Article Highlights

  • Japan’s average cash earnings (y/y) up by 0.2% as expected vs. 0.1% previous
  • Australia’s trade balance shows 1.24B AUD surplus vs. 0.55B deficit expected, 1.12B deficit in October
  • PBoC strengthened the yuan by its fastest rate in 11 years
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Concerns over the yuan and possibly a weak NFP report weighed on risk appetite, enabling the dollar to recoup some of its losses from the previous trading sessions.

Major Events:

PBoC STRENGTHENED the yuan? – The biggest story of the hour is the People’s Bank of China (PBoC) lowering the USD/CNY midpoint rate to its fastest pace since the yuan was taken off a fixed dollar peg in 2005. USD/CNY’s midpoint was set at 6.8668 per dollar, a whopping 639 pips or 0.92% lower than its 6.9307 rate yesterday. Yowza!

The move comes amidst speculations that the government is intervening in offshore yuan borrowing rates to deter investors from short-selling the yuan. See, the prospect of more weaknesses for the yuan and a potential trade war with the U.S. are pushing investors away from the currency, which would have seen sharper losses if not for strict capital measures and ballooning interbank rates.

Overnight yuan interbank rates in Hong Kong were fixed at 61.333% on Friday, up sharply from 38.335% on Thursday, while yuan deposit rates implied by the offshore forward market rocketed to 112% before seeing retracements.

Despite today’s strong moves, analysts aren’t holding their breaths over the sustainability of the rally. Unless we see a catalyst that makes the yuan more attractive, we’ll likely see more losses for the Chinese currency.

Australia’s trade surplus – Australia’s Bureau of Statistics unexpectedly printed a trade surplus of 1.24B AUD in November, a huge improvement from a 1.1B AUD trade deficit in October narks the first trade surplus since March 2014.

We don’t have far to look for the reason. Higher coal and iron ore prices boosted exports by a nice 8% on the month and a whopping 16% from a year ago while imports stayed flat. Specifically, coal exports were up 26% on the month, while iron ore exports jumped by 11% and rural goods rose by 17%. Basically, higher commodity prices, and not necessarily larger export volumes, were responsible for Australia’s surprising surplus.

Overall risk aversion – Asian session traders didn’t feel like taking risks today. For one thing, Uncle Sam’s weaker-than-expected employment numbers fueled speculations of a weak U.S. NFP reading today, which doesn’t bode well for the world’s largest economy.

Hang Seng and the Shanghai index were also weighed by concerns over the lengths the government has to do to protect the value of the yuan, while Australian traders weren’t impressed by a trade surplus in the economy. Meanwhile, Nikkei was briefly knocked down by a tweet by U.S. President-elect Trump, who threatened to charge higher taxes on Japan-owned Toyota.

Major Market Movers:

USD – The Greenback gained a couple of pips from its higher-yielding counterparts on the back of overall risk aversion and maybe some pre-NFP positioning moves in the Asian market.

EUR/USD inched 4 pips (-0.04%) lower to 1.0588, USD/JPY shot up by 19 pips (+0.16%) to 115.78, and GBP/USD slid by 21 pips (-0.17%) to 1.2390.

AUD – Aussie traders weren’t impressed with a surprise trade surplus from Australia, likely because much of the improvement came from higher commodity prices.

AUD/USD is down by 5 pips (-0.07%) to .7329, EUR/AUD is up by 5 pips (+0.04%) to 1.4447, even as while AUD/JPY ended the session 10 pips higher (+0.12%) to 84.87 after dipping to a low of 84.58.

Watch Out For:

  • Italian markets out on Epiphany Day holiday
  • 8:00 am GMT: German factory orders (-2.5% expected, 4.9% previous)
  • 8:00 am GMT: German retail sales (-0.8% expected, 2.4% previous)
  • 8:45 am GMT: French trade balance (-4.8B EUR expected, -5.2B EUR previous)
  • 9:00 am GMT: Switzerland’s foreign currency reserves
  • 11:00 am GMT: Euro Zone retail sales (-0.3% expected, 1.1% previous)

See also:

U.S. Session Recap
London Session Recap

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