Morning Report: China RRR Cut Fails To Support Risk Markets

Market Commentary  

The major market event yesterday was the PBOC’s easing measures. The central bank lowered required reserve ratio by 50bps to 17.5%. The benchmark lending rate and deposit rate were cut 25bps to 4.6% and 1.75% respectively. European stocks reversed out Monday’s losses and ended around 4% higher. That positive finish did little to inspire Wall Street which gave up its opening gains towards the last hour of trading. The DXY rebounded yesterday but was resisted by the 95-figure (at 200-DMA) and was last seen around 93.80. Eyes will be on the Yuan fixing today after USDCNY was fixed more than 100 pips higher yesterday. Chinese equities will be watched for any signs of a  sustainable relief rally post double cut.

Monetary policy divergence is still a driver in the FX space given the latest PBOC action. In the short term, this divergence could be dialled back as markets pared Fed lift-off expectations. Market implied probability of a September rate hike has now fallen to 28%, from 48% before the minutes release last week. What we can be sure of is volatility in the markets with VIX spiking to around 40, approaching 2011 levels. That could be a sign that the sell-off in equities is not quite done yet.

EUR was initially soft during London/NY session; trading as low as 1.1397 tracking the rally in risk assets thanks to China rate cuts (which helped to support sentiment). But losses were partially reversed back above the 1.15 -handle as US equities slumped into the NY close overnight. Risk sentiment remains a key driver in EUR. Traders remain cautious of ECB jawboning should there be excessive price action to the upside. EUR was last at 1.1520 levels this morning.

GBP’s initial strength towards 1.5819 high was thwarted after China cut interest rate after Asia market close. GBP reversed strength to trade below 1.57 -handle. There remains minimal trading focus on GBP at the moment, with the currency trading on the back of the broad USD move as well as risk sentiment. Traders have pushed back the UK rate hike expectations amid the devaluation of China and further signs of weakness.

The USDJPY climbed back above the 120 -handle on the back of China rate cut was brief as China growth concerns resurfaced overnight. Pair is now hovering just slightly above the 119 -handle. Trade is likely to remain choppy as markets digest the events of the past few sessions.

Technical  Commentary 

EURUSD Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bearish

  • 1.1350 is key to the bullish advance a failure here suggests a false upside break, while 1.1350 survives on a closing basis 1.18 remains the upside objective. Failure at 1.13 targets a retest of 1.12 next
  • Daily Order Flow bullish; OBV down, Linear Regression and Psychology bullish but rolling over to test midpoints from above
  • Monitoring intraday price and Order Flow indicators on a test of 1.18 or 1.13

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GBPUSD: Short Term (1-3 Days): Bullish  – Medium Term (1-3 Weeks) Bearish

  • A swift snap back of the a close above 1.57 threatens a false upside break a failure at 1.56 would confirm a reversal. While 1.56 survives on a closing basis next upside objective is 2015 highs
  • Daily Order Flow bullish; OBV sideways to up, Linear Regression and Psychology bullish
  • Monitoring intraday price action and Order Flow indicators on a test of 1.56 or 1.59

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USDJPY: Short Term (1-3 Days): Bearish  – Medium Term (1-3 Weeks) Bullish

  • Intraday resistance at 120.50 contains upside reaction for now, only a close back above 122.50 eases bearish pressure. While 121 contains upside a retest of the spike lows a 116 remains in play
  • Daily Order Flow bearish; OBV sideways to down, Linear Regression and Psychology bearish
  • Monitoring intraday price action and Order Flow indicators on a test of 116 or 121

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EURJPY: Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bearish

  • While ascending trendline support survives on closing basis bulls target symmetry objective at 141.70, a failure at 136 opens a retest of range support at 134/33.
  • Daily Order Flow bullish; OBV sideways to up, Linear Regression pierces midpoint from above, Psychology bullish but lacks upside momentum
  • Monitoring intraday price action and Order Flow indicators at 141 and 136

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