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China’s Market News: Fiscal Spending Soars in the First Half of 2016

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- The PBOC strengthened the daily fix for the Yuan against the Dollar to a three-week high.

- China’s FX regulator said the Brexit result has not brought major impact to China’s capital flows.

- The Chinese government increased fiscal expenditures to 8.9165 trillion Yuan in the first half of 2016.

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Hexun News: Chinese leading online media of financial news.

- The PBOC continued to fix the Yuan stronger against the US Dollar in the onshore market. The benchmark reference rate was increased by 74 pips or 0.11% to 6.6872 on Thursday, the highest level in three weeks. Following the PBOC’s guidance, the onshore Yuan (USD/CNY) extended its rally for the third consecutive day and moved to 6.6735 as of 10:40am EDT. The offshore Yuan (USD/CNH), on the other hand, weakened slightly against the US Dollar to 6.6804. The divergence between the two Yuan rates hints at wrestling between the Central Bank’s guidance and market moves.

SAFE News: China’s foreign exchange regulator.

– The spokesman of SAFE, Wang Chunying, said that the UK’s referendum has attracted considerable attention. Yet, the Brexit result has not brought major impact to China’s capital flows. The pressure on cross-border capital outflows has been steadily easing. In June, China’s commercial banks sold a net of $12.8 billion worth of foreign exchange, rising slightly from $12.5 billion in May. Under China’s current FX regulation, Chinese companies that receive foreign exchange from trade or other businesses are required to sell the portion of foreign exchange above the quota to commercial banks. This contributes a large part of China’s foreign reserves. When companies need to use foreign exchange for business, they may purchase foreign currencies in banks, with sufficient proof of the business.

In terms of Yuan rates, the spokesman said that expectations on Yuan devaluation are weakening.The average gap between the onshore and offshore Yuan rates narrowed to 97 pips in June from 162 pips in Mayon a daily basis.

China Finance Information: a finance online media administrated by Xinhua Agency.

- China’s fiscal expenditures in the first half of 2016 jumped +15.1% to 8.9165 trillion Yuan compared to a year ago. The fiscal income over the same period grew +7.1% to 8.5514 trillion Yuan. The higher growth rate and the larger absolute amount of spending show that China is implementing a proactive fiscal policy in the effort of supporting the slowing economy. In terms of sectors, education, social welfare as well as healthcare sectors are government main focuses. Expenditures on these three areas took up 14.69%, 13.45% and 8.05% respectively of all the spending. Investing in these sectors will not only help to improve the living standard of Chinese household; more importantly, it could help to release household savings, and in-turn, bring additional momentum to domestic consumption.

- As of the end of 2Q, the existing Yuan loans issued by financial institutions have reached 101.49 trillion Yuan, increasing +14.3% from a year ago. The growth in corporate loans dropped in the second quarter to 9.7% from 10.4% in the last quarter, showing slowdown in business expansion. However, loans made to small-to-micro businesses increased at a fast pace; as of the end of June, these loans have risen +15.5% to 19.31 trillion Yuan. This indicates smaller companies may bring more momentum to the economy in the coming periods than the larger state-owned enterprises.

Mortgages continued to soar in the second quarter: the existing credit issued to home purchasers jumped +24% to 23.94 trillion Yuan from a year ago. Coupled with the New Yuan Loans print as well as the housing prices read released earlier, the risk of price bubbles in real estate is increasing.

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AUD/JPY- View Weakness as an Opportunity

AUDJPY Daily

AUD/JPY- View Weakness as an Opportunity

Chart Created Using TradingView

Broader Technical Outlook: AUDJPY is trading within the confines of a well-defined descending median-line formation off the 2014 high with the Brexit low registering just pips away from a 161.8% extension extending off the 2008 high. A breach above the median-line has encountered resistance at the 50-line parallel with price continuing to consolidate below this region.

Key support rests at 77.62-78.04 where the 61.8% extension & the 38.2% retracement of the advance converge on a basic trendline support & the median-line. This is an area of interest for long-entries with a break below the monthly open at 76.87 needed to shift the focus lower (bullish invalidation). A breach higher targets subsequent resistance objectives at 82.59, the upper parallel and the 200-day moving average at 83.17.

Avoid the pitfalls of near-term trading strategies by steering clear of classic mistakes. Review these principles in the “Traits of SuccessfulTraders” series.

