Yesterday (12/01), EUR / USD fluctuated amid stock market stabilized and oil prices continued lower. The pair traded in a tight range between $1.08184 and $1.08992, before closing at $1.08561, virtually unchanged compared with the opening price of $1.08574.
From chart D1 we can see that in recent sessions, the pair was in strong volatility with long real bodies, short shadow. After rising sharply in Jan 7th session, the pair is on the decline, but there was high tension between two forces, buy and sell, due to the following reasons:
Firstly, China’s stock stable at the close
China continued to defense of the yuan, buying the currency in Hong Kong and sparking a record surge in the city’s lending rates to deter bearish speculators. The cost to borrow yuan overnight in the city’s interbank market surged to 66.82 percent, more than five times the previous high on Monday which is 13,84 percent. By intervening in the Hong Kong market, the central bank is trying to close the gap between onshore and offshore rates
Last week, borrowing costs in Hong Kong renminbi stayed at only 4%, enabling investors to jump in yuan short position, causing the spread reached a record high of 2.9%. By intervening to raise interest rates so high, yuan exchanged freely overseas will reduce volatility, avoid capital flows out of the border caused by depreciating currency. However, the selling-off continued on the stock market in early trading yesterday. The Shanghai Composite Index fell below 3,000 level before rising sharply at the end of the session, to close near 3,022.86 points, up 0.2% compared with the opening level.
Stable stock market meant partial capital flows had left the safe-haven assets like gold and US dollar to riskier assets. Yesterday precious metals also recorded price falls.
Secondly, oil prices to below $30/barrel
Yesterday, oil prices have dropped below $30/barrel for the first time, which is the bottom since 2003. Crude has lost up to 20% in this year. Oil prices were pushed down by the impact from a stronger dollar and fears of economic deceleration in China, Europe, which can cause oil demand to fall. This year, experts also forecasted oil prices could continue to fall down further, maybe even hit a threshold of $10/barrel. The oil price has pulled investors out of the assets “anti-inflation” as gold, as well low inflationary pressure over the US, the economy has not been achieving the inflation target of 2% for the last 3 years.
Director of International Monetary Fund (IMF) Christine Lagarde said any tightening moves would have to be supported by the clear evidence on the inflation growth. Also speaking in Paris, vice chairman of the US Federal Reserve (Fed), Stanley Fischer had sent the strong message that the introduction of negative interest rates upon the financial crisis would be a mistake. So we can see that Mr.Fischer still hold the view of aggressive monetary tightening in 2016, last time he also said the Fed may raise interest rates four times against the current market expectations of 3 times or even lower.
Speech by Mr. Fisher strengthened the possibility that the Fed will raise interest rates in March, according to many analysts, this capability is only 50-50, though. The dollar backed up by the prospect of economic tightening have pulled the pair down.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, gained more than 0.3% to an intraday high of 99.34, before closing at 99.03.
Analysis of Group If24h