China will allow the yuan to fall below $ 7 for the first time in 10 years

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Under pressure, the Chinese yuan will drop below the psychologically important $ 7 a bit later this year or in 2019. This will provoke a further decline in the currency, which the US will not like and will cause a new wave of criticism from their side. The US Treasury said it would continue to "closely" monitor China's monetary policy, although it refrained from calling the Celestial Empire a "currency manipulator" in its semi-annual report presented on Wednesday.

On Thursday, the yuan fell due to sales in the local stock market, the rate dropped to $ 6.94, the lowest level since January 2017. Now, the markets are trying to predict whether the yuan will beat the mark of $ 7, to which it has not dropped the last 10 years.

Some analysts believe that Beijing is trying to prevent a too sharp drop in the yuan, since capital will begin to leave the country. Others say the Chinese authorities may allow the yuan to fall below $ 7.

"As a rule, this level is considered psychologically important, but now that the yuan is dropping from $ 6.3 to $ 6.9 and this does not cause a significant outflow of capital from China, we believe that the Bank of China is confident that they can cope with a further decline below $ 7 without a destabilizing effect," experts of Capital Economics comment on the situation.

In UBS, the decline in the yuan is associated with a slowdown in the economy. Emerging market strategists expect the exchange rate to fall to $ 7.10 over the next six months and reach $ 7.30 over the course of the year.

"In our opinion, there is no reason why the weakening of the yuan should stop at $ 7. This is a psychologically important level, but we believe that the Chinese currency will continue to decline," they explain.

On Friday, the yuan is still at its lowest level since January 2017.

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Earlier, experts wrote that the decline of the yuan from June is the result of the first round of trade disputes about tariffs between the United States and China. Another series of reductions could be expected if the 10% tariff, currently introduced by the United States for 200 billion imports of Chinese goods, will increase to 25%.

Here, Washington keeps the situation on the pencil, having planned this action for January. The subsequent decline of the yuan can already be described as a freely floating exchange rate. The decision to allow such a step "is not a response and is not a competitive devaluation," wrote analysts of the Institute of International Finance (IIF).

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USD / JPY: The yen loses trumps

This week, the dollar-yen pair traded in the 100-point range, but in the end, it completes the five-day trading session almost at the opening positions. Despite the growth of core inflation in Japan, the yen remained under pressure from the US currency, jumping to the middle of the 112th figure. The external fundamental background is of primary importance for the pair, and the structure of Japanese inflation indicates a great influence of the oil market, the quotes of which have gone down again.

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In general, the yen is traditionally dependent on the degree of anti-risk sentiment in the market. Therefore, when one of the advisers to the American president this week accused China of ignoring US trade requirements, the Japanese currency "remembered" its status as a defensive asset and strengthened slightly against the dollar. In addition, the growth of the yen contributed to the negative dynamics in the stock markets of Asia, and China in particular. All this allowed the bears USD / JPY to test the 111th figure. Subsequent events have reduced interest in defensive instruments.

First, Beijing assured the public that it would support the national stock market, stopping sales in the stock market if necessary. Such a position calmed panic, and the yen, in turn, began to lose points.

Secondly, the data on the growth of the Chinese economy and the volume of industrial production published today suggest that the protracted trade war is beginning to affect the key macro indicators of the Middle Kingdom. In view of this circumstance, Beijing is again forced to devalue the national currency, thereby supporting exports and partly leveling the imposed duties. This tactic does not solve the root of the problem, but only reduces its consequences (and even partially), so the market again talked about that after the elections to the Congress, which will be held in less than a month. China and the US will sit down at the negotiating table. Such conclusions reduced anti-risk sentiment among traders and the demand for yen fell.

Without the support of an external fundamental background, the Japanese currency immediately loses its position, since it does not have its own arguments for growth. Extremely weak inflation in Japan leaves no hope for bears USD / JPY. The yen remains under the background pressure of the "pigeon" policy of the national Central Bank. Today's release of inflation data served as an extra confirmation of this. Despite the growth in the basic consumer price index (excluding volatile food prices), traders were cool about this fact, especially since the indicator was expected to grow to one percent.

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First, the pivotal level of inflation has overcome only half the way to the target two percent level. Secondly, the September CPI growth is explained by the increase in expenditures on petroleum products. In other words, inflation increased only due to "black gold". The cost of the rest of the group of goods increased slightly. It is worth noting that the barrel of the Brent brand fell today under the $ 80 mark, reflecting bearish sentiment. The emotional reaction to the scandal associated with the Saudi journalist subsided somewhat. According to analysts, Saudi Arabia will not use the oil market as a tool of influence in the conflict with the States. Also, the dynamics of quotations of "black gold" was influenced by data from the US. Oil reserves increased by 6.5 million barrels last week, these figures are more than two times higher than the forecasts of experts.

A set of fundamental factors lowered the cost of Brent under the key $ 80 mark. If this trend continues, Japanese inflation indicators may show a reverse trend, replacing weak growth with a gradual slowdown. Here, it is worth recalling that in July, the Bank of Japan expanded the range of the estimated size of the rate, thus admitting the likelihood of monetary policy easing. Therefore, a slowdown in inflation can hypothetically lead to a decrease in the interest rate further into the negative area. The head of the Japanese regulator, Haruhiko Kuroda, is a well-known supporter of the "pigeon" policy, so this scenario is not at all unlikely. At least in the course of his last speeches, he repeatedly pointed out the effectiveness of soft monetary policy. Therefore, in the next year and a half, the regulator can change its parameters except in the direction of easing.

