According to the Research Department at BBVA, argue that the recent depreciation of the Chinese renminbi (RMB), albeit pushed USD/CNY above the psychological level of 7, is unlikely to lead to financial turmoil like what happened in four years ago.

Key Quotes:

“The recent sharp depreciation of the RMB is unlikely to lead to financial turmoil like in 2015: the authorities kept the currency’s pricing mechanism intact and have accumulated valuable experience over the past few years; moreover, the PBoC still maintain a tight grip of the country’s capital account.”

“We believe that the current depreciation of the RMB won’t repeat the history of the currency devaluation in 2015 to plunge the country’s financial system into turmoil. For the moment, China’s authorities have no intention to initiate a bout of deep depreciation. That being said, the prospect of China-US trade talks will dictate the evolution of the RMB exchange rate in the short term.”

“We define two scenarios for the RMB exchange rate at end-2019: in the first scenario, if China-US trade war maintains the current situation, particularly, 10% tariff on the USD 300 billion goods without further escalation, the RMB exchange rate is expected to fluctuate around the level of 7.15 at end of this year; in the second scenario, the RMB exchange rate could further plunged to 7.4-7.5 if both sides further escalate the trade war in the second half of the year, such as to raise the tariff to 25% for all the Chinese exports to the US.”

  • Risk-off flows ramp up the demand for the precious metal this week.
  • Broad USD weakness supports the XAU/USD pair's rally.
  • US-China trade conflict, concerns over currency war lift gold.

After starting the week at $1,412, the troy ounce of the precious metal rose to its highest level since April 2013 at $1,510 before spending the last trading day of the week in a consolidation phase. As of writing, the XAU/USD pair was virtually flat on the day at $1,500.

Gold puts a smile on investors' face

Surprise rate cuts by the Reserve Bank of India and the Reserve Bank of New Zealand concerns over the potential impact of a prolonged US-China trade war on the global economy and fears of an all-out currency war forced investors to seek refuge throughout the week.

Major global equity indexes suffered heavy losses, strong demand for Treasury bonds weighed on the yields, and the precious metal capitalized on the risk-off atmosphere as a traditional safe-haven. Commenting on the market conditions, “We believe gold remains relevant given the elevated economic and geopolitical risks. Investors will continue to shift their strategic portfolio positions in favour of gold,” said ANZ analysts.

“Safe-haven flows continued to build in gold, with ETF holdings rising to six-years high of 2393t. Further, central banks bought 374.1t of gold, as emerging markets tried to diversify their reserves.”

On top of the rising demand for gold, the broad USD weakness this week supported the pair's rally. With US President Trump aggressively calling upon the Fed to cut rates and the US 10-year Treasury bond yield slumping to its lowest level since October 2016, the US Dollar Index is looking to post a weekly loss of around 0.6%.

Technical levels to watch for

Ahead of next week, analysts at Danske Bank, see that the trade war will continue to be in focus, also that any comments by members of the Federal Reserve and the European Central Bank will be scrutinized for signals of how much easing is in the pipeline. Regarding economic numbers, they noted next week are due: German ZEW, euro-area GDP for Q2, US core inflation and Chinese numbers on industrial production and retail sales.

Key Quotes:

“The US next week is quiet in terms of data releases. CPI core is due out Tuesday and we expect it rose +0.2% m/m in July which translates into an unchanged annual inflation rate at 2.1% y/y.”

“In the euro area, the focus turns to the German Zew (Tuesday) and the GDP figures, most notably in Germany (Wednesday). We expect the Zew to continue to point to a gloomy outlook in the uncertain global environment. On Wednesday we expect an unchanged euro area GDP growth figure from the advance estimate (0.2% q/q), but with the first release of the drivers we will assess if investments are still holding up amid the global uncertainty. Furthermore, the ailing German economy will publish its first Q2 GDP estimate. We expect 0.1%, but we acknowledge a downside risk to our forecast. Even the risk of a sub-zero reading cannot be excluded at this stage.”

“Financial market attention will once again also be on the unstable Italian political situation after the recent calls for new elections by League leader Salvini.”

“Next week in the UK, the labour market report for June is due out on Tuesday and CPI inflation in July is due out Wednesday. While the releases are important, the focus remains on Brexit and how it will develop over the autumn.”

“There are no market movers in Japan next week.”

“The focus in China continues to be on the trade war with the US, where things went sharply downhill last week. We expect the matter to go on the backburner for a while as both sides probably want to calm things down a bit to keep talks scheduled for September on track (…) On the data front, we have the batch of industrial production, retail sales and fixed asset investments, which always come on the same day. In line with consensus we expect the data still to paint a soft picture of the Chinese economy, but not a hard landing. Retail sales growth moved sharply higher but we expect it to fall back to around 8-8½% in July. New home prices will probably show a still robust pace of increase as they are underpinned by low inventories of houses.”

  • Italian political uncertainties could keep a lid on the EUR in the next few days.
  • The key level to beat for bears is the 1.1174 support.

EUR/USD daily chart

EUR/USD is consolidating for the fourth consecutive day the recent move up. The single currency is capped by the 1.1253 resistance and the 50/100-day simple moving averages (DSMAs). The greenback is currently rather flat as the 10-year bond yields are consolidating losses and the US equity market had a notable recovery in the last three days. On the other hand, the sentiment on the EUR is poor due, in part, to political uncertainties in Italy.

EUR/USD 4-hour chart

The market is currently in a range between the 1.1253 resistance and the 1.1174 while trading below the 200 SMA. Bears would need a clear break below the 1.1174 key support which could lead to a retracement down towards 1.1138 and 1.1105, according to the Technical Confluences Indicator.

