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EUR/USD Breaks Channel from November Low, AUD/USD Skewed by PBoC

EUR/USD Breaks Channel from November Low, AUD/USD Skewed by PBoC

2014-11-21 11:50:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- EURUSD slides after Draghi's comments on a QE program.

- AUDUSD jumps after PBoC announces surprise rate cut.

- See the 'high' importance events on the DailyFX Economic Calendar.

The People's Bank of China's decision today to cut its key interest rates in an effort to liberalize the exchange rate and boost consumption (their words, not mine) is nothing more than a veiled attempt to weaken the Chinese Yuan. Why? Just look across the Sea of Japan.

The PBoC's actions are a response to what has been a three-week long streak of aggressive Japanese Yen depreciation. Why does the PBoC care about the Yen being weak? First, it's important to accept that we live in a zero sum world. Accordingly, the weaker Yen makes Japanese products relatively more appealing than her Asian competitors - China, South Korea, etc.

There is a direct relationship between a weak Yen and Chinese trade prospects. In a Summer 2013 article for Markit Magazine, I highlighted this inverse relationship: for every 1% appreciation in CNYJPY, global exports are trimmed by about -0.17%. Put simply, a weaker Yen not only hurts the Chinese economy as foreigners shift preferences to a cheaper regional good, but also the global economy as trade slows. Lose, lose.

Between the PBoC's actions today and ECB President Draghi's soothing words of a large scale asset program (LSAP - aka QE), it's evident that the latest skirmishes in the global currency war are being fought. Investor risk preferences are once against skewered by a wave of unexpected stimulus, offering support to the commodity bloc and nothing of the sort to the European currencies.

See the above video for technical considerations in EURUSD and AUDUSD.

Read more: USDOLLAR Continuation as EUR/USD, GBP/USD Fail at Resistance

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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