Similar themes from yesterday are at play today– China in the spotlight with its devaluing currency and equity market shenanigans; lower commodity prices and global equity markets tumbling; and a flight to the safety of the Yen.

As usual, much of the action began early afternoon. The PBoC continued with its drip-feed devaluation, setting a Yuan reference rate of 6.5646.  This amounted to a 0.51% devaluation for the day, greater than the cumulative decline over the previous two days and the largest daily move since the August 2015 shock devaluation.

Traders noted that the Chinese government was active in the offshore market, trying to hold up its currency.  Data later in the day showed that China’s FX reserves were down a record $108bn to $3.33 trillion, suggesting ongoing sizeable capital outflows.

China’s stockmarket remained in free-fall and trading was suspended after 29 minutes, having reached the minus 7% threshold for the CSI-300 index.  This morning it had been confirmed that China’s securities regulator has now suspended the circuit-breaker, which should avoid panic selling by investors for fear of being locked out of trading, but it won’t avoid the fact that China’s stockmarket is amongst the world’s most expensive, the macroeconomic fundamentals are deteriorating and investors have been spooked by the incessant fudges to the market by the regulators.  Earlier yesterday, the regulator imposed fresh rules on how large shareholders can exit positions, including giving a 15 day notice period of an intention to sell.  Enough said.

Meanwhile, commodity prices continued to tumble.  Brent crude oil prices plunged towards the $32 mark last night and almost made it (a near 12-year low), before staging a recovery to $34.  Copper prices were also particularly hard hit, falling by 2.4%.  Amongst the sea of red prices, gold was an outlier, rising by 1.5% and blasting through the $1100 handle, as investors sought this traditional store of value.

Equity markets continued to fall, with European bourses down in the order of 2% and the S&P500 down over 2% as I write.  China’s big fall flowed through into Asian markets, with the Hang Seng index particularly hard hit, registering a fall of 3.1%.

In the currency space, for once it wasn’t the Yen leading the way, although it continued to show strength.  USD/JPY trades at 117.60 this morning, having traded as low as 117.33 last night.  The euro has been one of the best performing currencies on the day, with EUR/USD trading up 1.2% to 1.0910.  There wasn’t much global data overnight but the minor releases were euro-positive.  Euro-area economic confidence (EC survey) rose more than expected to 106.8, its highest level since April 2011 while the unemployment rate fell to 10.5%, its lowest in 4 years.

Pound sterling continued its weak run, with GBP/USD down 0.2% to 1.4600, after earlier reaching its lowest level since 2010.  Weaker manufacturing and services PMI data earlier this week are encouraging a pushing out of expectations of when the BoE will begin its tightening cycle, while the forthcoming referendum on Britain’s membership of the EU still overhangs the market.

The CAD had a wild night, trading at a 12-year low.  CAD/USD reached a high of 1.4170 before screaming lower to 1.4051 and over the whole day is fairly flat.

Despite the risk-off mood and Asian currencies being hit, the NZD was surprisingly robust.  It is only down slightly against the USD, trading at 0.6630.  Earlier this morning it fell to 0.6591, but it seemed to meet some resistance at that level and has recovered.  Our short-term model suggests that the 0.64 handle is a fairer level so we wouldn’t rule out further weakness in the weeks ahead.

The AUD was the worst performing major currency, down 1% to 0.7000, having traded down to 0.6981 early this morning.  The underperformance likely reflects its closer association with China’s economy and the weaker industrial commodity prices.  AUD/NZD is down 0.9% to 1.0555.  The 1.05 mark is a key technical level, having reached that mark in early November, but failing to push on down.

Despite all the turbulence in equity, commodity and currency markets, the US Treasury market remains fairly sleepy, with rates remaining in a tight trading range.  The 10-year rate is down 1bp at 2.16%, having traded in a range of 2.12-2.20%.  The 2-year rate has now moved more decisively below the 1% handle at 0.96%.  Investors seem to have become more confident that the tightening cycle will be much more gradual than indicated by the FOMC.

The key release over the next 24 hours is US non-farm payrolls.  All the indicators point to a robust outcome, with market expectations centred on a monthly gain for December of about 200k and the unemployment rate unchanged at 5.0%.  Watch out for some possible upward revisions to the November result as well.   Locally, Australian retail sales data are released, with the consensus picking a 0.4% increase for November.

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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