EUR/USD 30-minute chart

The market popped to the 1.1220 resistance but found no acceptance above the level. Buyers need a daily close above 1.1220 and 1.1253 to climb towards 1.1282 resistance, according to the Technical Confluences Indicator.

Additional key levels

  • USD/JPY is under bearish pressure at multi-month lows.
  • Bulls are attempting a rebound, but there is a lot of resistance to be overcome.

USD/JPY daily chart

USD/JPY is off multi-month lows while trading well below its main daily simple moving averages (DSMAs). Trade war news and US yields mainly influence USD/JPY price action.

USD/JPY 4-hour chart

USD/JPY is rebounding from a critical support at the 105.30 level. A break below this level would likely open the doors to a significant move down towards 104.65, according to the Technical Confluences Indicator.

USD/JPY 30-minute chart

Bulls are attempting to create some traction but they have a lot of resistance to overcome if they want to get out of the woods. The 105.69 resistance followed by 105.91 and 106.13 need to be taken out. After which 106.30 and 106.57 resistances can come into play, according to the Technical Confluences Indicator.

Additional key levels

  • Unemployment rate in Canada rises to 5.7% in July.
  • Crude oil extends recovery, WTI rises above $54.50.
  • US Dollar Index remains on track to finish week in red.

Following the disappointing labour market data from Canada, the USD/CAD pair rose sharply to a daily high of 1.3274 amid the strong selling pressure witnessed on the Loonie but failed to preserve its momentum and turned flat near 1.3230 later in the American session.

Rising crude oil prices support CAD

Statistics Canada today announced that the unemployment rate in Canada rose to 5.7% in July with the net change in employment coming in a -24,200 and missing the market expectation of 12,500 by a wide margin.

Commenting on the data, “Things must still be kept in perspective following outsized employment gains in H1 2019," said Matthieu Arseneau, an analyst at National Bank of Canada. "Despite the July drop, employment in Canada is still up 223K so far this year. No less than 205K of these jobs are full-time positions and 143K are coming from the private sector (best first seven months of the year since 2011).”

The sharp rebound seen in crude oil prices allowed the commodity-related Loonie to quickly erase its losses and caused the pair to reverse its direction. As of writing, the barrel of West Texas Intermediate is u 3.2% on the day at $54.57. The weekly data published by the General Electric Co's Baker Hughes energy services showed that the number of active oil rigs in the US declined for the sixth straight week to support crude oil's rebound.

In the meantime, the uninspiring Producer Price Index data from the US and President Donald Trump's recent comments about the lack of progress in trade negotiations and possibly calling next round of face-to-face talks in September in Washington off weighed on the Greenback.

At the moment, the US Dollar Index is down 0.06% on the day and is now looking to bring an end to its three-week winning streak.

Technical levels to watch for

  • The Aussie is correcting down below the 0.6800 figure.
  • The level to beat for bears are seen at the 0.6785 and 0.6761 support levels.

AUD/USD daily chart

In the last two days, the Aussie has been recovering some ground after hitting a new multi-month low at the 0.6676 level.

AUD/USD 4-hour chart

The Aussie is trading in a bear trend below the main simple moving averages (SMAs). The market is challenging the 0.6785 support. A break below that level would see the Aussie trade lower towards 0.6761, 0.6740 and 0.6715 in the medium term, according to the Technical Confluences Indicator.

AUD/USD 30-minute chart

The market is pulling back down as the market is trading between the 100 and 200 SMAs. The market is expected to decline further; however, immediate resistance can be seen at 0.6796, 0.6810 and the 0.6830 levels, according to the Technical Confluences Indicator.

Additional key levels

According to analysts at Wells Fargo, inflation will not prevent the Fed from easing more in the coming months, as their preferred measure of core PPI (Producer Price Index) has slowed sharply.

Key Quotes:

“Producer prices rose 0.2% in July amid higher energy costs. Excluding food and energy, inflation is softening. Input costs show no signs of that trend reversing, giving space for the FOMC to ease policy again soon.”

“A jump in energy prices pushed U.S. producer prices up 0.2% in July. The trend in inflation, however, remains tame. Ex-food and energy, goods prices were up 0.1%, while services prices fell for the first time since January. Specifically, services ex-trade, transportation & warehousing fell 0.3%.”

“Costs of domestically produced inputs show few signs of breaking higher. With the exception of energy, intermediate processed goods fell in July, as did inputs for services. That should help keep consumer goods inflation from running away even as more imports become subject to tariffs next month.”

Data released today in Canada showed employment declined by 24K in July, against expectations of a 15K. Matthieu Arseneau, analyst at National Bank of Canada, highlights job creation eased while at the same time wage inflation surged.

Key Quotes:

“In a context of trade tensions and financial market volatility, the biggest job loss in eleven months is certainly not good news, even more so since it’s due to a plunge in the private sector (worst showing since 2009).”

“Things must still be kept in perspective following outsized employment gains in H1 2019. Despite the July drop, employment in Canada is still up 223K so far this year. No less than 205K of these jobs are full-time positions and 143K are coming from the private sector (best first seven months of the year since 2011).”

“The tight labour market is reflected in wages with hourly earnings of permanent workers rising 0.7% m/m in July (seasonally adjusted by NBF), following similar prints in the two prior months. As a result, wage inflation accelerated to 4.5% on an annual basis in July, the fastest clip since 2008. This development is consistent with the sharp increase in labour turnover currently taking place.”

“While trade disputes remain a concern for global growth, near record low unemployment and accelerating wages provide a buffer for the Canadian economy.”