PBOC cuts daily fixing for yuan, sees currency weaken further

Wednesday, January 06, 2016

The onshore yuan exchange rate dropped to a fresh multiyear low against the USD as the PBOC cut its daily fixing for the currency, a surprise move that caught many investors off guard. The Chinese currency traded 0.38% lower against the dollar, as it pushed above 6.5500 for the first time since March 2011 while the offshore exchange rate weakened considerably more, by as much as 0.8% as it traded towards 6.7000, losing ground against the dollar for the fourth straight session. It seems recent intervention from policymakers in Beijing express a willingness to allow the currency to depreciate as recent attempts to shore up markets, stabilise economic growth and prevent capital flight have so far failed to have the desired impact. We expect 2016 to be a very busy year for central bankers and policymakers in China as they slowly allow market forces to have a greater influence.

Yen strength continued on the Chinese central bank’s intervention, gaining on the dollar for the third straight session as moves overnight saw the currency trade towards 118.36 against the dollar, a fresh two and a half month low. Japanese officials will no doubt be extremely worried if this weaker yuan outlook continues as it would reduce the competitiveness of Japanese exports. The yen has strengthened as much as 1.5% against the dollar and the duel headwinds of a strengthening domestic currency and weaker Chinese yuan doesn’t bode well for Japanese exports.

A busy day for economic data particularly for US markets with the release of ADP employment change data for December and November trade data later on today. We will also see the release of PMI data as well as durable goods orders for December while the highlight of the day will be December’s FOMC meeting minutes. Investors will be paying particular attention to the minutes as they weigh up the market expectations of two rate rises this year against the Fed outlook of four rate rises. The minutes will hopefully provide further insight into the path that any interest rate increases in 2016 will take and will also offer additional details on the US central bank’s inflation outlook. Policymakers at the Fed became increasingly data dependent in 2015 when debating whether to raise interest rates or not which frustrated many investors. Market participants are hoping that any increase in the benchmark rate will follow a gradual path, allowing them to position themselves accordingly and hopefully minimizing market volatility.

The dollar continues to strengthen against a basket of major currencies with the dollar index building on Monday’s gains, adding 0.5% against its major peers with gains compounding early on this morning as the greenback finds firm support around yesterday’s close, trading above 99.500 early on. After a volatile December amid uncertainty surrounding the US Fed’s interest rate outlook many are expecting the dollar to strengthen further as investors are attracted to the prospect of higher yields in the US.  

Offshore yuan hits multiyear low against USD

CNH Curncy Offshore Deliverable 2016 01 06 07 56 33

Yen strength persists against USD

JPY Curncy Japanese Yen Spot 2016 01 06 08 08 06

Dollar index continues to rally

DXY Curncy DOLLAR INDEX SPOT 2016 01 06 07 48 15

Events for today

0145

CN

Dec

Caixin China Services PMI

0855

DE

Dec

Markit Services PMI

0930

UK

Dec

Markit Services PMI

1000

EZ

Nov

PPI

1315

US

Dec

ADP Employment Change

1330

US

Nov

Trade Balance

1445

US

Dec

Markit Services PMI

1500

US

Dec

ISM Non-Manufacturing

1500

US

Dec

Durable Goods Orders

1530

US

w/e

EIA Crude Oil Stocks

1900

US

Dec

FOMC Meeting Minutes

Topics: US Fed, JPY, CNY, DXY, PBOC, CNH
More from: Kash Kamal