AUDJPY 30min

AUD/JPY- View Weakness as an Opportunity

Notes: A near-term slope has been identified extending off last week’s highs and has continue to guide price action since the start of the week. Interim resistance stands with the weekly open at 80.00 backed by the sliding parallel (red) & the weekly high / 80.78. We’ll reserve this region is our bearish invalidation (area of interest for possible exhaustion / short-entries)

Interim support rests with the 61.8% extension at 79.31 with a break below the lower parallels eyeing subsequent support targets at the 78.40 & 78.04. From a trading standpoint I’ll be looking to sell strength while within this formation, ultimately to offer more favorable long-entries lower down for a broader rally.

A quarter of the daily average true range (ATR) yields profit targets of 47 pips per scalp. Added caution is warranted heading into key inflation prints next week as well as the Bank of Japan (BoJ) policy decision, with the releases likely to fuel increased volatility in Aussie & Yen crosses. Continue tracking this setup and more throughout the week- Subscribe to SB Trade Desk and take advantage of the DailyFX New Subscriber Discount.

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Relevant Data Releases

AUD/JPY- View Weakness as an Opportunity

Other Setups in Play:

Looking for trade ideas? Review DailyFX’s 2016 3Q Projections

—Written by Michael Boutros, Currency Strategist with DailyFX

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Join Michael for Live Scalping Webinars on Mondays on DailyFX and Tuesday, Wednesday & Thursday’s on SB Trade Desk at 12:30 GMT (8:30ET)

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EUR/USD Sits at Support Post-ECB; Outlook Favors Further Losses

Talking Points:

- EUR/USD Outlook Mired by Bearish Patterns Even as ECB Sticks to Status Quo.

- USDOLLAR Continues to Hold Above Former Resistance; Fed Expectations in Focus.

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the Traits of Successful Traders series.

EUR/USD

EUR/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • EUR/USD struggles to hold its ground even as the European Central Bank (ECB) endorses a wait-and-see approach for monetary policy and preserves the zero-interest rate policy (ZIRP), while keeping the asset-purchase program unchanged at EUR 80B/month; need a break/close below 1.0960 (23.6% retracement) to 1.0970 (38.2% retracement) to favor a further decline in the exchange rate, with the next downside target coming in around 1.0910 (38.2% retracement), which coincides with the June low.
  • Even though the ECB expects interest rates ‘to remain at present or lower levels for an extended period of time,’ the Governing Council may adjust its quantitative easing (QE) program rather than implementing lower borrowing-costs as central bank officials continue monitor the impact of the ZIRP on the real economy.
  • Need a move back above 1.1110 (50% retracement) to see EUR/USD preserve the near-term range, but the head-and-shoulders formation from earlier this year may continue to pan out as long as the Relative Strength Index (RSI) retains the bearish formation carried over from April.

EURUSD SSI

  • The DailyFX Speculative Sentiment Index (SSI) shows a bit of back-and-forth in retail sentiment, with the retail crowd flipping net-short EUR/USD following the ECB interest-rate decision.
  • The ratio currently sits at -1.03 as 49% of traders are long, with long positions 28.5% higher from the previous week, while open interest stands 8.7% above the monthly average.

Why and how do we use the SSI in trading? View our video and download the free indicator here

USDOLLAR(Ticker: USDollar):

EUR/USD Sits at Support Post-ECB; Outlook Favors Further LossesEUR/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • The USDOLLAR trades on a firmer footing as the slew of second-tier U.S. data highlights an improved outlook for growth and inflation, but the prints may have a limited impact in moving the needle for Federal Open Market Committee (FOMC) as the central bank is widely anticipated to retain its current policy at the next interest-rate decision on July 27.
  • With Fed Funds Futures still showing limited expectations for a 2016 Fed rate-hike, more of the same from the FOMC may produce near-term headwinds for the greenback as market participants push out bets for higher borrowing-costs, but we may see a growing rift within the committee as the central bank faces a growing risk of overshooting the 2% target for inflation.
  • String of closing prices above 12,049 (78.6% retracement) to 12,064 (61.8% retracement) raises the risk for a further advance in the USDOLLAR, with the next objective coming in around 12,170 (78.6% retracement) to 12,176 (78.6% expansion).

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— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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Shakeout in the Yen on Prospect of ’Helicopter Money’

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Talking Points:

- The prospect of additional Japanese stimulus continues to bring strength to global risk markets as investors attempt to front-run more Japanese stimulus.

