A month later, after various spikes ranging from tens to thousands pips in pairs with the yen, lira and sterling (and this happens on the most liquid foreign exchange market!), swiss franc joined the party on Monday. A collapse of the franc against dollar, yen and euro “surprisingly” coincided with the highly illiquid Asian session, and the day when Japan is closed for holidays. Dealers did not fail to take advantage of the opportunity to hunt for stop loss of the large bulls of the franc. They did succeed in this which, in fact, intensified the crash of franc:
As a result of the “raid on the franc buyers camp”, USDCHF jumped from 0.9% to 1.0096, but after having completely eliminated the effects of the movement, having gone below 1.000. CHFJPY was losing less, about 0.4%, EURCHF also reached 1.14081 for a very short period of time, before returning to the previous equilibrium range.
The recovery of the franc to the pre-crash trading range hints that the drop was not driven by some shift in fundamentals, i.e. it was not preceded by the release of any important news or events.
Asian markets started the week at minor loss, as in the last week they didn’t get favorable updates on the course of negotiations between the US and China. Trump tied market expectations to his own will, saying last week that only a personal meeting with Chinese leader Xi would be able to resolve major trade differences.
It is also curious to observe the movement of the mainland and offshore yuan today. Despite the sale of the mainland yuan to 6.78 per dollar (+ 0.55%), CNH, on the contrary, increased, although it is usually more sensitive to negative expectations, if any. The reference rate was set today at 6.7495. The Chinese are celebrating the lunar new year, which is traditionally associated with an increase in consumer spending, which means an increased demand for cash, so the PBOC probably is now taking appropriate measures to fill banks with liquidity. It is worth considering this as, the factor pushing the yuan lower, and behind it the gold. Recently, a correlation has reappeared between them:
This week, there should be data on monetary aggregates and lending rates in China, which will shed light on the implementation of plans to stimulate the economy in response to a fall in export and production growth rates. Global risk aversion may increase this week if export and import data for January does not meet expectations in China. I remind you that now, China’s trade with partners is experiencing a kind of “exhaustion” after Chinese firms rushed to ship goods in the third quarter of last year to avoid tariffs. Then, export grew amid reduced production volumes and it is clear that the business inventories were the “fuel” for export growth. The pace of their refilling is likely to have a negative impact on export statistics in January, as well as in the following months.
The European Commission last week sharply lowered growth forecasts for the Eurozone this year and next, Trump said he has no plans to meet with Xi before March 1, i.e. the date of introduction of new tariffs. That automatically makes relevant the scenario of a new round of tariffs. As a result, the dollar returns itself the status of the best safe heaven out of the worst that it is likely to use it this week.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.