THE TAKEAWAY: G20 finance ministers, labor ministers, and central bank governors meet in Russia> PBOC removed its floor on lending rates
While there was a shortage of market-moving economic data today (Canada reported CPI of +1.3% in line with expectations), two policy related events took place. Major economic leaders from the G20 nations met in Russia to discuss policy clarity amidst recent market volatility especially in emerging markets. Chinese credit tightness and US asset purchase tapering were focal points of conversation. The IMF prepared a paper for the G20 meeting which warned, “The eventual exit from low rates and unconventional monetary policy in advanced economies could pose challenges for emerging economies, especially if it proceeds too fast or is not well communicated” [Reuters].
China also notably removes its floor on lending rates today. This news sparked a rally in commodity-related currencies (viz. AUD, NZD). Some investors interpreted the floor removal as a practical liquidity injection and a signal towards eventually floating the Yuan (further analysis). It should be noted that not many companies were receiving funding near the rate floor amidst the tight Chinese credit conditions.
Several measures of risk sentiment indicate allaying tensions even though global markets trade mixed. The implied volatility in the market, measured by the CBOE Volatility Index (VIX) is down -5.37% to 13.03 at the time of writing, significantly lower than the 20+ levels during the rampant QE tapering speculation and Shibor spikes which characterized mid-June. Additionally the AUDJPY — another risk barometer— is higher by a modest +0.19% at the time of writing.
Equity markets are trading flat to modestly weaker: S&P -0.11%; Euro Stoxx -0.07%; FTSE -0.06%; Nikkei -1.48%; Hang Seng +0.08%; Bovespa -0.68%; Sensex +0.11% at the time of writing.
US treasuries are modestly stronger while other regions are mostly flat. 10YR government bond yields trade as follows: US -3.7bps (-1.46%) to 2.491%; Germany +0.0bps (+0.00%) to 1.517%; Spain +2.3bps (+0.49%) to 4.661%; Portugal -19.9bps (-2.91%) to 6.618%; Japan +0.5bps (+0.62%) to 0.804% at the time of writing.
Base metals are rebounding moderately today while crude oil trades slightly weaker: WTI -0.16%; Brent -0.70%; LME Copper +0.22%; COMEX Copper +0.18%; Shanghai Copper +0.81% at the time of writing. Commodity traders will recall that the Brent-WTI spread reversed today for the first time in nearly three years.
In FX markets, the dollar pulls back slightly. The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) falls -9 (-0.08%) to $10833 at the time of writing.
AUDUSD 15-minute Chart: July 19, 2013
Charts Created using Marketscope – prepared by Kevin Jin
The AUDUSD is net +0.26% higher today, after a sharp +60 pip gain following the announcement of the Chinese lending floor being removed. Many investors use the AUD as a proxy for the Chinese economy because Australia provides many raw materials used in Chinese building and development. After the initial rally up to $0.9234, the AUDUSD leveled off and currently trades just below .9200 at the time of writing.
GBPUSD 15-minute Chart: July 19, 2013
Charts Created using Marketscope – prepared by Kevin Jin
The GBPUSD is +0.24% higher at the time of writing, continuing a trend of four straight days of moderate increases. The pair inched higher throughout the various trading sessions and remains stagnant past London Close, at the time of writing.
EURUSD 15-minute Chart: July 19, 2013
Charts Created using Marketscope – prepared by Kevin Jin
The EURUSD is also slightly higher, by +0.23% at the time of writing. The pair displayed relatively muted volatility, trading in a range between $1.3100 and 1.3150 through the entirety of the day.
USDJPY 15-minute Chart: July 19, 2013
Charts Created using Marketscope – prepared by Kevin Jin
The USDJPY experienced rapid declines during the Asian session which took it down roughly -80 pips to ¥100.00. The pair did slightly bounce during London Open but trading was tightly range bound between 100.20 and 100.50 throughout the rest of London trading. Note that Japanese Diet elections will occur this weekend.
— Written by Kevin Jin, DailyFX Research
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