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Markets show disdain for Chinese market manipulations. Commodities fall along with commodity currencies. Fed tries to add unpredicatibility

Currencies
Markets show disdain for Chinese market manipulations. Commodities fall along with commodity currencies. Fed tries to add unpredicatibility

Content supplied by BNZ Markets

It was a more “normal” overnight trading session, following the big risk-off move on Monday night, although there were still some interesting currency moves, with Yen well supported and the NZD drifting down further.

China’s equity market stabilised, following the 7% fall on Monday.  I use the word “market” fairly loosely, as in China’s context it is the government that is trying to control share prices, rather than private sector investors.

Traders pointed to government funds being active in the market on Tuesday to prop up share prices, while the sharemarket regulator said that it may extend a lock-up period for investors holding more than 5 per cent of a listed stock that was due to expire on Friday. What a circus.

European equity markets were in modest positive territory on their on accord, although one must view the 0.3% gain for Germany’s DAX as pretty disappointing following the 4.3% decline on Monday.  The S&P500 is down 0.3% as I write.

The key economic news overnight was a weaker CPI reading in the euro area.  The core CPI rose by 0.9% y/y in December, undershooting market expectations by 0.1%.  EUR/USD was already weakening ahead of the release and the weak CPI reading added to its downfall.  EUR/USD reached its lowest level in a month of 1.0711, and currently trades down 0.8% at 1.0744.

The NZD/USD continued its bad start for the year, falling another 0.9% to around 0.67, trading as low as 0.6677.  The latest GDT dairy auction showed an average price decline of 1.6%, with whole milk powder down 4.4%.   This was more or less in line with BNZ expectations of up to a 3% decline in the overall price index.

The Yen remained well supported in the more volatile and uncertain market environment.  USD/JPY trades down 0.4% at 119.00.  With the Yen well supported and the NZD seemingly out of favour this year, NZD/JPY fell below the 80 mark and currently sits at 79.65.

The AUD has also started the year off on a weak note, not helped by weaker commodity prices.  The LME index, representing a basket of 6 primary metals fell by 2.2% on the first day of trading this year, while iron ore prices were down by 2.8% yesterday.  Some heightened Middle East tension appeared to have only a passing upward impact on oil prices earlier this year.  Overnight, Brent crude is down 2% to 36.50, while WTI crude is down 1.6% to 36.20.  AUD/USD is down 0.6% to 0.7150.  NZD/AUD has oscillated around the 0.9350-0.9450 range over the past three weeks and it remains in that range.

The CAD remains out of favour in the weak oil price environment.  USD/CAD broke through the 1.40 mark, making the Canadian dollar the weakest since 2003.

Finally, the US Fed’s Williams was on the telly, saying that he thought about 3-5 rate increases was about right for the US economy this year.  Note that this is currently more than the 2 rate hikes currently priced by the market. He gave the impression of not wanting to lock the Fed into a predictable pattern, saying that it wasn’t necessary to move rates only at FOMC meetings with press conferences.


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Kymberly Martin is on the BNZ Research team. All its research is available here.

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