Time of Dragon

The consequences of yuan devaluation on August 11 was one of the reasons of collapse on the Asian market that occurred yesterday
Asian stock market fell again, producing the echo of margin calls all over the world. Chinese Shanghai Composite Index, at closing on Monday lost 8.9%, the other markets are narrowing simultaneously. Raw materials market index Bloomberg Commodity Index has been minimal since the beginning of the year. China's production sector business activity index fell to 47.1 points, which the market saw as a catastrophe signal along with instability of prices on commodity and raw materials markets.

The market has not seen such a show for a long time - USD/JPY pair dropped by more than 5 figures in 24 hours with following adjustment by 350 points. That was clearly the result of massive of stop hunting and forced fixation of positions. Euro showed slight resistance at the psychological level 1.15; however, it still showed 1.1700, which is maximum since the time of the Swiss escapade on January 15. Large scavengers used this situation and made massive purchases of dollar that went down in value, including using high-frequency automated trading systems; that is why quite a rapid pullback took place. Today, demand for euro is provided by two factors: closing of carry positions in the common currency and drastic decline of US rate increase forecasts in September. Large investors sold EUR, including crosses, for improving positions associated with China; and now they were forced to liquidate them urgently. July inflation in Eurozone was meager 0.2%, and GDP (as predicted) will grow only by 1.4% in one year, which is twice below the average value of G-20 countries.

The Greek drama is developing strictly according to the script - the resignation of Tsipras and running of election were designed to dull the expectation of collapse for a period of time. That theme became secondary (until September 20). The thought that euro may become a safe-haven asset seemed absurd just a couple months ago. However, that insanity became real: for the last three weeks, euro became the growth leader and grew in price against the basket of currencies by more than 4% (and from its minimum in March - by 12%). Exactly euro devaluation was declared as the main ECB tool for stimulation of inflation; therefore, we should expect at least verbal intervention from ECB in the nearest future.

The consequences of yuan devaluation on August 11 was one of the reasons of collapse on the Asian market that occurred yesterday. According to the official data, the Chinese growth is 6-7%, however, analysts do not see more than 4% with the existing evident structural failures. MSCI Emerging Markets has lost 18% since the beginning of the year, while the similar global index - only 3.6%. So far, no one can make a real analysis of what is going on. Chinese authorities have not voiced their stabilization measures; however, looking at Chinese shares, even small players can see that the situation has gone out of control at least for several days. Since China devalued yuan, shares all over the world have tentatively lost more than 5 trn dollars of their worth. Chinese and Japanese shares still have quite large potential for downfall.

In order for dollar to decline, the US stock market has also contributed with weak growth of return and profits on shares of large companies, record-high (reporting) profits of S&P500 companies and the absence of S&P500 technical adjustment by more than 10% for three years. As early as Friday trading on the US stock market produced the most serious downfall for the last 4 years (3.13%). Among Dow Jones Company shares, those most affected were Apple - by 5.86%, Nike (4.84%), and Walt Disney Company (1.18%). The flight from raw materials assets produced growth for EUR and JPY and generated a wild demand for American securities (yield reached min 1.91%).

FOMC protocol last Wednesday was clearly leaked prior to the date of official publication - Bloomberg and a couple of smaller agencies gave their official apologies. The market produced not a very clear downward peak at EUR/USD - there is no serious grounds for that in the text (no vote against by the majority of key points of discussion). Despite abrupt decline of expectations regarding rate increase in public statements, 43% of this probability was included in the current futures quotes until the end of the year. If the present volatility period ends quickly, FOMC may undertake risks as soon as in November. If volatility remains at least for one month or slowing down of economic activity becomes more evident, we should wait for the first rate increase not earlier than next March.

The likelihood of the Bank of Japan taking any measures until September FRS is very low. Downward adjustment in USD/JPY will likely go deeper. Mid-term support at 117.50, resistance at 120.50/121.50. In order to go above 125.00, FRS hawkish sentiment and the steps of the Bank of Japan for QE increase are required. Adjustment after Monday speculations was completed to the level of opening of the week practically in all assets. Today's morning fluctuations of yen with the amplitude more than by a figure already seem a normal flat. This week, the market will get used to new price levels.

Regarding euro, there is zone of intraday resistance 1.1600-1.1670, secondary support - 1.1560, strong support 1.1490 - 1.1447. Strong mid-term resistance 1.1400 – 1.1350 and strong intraday support 1.1300 are still part of the agenda. By the results of yesterday, a very large number of contracts was introduced to the market, volumes for sale are of priority. By the end of the week, large capital will come back to the market from their vacations; therefore, response to US GDP and statements made in Jackson Hall may take down the current estimations.

作者: Navsher Bartash,
ForexChief Currency strategist