FX Commentary – Fallout From Yuan’s Decline

Market Talk

– China allowed its onshore Yuan to weaken past the key 7-per-dollar level on Monday for the first time in 11 years. China had previously intervened heavily to keep it below 7 but there were no central bank intervention to cap the USD/CNY movement yesterday. The offshore Yuan fell to an all-time low of 7.1185 and continued its decline to 7.1265 this morning.

– This move shows Beijing is prepared to use its currency as a tool to respond to Trump’s decision to impose 10% tariffs on $300 billion of Chinese imports from 1st Sept 2019, marking a sharp escalation in the bruising trade war between the world’s two largest economies. Chinese buyers of US’s soya bean halted orders, reportedly on trade concern. China’s retaliation could mean there will be no trade deal at the end of the road.

– U.S. Treasury Secretary Steven Mnuchin said in a statement on Monday, the US government had determined that China is manipulating its currency and that Washington would engage with the IMF to eliminate unfair competition from Beijing. Trump tweeted that “This is a major violation which will greatly weaken China over time”

– RBA kept rate unchanged at 1.0% after its Monetary Meeting today, dampening market hopes of another rate cut. However, this action managed to lift AUD/USD off its low.

– Tomorrow morning, RBNZ will be holding its Monetary Policy meeting with rate announcement scheduled at 10am. Press conference will be at 11am.

Chart Focus EUR/JPY

Key Points

1. Sell EUR/JPY recommendation

2. Sell EUR/JPY at 119.50. Stop at 120.05 and target at 117.70

3. Trade tariffs war and Chinese Yuan’s decline are likely to keep safe haven JPY strong

4. Price is capped by Fibonacci 62% correction point and a bearish MACD is hinting of further price decline.

Fundamental Comment

1. Trade tariffs war between the US and China is likely to keep safe haven JPY strong

2. Chinese Yuan currency decline is likely to lead to worries that a trade deal will not be concluded between the 2 largest economies

Technical Comments

1. Price is capped by the Fibonacci 62% correction point of the decline from 121.73 to the low at 117.69

2. MACD is rising but is still bearish

Key Levels

Support 119.10118.50118.05
Resistance 119.50119.95120.50

Technical Overview

USD/JPY – After reaching a low of 105.50 this morning, price has recovered higher to 107.08. Stochastic is moving higher from oversold extreme but it still looks weak. MACD is recovering but is still bearish. If price is unable to move above 107.86, we think price is likely to test 105.70 again in the next few days.

Support 106.30105.95105.50
Resistance 106.70 107.10 107.55

EUR/USD – We had a sell call on this pair yesterday, but we got it wrong. We were stopped out with a 30 pips loss. Price has reached a high close to 1.1250 and Stochastic is deep into overbought extreme but MACD is still bullish. We are expecting a price pullback to 1.1170-1.1150. We will watch the reaction at this support to gauge the next directional move.

Support 1.11801.11501.1115
Resistance 1.12251.12501.1285

GBP/USD – After reaching a low on Friday at 1.2069, price has been consolidating around 1.22 to 1.2069. Stochastic may have reached its peak and could be about to turn lower. MACD is rising but is neutral at the moment. 20EMA is flat and not indicative at the moment. Wait for better trading idea

Support 1.2135 1.2100 1.2070
Resistance 1.2185 1.2210 1.2250

XAU/USD – Price rallied overnight to reach a high of 1474.80. Stochastic is turning down from overbought extreme and MACD has a crossover and is heading lower. We are expecting a price correction down to 1447 before the uptrend resumes again. A move below 1428 could signal a prolong correction

Support 1456.50 1446.45 1431.25
Resistance 1464.651475.10 1487.95

EUR/GBP – This morning price reached a high of 0.9249, filling our profit order at 0.9230. We are out with a 95 pips profit. Price may have exhausted its move and we are likely to see a price decline lower to 0.9100. MACD and Stochastic have both given bearish divergence warnings of a potential price high.

Support 0.9185 0.9150 0.9115
Resistance 0.9225 0.92500.9300

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