The markets are dominated by the Chinese announcement that they will permit more flexibility in their currency. The Chinese Central Bank is inching ever closer to a freely floating currency, but the important word here is ‘inching’. At the rate, we are going it will be decades before the Yuan becomes a Reserve currency.
The dollar has fallen in reaction as its status as the world’s leading currency of choice comes under question.
As with most recent market moves a weakening dollar has also translated into rising Equity, Oil and Gold prices. The equity markets are also rallying in line with easing pressure on Chinese imports. Recent numbers have indicated an increasing appetite for imported goods in the massive economy, and if their currency appreciates, these goods will be cheaper aiding exporting economies across the globe.
The announcement has resulted in the biggest rally this year in the Asian markets, and the FTSE, Dax, Dow and S&P are likely to follow suit.
The FTSE is called at 5335 in early action up about 75 points on Friday’s close and above the 5250/5300 resistance level that had tempted quite a number of shorters into the market. As mentioned in previous comment, there is quite a bit of resistance all the way up to 5400, which will probably exercise minds into being a little cautious, but it must be added that the current bullish impulse is looking stronger by the session. The intra-day pull-backs are very weak, merely giving slightly better levels for bulls to enter. At the moment, the bears are being squeezed mercilessly.
The Dax has actually hit its highs for the year, with traders pushing the price above 6340 for the first time since Sept 2008. We will need to see it close above 6290/6310 to confirm the move, but markets are unlikely to be too inclined to make a sell off until the US session opens.
Traders will have to be cautious though, as the US markets really hate major moves made in their indices out of their own trading hours. No matter what the originating impulse, US markets have a habit of retracing back to a previous closing level over subsequent sessions. In opposition to this is the undoubted fact that an easing Chinese situation is most definitely a potential boost to the global economies.
On the currency front, the Pound and Euro have blasted higher on the news. Not because they will gain in strength from a floating Yuan, but because the Dollar may weaken as reserve currency funds are diverted from the Greenback into China. This is still, obviously, a long way away but still not as far as it was last Friday.
The Euro had a look above 1.2450, albeit briefly and is hanging onto ground around the 1.2425 level. This area could offer up some resistance as it was one of the supports on the way down, however you have to admire the currency’s resilience in its recent grind higher from below the 1.2000 level. The bears are continuing to be squeezed, but there’s still little doubt as to the prevailing trend. The rate is also just below the 50-day moving average, so bears will be expecting a pull back from this recent rally.
Gold continues to forge ahead and defied any calls for a double top around the 1250 area. Now at 1264 this morning the precious metal has entered the next stage in its relentless move higher.
Crude prices are also firmer as we head back to the $80 region, almost touching it this morning. Now firmly back above the 50-day moving average crude bulls are back in control of proceedings and they’ll have their eyes on the highs around $86.