- A news report in the overnight session had communicated that BoJ Governor Kuroda had rebuked the possibility of ‘helicopter money’ for Japan. This created a quick bout of Yen-strength as some stimulus bets came out of the market. But it later came-out that this interview was over a month old, and the Yen found resistance (support in USD/JPY, EUR/JPY, GBP/JPY) before moving back-in the trend-side direction.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

The big takeaway from the overnight session was volatility in the Yen, and this has some fairly interesting motivators. In a BBC interview that was broadcast this morning, the Head of the Bank of Japan, Haruhiko Kuroda said that there was no possibility of ‘helicopter money’ for the country. Later in the session, it came out that this interview was actually conducted in June, before the well-publicized meeting with Ben Bernanke in which the topic of helicopter money was initially floated. This is a hot trigger-word at the moment, as bets on additional Japanese stimulus have seemingly coalesced into bets that Japan will embark upon the untested, theoretical concept of helicopter money, which is also known as ‘QE for the people,’ rather than ‘QE for the banks.’

As we had written in the Yen forecast for this week, helicopter money is unlikely in Japan in the near-term, as this technically wouldn’t even be legal as of right now. Japanese law prohibits the country from directly underwriting government debt. To accomplish helicopter money, Japan would need to coordinate monetary and fiscal policies so that they can a) underwrite their own debt and b) distribute it into the financial system. And while current Japanese law doesn’t preclude modifications down-the-road that might make this possible, given the very untested nature of this theory and also given the response that the Bank of Japan has seen from other very theoretical moves (like negative rates, buying stocks with QE), it would make sense for the bank to embark on this concept slowly, if at all.

However, even if we do not see a form of ‘helicopter money’ in Japan’s near future, this doesn’t rule out the prospect of the ‘comprehensive, bold economic stimulus package’ that Japanese Prime Minster has previously alluded to, saying that it would be coming this fall. And given the recent win of Abe’s coalition in the upper-house of Japanese Parliament, resistance to further stimulus will likely be lessened moving-forward.

But after the month-old interview with Kuroda took markets very much by surprise, we saw a quick spike of Yen strength; surging 200-pips against the US Dollar, 300-pips against the British Pound and 230-pips against the Euro. And as we later heard that this was a dated interview from last month, weakness returned to the Yen as stimulus bets have flowed back-in to markets. On the three charts below, we look at the current technical setup in each market.

USD/JPY

USD/JPY had just set a fresh near-term high at the 107.50 psychological level yesterday before this retracement came-in; and that retracement moved price action down towards a big, confluent zone of support. At 105.42 is 76.4% (a 23.6% retracement) of the post-Brexit move in the pair, and just a few pips below that we have the 50% Fibonacci retracement of the 2002 high to the 2011 low in the pair. And 35 pips below that level we have the 105-psychological level.

Shakeout in the Yen on Prospect of 'Helicopter Money'

Created with Marketscope/Trading Station II; prepared by James Stanley

EUR/JPY

EUR/JPY had just set a higher-high in the overnight session by a few pips before turning around. Support came in on a projected trend-line of the near-term lows (shown in red on the chart below), and after the European Central Bank made no adjustments to policy at this morning’s meeting, the pair has begun to move higher again. The key level in EUR/JPY appears to be around the 115.00 psychological level, as 37 pips above this price we have a key Fibonacci level of the ‘Abenomics’ move in the pair, taking the low in the year 2012 to the high of 2014. At 115.37 is 38.2% of the total move (61.8% retracement of the move), and this had previously provided a rather brisk price action inflection last week while also functioning as a ‘swing-high’ after the violent declines of the Brexit-move.

Shakeout in the Yen on Prospect of 'Helicopter Money'

Created with Marketscope/Trading Station II; prepared by James Stanley

GBP/JPY

We had written a technical piece on GBP/JPY yesterday, noting the five days of resistance that had shown at a key Fibonacci level at 140.63. This is 61.8% of the Post-Brexit move (a 38.2% retracement of the move), and traders had continually come-in to sell this level over the previous week. This would normally be a bearish connotation, but given the higher-lows that have been seen over the past week combined with the macro backdrop that was seemingly changing in the Yen behind the expectation for even more stimulus, this set up an ascending wedge pattern in the pair.

The quick turn-around of Yen-strength this morning had sent the pair from above 142.25 down to just above the 139-handle, and now support appears to be forming above the prior ‘higher-low’ around 138.32. On the chart below, we look at the near-term channel that’s been building on the hourly in GBP/JPY.

Shakeout in the Yen on Prospect of 'Helicopter Money'

Created with Marketscope/Trading Station II; prepared by James Stanley

— Written by James Stanley, Analyst for DailyFX.com

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Preview for ECB: No Rate Cut Yet but Tweaks to QE Program Possible

Talking Points:

- ECB likely on hold until next staff projections in September.

- EUR/USD hovering around $1.1000 pre-meeting.

- As market volatility stays elevated post-Brexit, it’s a good time to review risk management principles.

Join me today at 07:30 EDT/11:30 GMT for live coverage of the European Central Bank rate decision.

