China, UK Wages, and Greece: Today's Focus

The euro has rallied to new highs since mid-July, and after repeated attempts to convincingly break above JPY125, the dollar is retreating against the yen as well.   The euro reached almost $1.1160.  The next target is near $1.1200.  The dollar is posting an potential key reversal against the yen by making a new high for the move before selling off through yesterday's low.  This bearish price action needs to be confirmed by a close below yesterday's lows seen just above JPY124.50.  Support is seen near JPY124.

We note that the dollar-bloc currencies initially continued to sell-off, but have steadied.  The Aussie has fully recovered from the slide that took it to almost $0.7200, completing a nearly two cent sell-off in two days.  Resistance is seen near $0.7350.  The New Zealand dollar fell a little below $0.6470 before rebounding to near $0.6600.  Resistance is pegged near $0.6640.  The Canadian dollar is also correcting higher.  US dollar support is seen near CAD1.30. 

Global equities are sharply lower.  Yesterday the Dow Industrials saw the 50-day moving average cross below the 200-day in what technicians call the "golden cross" or more ominously, the dead-man's cross.  It the first turn since early 2012.   The S&P 500 averages have not crossed, but they are narrowing.  The 50-day average is near 2095 and the 200-day average is just below 2075.   The S&P 500 is presently poised to gap below the 200-day moving average at the open.  How the market trades around that gap will be important for the near-term technical outlook.  If the gap is not filled it will be seen as particularly bearish.

One of the consequences of Chinese developments and the fall in commodities, coupled with the Fed's Fischer's emphasis on inflation earlier in the week is that the market has reduced the chances of a Fed  hike next month.  The implied yield of the September Fed funds futures contract has fallen from 20.5 bp after last week's employment data to 17 bp earlier today.  This means that the implied odds of a hike have been reduced from a little over 60% to about 40%. 

The much-anticipated fix today in China saw the yuan fall another 1.6%.  This put the dollar at CNY6.3306.  The dollar  rose to almost CNY6.45 before the PBOC apparently intervened to support the yuan.  The dollar finished the Shanghai session near CNY6.3860.  The offshore yuan (CNH) continued to sell-off.  The dollar rose to CNY6.5945.  It slipped to CNY6.50, but is back near CNY6.55 near midday in London.  The gap between the two (CNY/CNH) warns of further depreciation. 

The IMF seemed to welcome these developments in China, and denied any direct implication for the pending decision about whether to include the yuan in the SDR.  However, it was supportive of giving market forces more sway, but it noted, as we have, that the key lies with the implementation of this new policy.  As one might expect, the US was more circumspect.  Officials are obviously monitoring developments closely.  They cautioned against reversing the reforms.

The more important part of the UK employment report was the earnings because that is the main source of inflation fears.  Average weekly earnings for June rose 2.4% (3-months year-over-year).  The consensus was for a 2.8% increase after 3.2% in May.  Excluding bonuses, the increase was unchanged at 2.8%.  This is a key reason for sterling's under-performance today.   Short-term UK rates have fallen and the yield on the 10-year gilts is off 4 bp, more than other core European bonds. 

The rest of the UK employment report was as expected or marginally better.  The claimant count fell by almost 5k.  The consensus was for a 1k increase.  The 7k increase in June was nearly revised entirely away.  The ILO unemployment rate was unchanged at 5.6%.

Greece's parliament will debate today the two bills that the government has submitted for a third aid package.  The first is the infamous MOU (memorandum of understanding) with the creditors.  The second is a list of about 35 prior actions that Greece commits to implementing.  The vote is expected tomorrow.  The challenge lies not only with Prime Minister Tsipras securing parliamentary support, as the left-wing of his coalition cannot be counted upon, but also with Germany.  Reports indicate that as recently as the start of the week, German Chancellor Merkel was still pressing Tsipras to request a bridge loan.  Tsipras has little interest in doing so as it would likely require additional concessions.

Merkel is in a similar political position as Tsipras.    A faction of her own party is balking.  Like Tsipras, Merkel will likely be forced to rely on support from outside of her party to secure approval for the third aid package.   Greece needs funds by August 20, when the next ECB payment is due.  Many Germany parliamentarians are on summer vacation.  They are loath to cut it short, they say, on short notice and without adequate information.  Assuming the Greek parliament passed what it must, the focus will shift to when the German parliament will vote. 

China, UK Wages, and Greece: Today's Focus China, UK Wages, and Greece:  Today's Focus Reviewed by Marc Chandler on August 12, 2015 Rating: 5
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