Intraday Market Thoughts

Cracking Chinese Dam

by Adam Button
Jul 2, 2018 23:06

Money continues to leak out of Chinese markets and the risk that problems could burst into global turmoil is rising. The US dollar was the top performer Monday while the Australian dollar lagged. The RBA decision is due up next. The euro had a late session boost following news from German interior Minister Seehofer indicating a “clear agreement” was reached with Chancellor Merkel and her Christian Democratic Union over immigration after more than four hours of negotiations. The subscribers' video on existing and future trades is found below.

The Shanghai Composite fell 2.5% on Monday and is now down 13.5% since the final week of May. The PBOC lowered reserve ratios on June 25 but the market fell the next day, in something we warned at the time was a troubling development.

There are two main catalysts for the trouble in China: The main one is trade worries and that increased after last week's chatter on IP protection from the US and potential harsh retaliation from Beijing. The second is weakness in the Chinese yuan, which is also tied to trade but increasingly obvious that the currency is being managed lower. USD/CNY has risen in 11 of the past 12 days in a 4% rise. For perspective, the China-sparked tantrum in markets in 2015 came after just a 3% move.

Industrial metals are being hit hard alongside China and copper is now testing the lows from December and March. In turn, that's weighed on the Australian dollar, which fell nearly a cent Monday and broke the May 2017 low. Technically, that leaves little support within the next 120 pips.

However, the RBA meeting will steal away the spotlight at 0430 GMT. The overwhelming consensus is for no change from the 1.50% with no clear signal on rates. The most-recent meeting highlighted some risks from Europe and emerging markets. Those have ebbed but global trend tensions have certainly risen. The baseline is that the statement will remain upbeat but there is a small risk of something more dovish.


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