Market looking for a support level

In the market of a corporate debt of China a stressful situation has occurred; there is a lack of clear opinions, but they still exist.

Last week the USD reaction surprised even those who tried to affect it. The report of NFP was significantly inconsistent and those who were betting against reversal miscalculated. The oil was at the focus of traders, but the bets against the oil were also at loss. Only the FRS protocols have shown the normal picture - there is a lack of clear opinions, but they still exist.

The market has slightly come off reality, and the growth of the dollar before NFP without any reasonable grounds in recent days can hardly be explained. There is an assumption of the arrangement provoked and skillfully carried out by the Federal Reserve. Since the European currencies (euro, pound and franc) against dollar are traded mainly in Europe, the reasons for this tendency can be found there.

Although the PMI data of almost all European countries appeared to be worse than was expected, the euro only grew up on this major indicator. The unsatisfactory ISM (the US version of the PMI) has not also led to any reaction. Draghi has said nothing new in his speech, has praised low rates, having the inflation increase as always had no identification as to the probable timeframe. Nevertheless, after that statement the euro had been growing all the evening and the half of the following day.

On Wednesday the composite PMI was poor, and the ADP report didn't please too, therefore the possible leak of the information from the FRS was the second most likely reason of the USD growth. Moreover, all details were visible before the appearance of the protocols from the active comments of the voters. The overall opinion is that economy is growing, but the growth is not sufficient so that it is too early to make decisions. There is a serious fight inside FRS for «prize-winning places», but for the market traders may conclude - there will be no correction of rates in June.

The basic monthly report hasn't met expectations, the main indicator (employment) has grown insufficiently, the share of economically active population has gone down again, unemployment rate remained unchanged. From a collapse the dollar was held by indicators of growth of salaries: average hourly salary was above expectations almost on all branches, the average duration of working week has also increased that indicates that the new workplaces with full work loading were created. It obviously has to add confidence to consumers as the population will have more money, which can be spent. The growth of consumer expenses will be one more benefit for GDP of the USA and acceleration of the inflation that will affect implementation of new toughening of the monetary policy.

The protocols of Bank of Japan published on Monday night contain a traditional set of preventions on the slow growth of world economy and to falling of annual inflation, danger of weak export and production, the termination of falling of a rate of yen, risks from policy of negative rates. Influence on a current rate of yen and advantage for trade - zero.

From the other news we will outline the following:

  1. The Bank of England has stated that approaching of the referendum on the UK’s membership in the EU negatively influences the trust and investments, and the negative effect would be even higher if the decision to leave the EU has been made. The British businesses have been feeling nervous, the indicator in a services sector has fallen to a three-year minimum, under Market Economics data the index of purchase managers also has been decreasing, some large companies state that major customers have postponed long-term contracts. The index of business activity Market PMI and employment indicators have been also dropping.
  2. S&P Global Ratings warns that a number of developing countries can face a decrease in sovereign ratings because of the growing debt load, decrease in the income and deterioration of the balance of payments, and also the growth of conditional obligations. Until 2020 the companies from developing countries will have to extinguish dollar bonds of a corporate debt almost for $180 billion.
  3. In the market of a corporate debt of China a stressful situation has occurred. It was declared that the government was not ready to rescue the problematic state companies. Since 2010 Beijing has been pursuing a policy of the support of inefficient and non-profitable companies issuing a cheap debt. Attempts to become less dependent on bank loans have led to issuance of unsecured bonds more than for $900 billion. Since the beginning of 2016 there were 22 defaults on bonds in domestic market, generally at the expense of state-owned firms, the share of which in the debt market amount to almost 70%. If some state companies are allowed to become bankrupt today, then revaluation of risks in the Chinese debt market will lead to active outflow of the real capital.
  4. The Chinese investors in panic buy up raw materials futures that have led to record trade turnovers and stimulates an increase in prices. The analyst of the London Metal Exchange Harry Jones states that some participants of the Chinese market sometimes do not even know what exactly they buy and sell. China Securities Regulatory Commission has promised to prevent ‘an overheat’ of the market. In order to reduce a demand the exchanges in Dalian, Shanghai and Zhengzhou have been toughening rules, increasing fees and even reducing trading sessions.
  5. On the 2nd of May the US Treasury has published the quarterly report on the attraction of a debt. After two quarters of its aggressive build-up, the short and probably trial period of repayment is expected to be held. On the new project in current quarter a pure repayment of a national debt for $65 bln is expected as opposed to $112 bln that was expected earlier, and in the 3rd quarter 2016 it is planned to attract a debt for $155 billion. It is only the first estimation and in fact the volume can appear to be less. That is for carrying out the devaluation of the dollar a situation is quite favorable.

EUR/USD: in order to break level 1.14 before the NFP the buyers have involved huge volumes, but in fact they have received illogical reaction of the market, which have been most likely the result of speculative game of the large players which has not been observed for a long time. It is interesting that very strong offers have been accumulated at the level of 1.1750 and after Friday the way to them is almost free, but the market has preferred to be rolled away to the previous basic levels. The border 1.1400/1.1412 is again actual. To start a new growth it is necessary to overcome resistance 1.1407/1.1422. Following intraday resistance: (1.1452/1.1460) / (1.1493/1.1512) / (1.1530/1.1544) / (1.1570/1.1590) / (1.1635/1.1700). The next intraday supports: (1.1380/1.1348 - strong) / (1.1330/1.1298 - very strong) / (1.1280/1.1243). Despite closing of the week above 1.14, it is possible to consider that the level is broken. It adds confidence that the negative scenario for euro has not cancelled yet.

USD/JPY: the strategies of traders interested in buying near level 105.00 have been almost fulfilled. The border of risks shifted to 108.23 level. Intraday resistance: (107.73-107.80) / (107.90-108.05) / (108.20-108.27) / (108.62-108.70) / (108.95-109.11); intraday supports: (107.05-107.20) / (106.73-106.67) / (106.13-105.97). USD/JPY is inclined to formation of aggressive extremes, in medium-term perspective it will strictly follow the dollar.

The market has not decided yet on the main direction, therefore the search of ideas will be continued on Monday. Within a week the stresses are not expected to take place.

Author: Alexander Ward,
ForexChief Currency strategist