Global macro overview for 04/07/2018
A large number of investors have started to fear that the weakening of CNY and the collapse of the Shanghai stock market may be associated with a strong outflow of capital. However, the verbal monetary support from the monetary authorities, which supported the second day of the clear strengthening of the yuan and the clearly better-than-expected PMI for China’s services, should somewhat allay fears. All comparisons with the situation from 2015, when traders fear the prospects of China and the stability of the local financial system are to a negligible extent justified. First of all, this is due to the fact that those turbulences were the result of errors of regulators, who first allowed for the emergence of a speculative bubble in the stock market and then fought unsuccessfully with the effects of its breakage. Now, there is no such thing, although it should be remembered that the scale of debt is a serious problem in the financial system of the Middle Kingdom. However, this is a long-term problem and a permanent element in the balance of risks, not a new element of the market puzzle that suddenly appears and causes a panic.
The first signs of calming down the sentiment go hand in hand with slowing USD appreciation. After a multi-week rally ahead of the dollar, the global investors do not see much room for strengthening, a lot of positive information is already discounted by the markets.
If concerns about the future of China are quickly dispelled, AUD and NZD can count on strong rebound. The medium and long-term perspectives of both currencies are not positive in our opinion (low-interest attractiveness and lack of prospects for a rapid rise in interest rates) and the potential rebound market will be surely used to renew the short exposure.
Let’s now take a look at the USD/CNY technical picture at the daily time frame. The market has made a big pin bar candle around the level of 6.6855 where the 61% Fibo retracement of the last swing down is. It might indicate a temporary corrective cycle in progress, but for now, the price might start to consolidate between the levels of 6.6000 – 6.7180. The market conditions are overbought, but the momentum is way above ifs fifty level, confirming the strength of the up move. The nearest important support is seen at the level of 6.4372.