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Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

Christopher Vecchio, CFA, Senior Strategist


One of the more under the radar themes the past few weeks, no doubt overshadowed by the Federal Reserve’s policy meeting last Wednesday, has been the Chinese credit crunch. Last week, the overnight interbank lending rate spiked to as high as 25.0%, a sign that cash reserves were low, typically a sign of stress in the financial system. Accordingly, with less capital to lend, we’ve witnessed how a deterioration in Chinese growth prospects has weighed on the commodity currency complex.

Accordingly, the Australian and New Zealand Dollars have benefited over the past two hours, after it was announced that the People’s Bank of China had intervened in the market and distributed cash to banks in order to ease tight lending conditions. On the surface, these measures are soothing; but they are in reaction to a financial system currently in a state of disequilibrium, not one that is healthy. Any near-term rallies in the commodity currency bloc should look to be sold as a result.

It is worth mentioning that the Chinese credit crunch isn’t necessarily organic; that is, the PBOC has intentionally kept its lending standards tight despite slowed growth prospects. The main reason for this is the goal by the new government to weed out the shadow banking system. These efforts have been signaled well in advance, and we should thus not expect any significant progress to be made on the credit side in China. Rather, the measures today to provide liquidity are merely a patch up job, not an elegant solution. Alongside the Fed’s taper talk, this is the most important theme in the market right now.

Taking a look at European credit, have rebounded slightly today, although prices remain significantly depressed from their pre-FOMC levels. The Italian 2-year note yield has increased to 2.230% (+1.5-bps) while the Spanish 2-year note yield is flat at 2.473%. Similarly, the Italian 10-year note yield has decreased to 4.804% (-2.1-bps) while the Spanish 10-year note yield has decreased to 5.027% (-6.9-bps); lower yields imply high prices.


JPY: +0.28%

CAD: +0.25%

AUD: +0.12%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.01% (+1.69%prior 5-days)


Yen_Leads_but_Risk_Makes_Comeback_as_PBoC_Announces_Intervention_body_Picture_1.png, Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

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Yen_Leads_but_Risk_Makes_Comeback_as_PBoC_Announces_Intervention_body_x0000_i1028.png, Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

EURUSD: The past few weeks week I’ve been suggesting that a Right Shoulder on a Head & Shoulders formation, dating back to September 2013, might be forming with implications for a retest of the June 2010 low near $1.1875. The FOMC decision provided the necessary catalyst for a turn near 1.3400. The EURUSD now finds itself below the formerly key 1.3185/45 zone, which produced highs in mid-April and late-May, before breaking in the first week of June. Support has been found at 1.3070/75, the 200-SMA and the 38.2% Fibonacci retracement (July 2012 low to February 2013 high). I continue to favor shorts, as evidence of a return of the Euro-zone crisis is building.

Yen_Leads_but_Risk_Makes_Comeback_as_PBoC_Announces_Intervention_body_x0000_i1029.png, Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

USDJPY: Although price has maintained the 38.2% Fibonacci retracement (May 22 high to June 7 low) at ¥97.58, constructive price action into 99.25/35 has yet to develop as a number of the JPY-crosses have seen Inverted Hammers or Dojis (topping candles) form on daily timeframes. Undoubtedly, this is a result of the global shift to safety; the USDJPY typically struggles when US equity markets do. Until global equity markets stabilize and US yields begin to rally further, it is too early to declare the reaction in risk assets finished, and therefore, it is too early to declare the USDJPY’s slide since late-May complete either. At this juncture, only a break of 99.25/35, the June high and the 50% retracement of the May 22/June 7 high/low, will negate the bearish bias in the pair. Until said level is broken, shorts are eyed into 95.25/35, 93.75/85, and 92.55 (pre-BoJ QE announcement low in April).

Yen_Leads_but_Risk_Makes_Comeback_as_PBoC_Announces_Intervention_body_x0000_i1030.png, Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

GBPUSD: The GBPUSD has traded in a slight ascending channel off of the March 14 and May 29 lows (parallel to May 1 high), and the conflux of the 200-SMA and said channel resistance just under $1.5750 provoked a pushback midweek. Now, price finds itself at the 50% Fibonacci retracement of the February high to the March low at 1.5354, as well as underneath the 38.2% Fibo of the yearly high/low at 1.5405/10. With US yields rallying, the USD component of this pair looks well-supported, and any rallies seen in the coming days are viewed as selling opportunities. 1.5230 is the first big support lower.

Yen_Leads_but_Risk_Makes_Comeback_as_PBoC_Announces_Intervention_body_x0000_i1031.png, Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

AUDUSD: No change: “Fresh selling has provoked an even steeper decline in the AUDUSD, with the pair falling towards the 38.2% Fibonacci retracement off the 2008 low to the 2011 high at $0.9141. While fundamentally I am long-term bearish, it is worth noting that the most readily available data shows COT positioning remains extremely short Aussie.”

Yen_Leads_but_Risk_Makes_Comeback_as_PBoC_Announces_Intervention_body_x0000_i1032.png, Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

S&P 500: The 2013 uptrend off of the December 28, 2012 and April 18, 2013 lows gave way on Thursday, and with a sustained break by the end of the week, the technical bias is for a deeper pullback in the near-term. The 61.8% Fibonacci retracement of the Feb low/May high serves as near-term support at 1561, followed by mid-April swing lows near 1535. A bearish bias is appropriate unless 1605/08 is broken.

Yen_Leads_but_Risk_Makes_Comeback_as_PBoC_Announces_Intervention_body_x0000_i1033.png, Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” This has played out, with fresh yearly lows at 1269.45 last week, and pressure remains biased for a move lower so long as US yields remain elevated.

--- Written by Christopher Vecchio, Currency Analyst

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