Yuan stabilises as markets remain volatile and choppy
April 26,2022 08:09:00Overnight Headlines
*China central bank seeks to calm markets with support pledge
*Dollar ascends on China Covid fears, Fed rate hike pace
*Asia shares edge up, sentiment fragile on China growth fears
*Twitter accepts Musk’s buyout deal for $44bn or $54.20/share in cash
US equities closed higher to start the week after a volatile session. The Dow gained 0.7% after cutting a 500-point loss earlier in the day. The S&P500 gained 0.6% and the Nasdaq jumped 1.3%. The VIX popped up above 30 before closing at 27. European futures are showing a positive open with Eurostoxx +1.6% after the cash market closed lower by 2.2%. US futures are modestly in the green. It’s a big week of tech earnings kicking off with Microsoft and Alphabet later today.
USD’s upside breakout posted a new 2022 high at 101.85, before taking a breather this morning. EUR stayed heavy and gave up early gains from Macron’s re-election, closing near session lows at 1.0697. GBP saw further losses after crashing through the 1.30 barrier on Friday, down to a low of 1.2697. JPY drew some safe haven flows as USD/JPY slipped below 128. AUD fell for a third day, closing 0.9% lower at 0.7178. Falling commodity prices hit NZD and CAD as well.
Market Thoughts – China growth concerns
As one analyst wrote this morning, “It’s never safe to ignore China”. The country’s zero Covid-policy has been a “known-known” for some time now, or should that be “known-unknown”? Supply chain issues affect the global economy, and the currency is important as it affects inflationary forces.
Continued aggressive policy tightening signals from central banks like the Fed and the ECB have contrasted heavily with the PBoC. Overnight, they have pledged support to the real economy, reacting to financial stress in local markets. We’ve seen the sharpest weekly decline in the CNY since 2015 while stock markets have seen severe losses.
Commodity markets got hit yesterday too on China growth concerns. Iron ore tumbled initially so AUD and NZD will remain volatile. But ultimately, a weaker CNY may be welcome by many central banks. It acts against rising inflation (dis-inflationary) and helps policymakers who are battling against high imported price pressures.
Chart of the Day – USD/CNH shoots higher
The weakening of the yuan over the last week is grabbing all the headlines. (Though the move in cable has been pretty startling.) Since Chinese authorities first allowed it to begin moving in 2005, the yuan has only once dropped as much as over five days. That was the August 2015 devaluation that sparked major volatility across global markets.
USD/CNH spiked to 6.60 yesterday before easing to 6.57. The March top at 6.58 offers resistance. It is more the pace which may be a worry rather than the actual level. Initial support is 6.54 and then 6.52. The breakout mark came around 6.40.
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