Thus, the risk appetite renewed in the market, paired with the weak data on inflation in Japan, reduced interest in the yen, after which the USD / JPY rate went up again. This week, the situation is unlikely to change drastically (the pair will continue to be traded in the flat), so the main "fighting" for the pair will take place as early as Monday.

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Technically, a pair of USD / JPY needs to overcome the border of the 113th figure to confirm the development of the northern trend. If the price rises above 113.05, then the Ichimoku Kinko Hyo indicator will generate a rather powerful bullish signal Parade of lines that will "allow" the pair to grow up to the middle of 114th figure. A reliable level of support is the price of 111.50. At this price point, the upper limit of the Kumo cloud coincides with the lower line of the Bollinger Bands indicator on the daily chart.

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The US economy may slip into recession in the next two to three years - JPMorgan

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Analysts at US investment bank JPMorgan Chase once again calculated the risk of a recession in the United States.

According to experts, the likelihood that in the next two to three years, the US economy could plunge into recession, exceeds 50%.

"According to our estimates, the risk of a recession, or an economic downturn in the United States, within one year is almost 28%, in the next two years, more than 60%, on the horizon of three years, more than 80%," representatives of the financial institution said.

JPMorgan Chase's calculations are based on a macroeconomic model, which, in particular, includes indicators such as consumer and business confidence, the demand for durable goods and the share of construction in the gross domestic product.

Meanwhile, experts from the Federal Reserve Bank (FRB) of New York estimate the likelihood of a recession in the coming year only at 14.5%.

In turn, the head of the Federal Reserve Bank of St. Louis, James Bullard believes that at present, the US economy does not need any stimulation or cooling.

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The dollar sweeps away barriers

It cost the Federal Reserve to show that it is not going to be led by Donald Trump and is ready at any time to accelerate the process of normalizing monetary policy, as investors turned to the US dollar. According to Randal Quarles, vice-president of the Fed for Supervision, the Central Bank should not pay attention to the temporary difficulties of inflation or other indicators, it must bend its line. The US economy is strong and the probability of a recession is extremely low. Is it possible against such a background that someone can resist the dollar?

The publication of the minutes of the September meeting of the FOMC was a turning point in the fate of the "American" in the week to October 19. The Federal Reserve believes that it can afford to raise the rate above its long-term projected level and make monetary policy moderately tight. For a while. In order not to overheat the economy and prevent the arbitrariness of inflation. The Central Bank is in open confrontation with Donald Trump, who does not tire of criticizing him. According to the President of the United States, his main problem is the Fed. Judging by the dynamics of EUR / USD, the markets are betting on the Federal Reserve and still do not intend to stand on its way. As for the owner of the White House, his intervention, as in the previous cases, had only a temporary effect. Those who learned to use them, bought a dollar in the dips.

Euro does not leave the policy alone. According to a Bloomberg expert survey, events in Italy are the main problem in the eurozone. Trade wars, a slowdown in the GDP of the currency bloc or the Chinese economy, and the difficulties of developing markets seem less dangerous to specialists than the conflict between Rome and Brussels.

Eurozone Risks

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Italy put on the table the EU draft budget with a 2.4% deficit of GDP. This is less than in France, Japan or the United States, but three times overrule the obligations of the previous government. The European Union has already expressed its dissatisfaction, noting that the submitted document does not comply with the rules. The markets immediately responded by increasing the yield of Italian bonds and expanding their differential with German counterparts to the maximum level since 2013. This indicates an increase in political risks and is a "bearish" factor for EUR / USD.

Dynamics of yield differential of bonds of Italy and Germany

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At the same time, experts polled by Bloomberg expect that the ECB will begin to actively adjust its monetary policy only in 2020. By this time, the federal funds rate may rise to 3.25-3.5%. Divergence in the monetary policy of the Fed and the European Central Bank, as well as the different rates of economic growth in the United States and the eurozone, contribute to the development of a downward trend in the main currency pair. It can accelerate if statistics on US GDP for the third quarter, scheduled for the end of the week by October 26, will show that the United States has maintained momentum.

Technically, a breakthrough of support at 1.143 - 1.144 will increase the risks of activating the AB = CD pattern with a target of 161.8%. It corresponds to a mark of 1.095.

EUR / USD, the daily chart

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EUR / USD: plan for the US session on October 19. The fall of the euro has slowed

To open long positions on EUR / USD, you need:

The buyers managed to keep the support level of 1.1434, which I paid attention to in my morning review, which led to profit taking and an upward correction in euro. Return and consolidation above the resistance level of 1.1456 is a good signal to buy the euro, based on the update of the maximum of 1.1482, where today, I recommend fixing the profits. The breakdown of this area may lead to larger growth in the area of 1.1516.

To open short positions on EUR / USD, you need:

In the morning, the sellers worked out all their goals, which I spoke about in the morning, which led to profit taking. Consider selling euro today in the afternoon is best after the formation of a false breakdown in the area of 1.1482 or to rebound from a maximum of 1.1516. The main task will be to return to the support level of 1.1456, which will keep downward potential in EUR / USD next week.

Indicator signals:

Moving Averages

Trade is conducted under the 30- and 50-day average, which indicates the formation of a downward trend in the euro.

Bollinger bands

The breakdown of the middle border of the Bollinger Bands indicator in the area of 1.1507 will come to the return to the buyers market and update the above resistance levels.

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Description of indicators

  • MA (moving average) 50 days - yellow
  • MA (moving average) 30 days - green
  • MACD: fast EMA 12, slow EMA 26, SMA 9
  • Bollinger Bands 20
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