The European Central Bank meets for its July rate decision today, one in which, in the immediate aftermath of the Brexit vote, was rife with potential for surprise action. Instead, however, the stability in financial markets will most likely allow the ECB to keep rates on hold, staying with the pattern of only making a significant change to policy when the staff economic projections (SEP) are released (recall our discussion over the past year on how central banks, in an effort to become transparent, have become too predictable).

Chart 1: EUR/USD Daily Chart (September 2015 to July 2016)

Preview for ECB: No Rate Cut Yet but Tweaks to QE Program Possible

There are two things to watch for, if this meeting is going to be used as a runway to potential action at the end of Q3 or the beginning of Q4. First would be any language regarding the timetable for the QE program. Currently, it is set to end in March 2017; seeing the seeds planted for another six-month extension to September 2017 seems very possible.

Second, given the downdraft in core sovereign bond yields in recent weeks, the ECB will indicate that it needs to adjust the way its bond buying program is conducted. The ECB allots its bond buying based on the capital key. What is the capital key? The capital of the ECB comes from the national central banks (NCBs) of all EU member states. According to the ECB, the NCBs’ shares in this capital are calculated using a key which reflects the respective country’s share in the total population and gross domestic product of the EU.

As such, it’s no surprise that Germany – as the country with the largest capital key contribution – has seen the belly of its yield curve (3Y-7Y) drift lower into negative territory, below the ECB’s -0.40% deposit level – the threshold at which the ECB no longer purchases bonds in its QE program. Likewise, the ECB needs to either: remove the limiting parameter of -0.40% on its bond buying; or discard the capital key variable. In the first case, German yields would like move lower the fastest; in the second, peripheral yields like in Italy and in Spain. In either case, the potential for a signficant Euro move absent a notable driver – like a rate cut – seems limited.

This is updated to reflect market changes from its original publication on Wednesday, July 20, 2016.

See the above video for a technical review of the USDOLLAR Index, EUR/USD, USD/JPY, and GBP/USD. If you haven’t yet, read the Q3’16 Euro Forecast, “Euro Awakes to Brexit Nightmare; Time for a Turn in EUR/USD?”as well as the rest of all of DailyFX’s Q3’16 quarterly forecasts.

— Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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Australian Dollar at Risk on Post-Brexit, Geopolitical Jitters

Australian Dollar at Risk on Post-Brexit, Geopolitical Jitters

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar likely to fall in with risk sentiment trends yet again
  • Eurozone data, ECB rate decision to offer early Brexit spilloverclues
  • Geopolitics complicate the landscape as coup breaks out in Turkey

Are FXCM traders buying or selling AUD/USD? Find out here.

A lull in top-tier domestic event risk puts the Australian Dollar at the mercy of risk sentiment trends once again. The currency remains highly sensitive to changes in market mood, with the correlation between AUD/USD and the benchmark S&P 500 stock index at a three-month high of 0.9 (on rolling 20-day studies).

The aftermath of the UK Brexit referendum remains a critical macro theme. With the threat of a financial crisis immediately following the vote seemingly out of the way, investors have turned their attention to gauging the severity of knock-on effects on global economic growth and financial stability.

Needless to say, the Eurozone is ground zero for spillover. Germany’s ZEW survey of investor confidence, the flash Eurozone PMI roundup from Markit Economics and the ECB monetary policy announcement will offer early clues about the severity of contagion being expected in official and private-sector circles.

Uncertainty about the ground rules of the future economic relationship with the UK – heretofore the second-largest EU member state – will almost certainly dampen activity on the Continent. PMI and ZEW data will hint at the severity of the cooling effect while the ECB will suggest what may be done about it.

Eurozone economic news-flow has somewhat softened relative to consensus forecasts recently, warning that signs of weakness may already be emerging (although it is premature to say this with confidence for now). If this paves the way for downside surprises, risk appetite may be undermined.

For its part, the ECB seems unlikely to deliver an outright expansion of stimulus measures but comments from central bank President Mario Draghi will be critical to gauge policymakers’ readiness to act if need be. A neutral wait-and-see posture may prove to be a disappointment, amplifying the threat of risk aversion.

On the geopolitical front, an attempted military coup in Turkey late Friday complicates the landscape further. The country’s proximity to and significant economic linkages with Western Europe may fuel fears that turmoil there will amplify existing post-Brexit vulnerabilities, catalyzing a broader unraveling.

Taken together, all this amounts to a precarious environment for the Aussie. Much of the landscape remains clouded however and a great deal can change quickly, triggering seesaw volatility. With that in mind, the probability of follow-through on seemingly decisive moves should not be taken for granted.