More Chinese Turmoil Drives Safe Haven Flows

It’s been an incredible start to the new year and events in Asia overnight suggest it’s not going to ease up quite yet.

China was once again at the centre of the storm after the People’s Bank of China sharply devalued the Yuan, fixing it at its lowest midpoint since 2011. The move triggered another meltdown by investors, exacerbated once again no doubt by the new circuit breaker rules which have so far only serviced to spread more panic as the first 5% threshold has approached. Moreover, once this is triggered and the 15 minute break is enacted, it seems almost inevitable that the 7% threshold will be hit and trading will cease for the day. Chinese markets survived only 15 minutes in total today.

Chinese regulators have a real job on their hands in the coming days if they intend to prevent a repeat on the events in August when the Shanghai Composite fell almost 30% in just over a week. Already it’s down almost 12% in what has been an extremely turbulent opening week of 2016. Restrictions on large share sales – which comes into place as the previous ban is due to expire – could help to calm the markets a little but more will likely need to be done.

While the PBOC wishes to let the Yuan rate be more market driven – hence its new rate fixing structure – the aggressive devaluations appear to be the primary trigger for these wild market swings. In August, it was believed that the PBOC instructed state-owned banks to sell dollars on its behalf in order to halt the slide and it may take a similar response to halt the decline once again.

It will be interesting to see what the Fed response to yet more turmoil in China will be. The events of last August were clearly influential in the Fed opting to hold off on raising interest rates in September and I am convinced that has this week come a month earlier, the Fed would probably have held off once again in December. While last night’s FOMC minutes showed strong support for a hike, there is still clearly a nervousness within and this week’s events will not help to alleviate these concerns and I don’t think this is the last time we will face issues like this. With that in mind, I think the pace of tightening will be slower this year than the Fed is currently indicating.

While events in China are likely to dictate market sentiment this morning – with European indices seen opening significantly in the red and safe haven flows clearly evident in Gold, the yen, euro and Swiss franc – there is some data due out that will be of interest. Eurozone unemployment is expected to remain at 10.7% having declined steadily from its peak over the last couple of years. Retail sales in the region are expected to have increased by 0.2% in November, up 2% on the same month a year earlier.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.