to be a closing move above $1109.50 to confirm that a near term rally may be on. This would be a signal for gains back up towards the old key breakdown up at $1131 (at which point I expect significant resistance to come in and the sellers to resume control again). The intraday hourly chart shows the improvement and a couple of brief moves above the $1105.60 resistance but there was not even an hourly close above let alone a daily close above. So for now, although this is an improving chart it must still be treated as a range play. The overnight low is in place at $1093.25 and this now needs to hold for the improvement to continue. Also watch for the hourly RSI dropping below 40 and hourly MACD lines moving negative for a sign of the recovery falling over.

Gold   11082015


Yesterday we saw another intraday rally on WTI, but for now this has to simply be treated as another technical rally that is likely to come under selling pressure again in due course. Looking on the daily chart the rebound is a mere blip within the 7 week sell-off, the downtrend of which currently comes in at $45.60. Additionally there is very little impact yet seen on the daily momentum indicators. The intraday hourly chart shows a sharper downtrend in place since the 30th July which is also flanked by the falling 89 hour moving average. The first test of resistance comes in between $45.00/$45.45, with the next key near term level at $46.70. These are two resistance areas that will need to be breached for a near term rally to be taken seriously. In the meantime though, from tiny acorns mighty oaks grow…

WTI   11082015

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