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Daily Market Analysis
Steady Does It

by Sean Coakley | December 7, 2016

– Forex Reserves Signal China Capital Flight

– Australian Surprise – .5% GDP Contraction

– Bank Of Canada Rate Statement On Deck

 

Traders are mostly optimistic as US equities continue to trade near all-time highs igniting positivity in both Asian and European sessions. Dark clouds are starting to emerge on the horizon, however, particularly in China, as rapidly declining forex reserves along with surprising new currency restrictions signal growing concern about capital flight in the world’s second-largest economy. The renminbi has continued its slide despite the best efforts of officials to stem the losses and with all signs flashing red with respect to the potential for a credit crisis in the mainland the worst may be yet to come.

Outside of China, the rest of Asia looks to be in fine form, with equities across the board in positive territory and the yen trading higher. The exception being Australia, which posted its first economic decline since 2011 as GDP contracted .5% in a surprise move. This had the Aussie dollar on the back foot, declining before bouncing back against the greenback as firming metals prices favoured it along with its NZ counterpart.

In Europe, traders were caught by a surprise decline in UK industrial production which took the sterling down a notch. Across the channel, the euro moved higher versus both the pound and the US dollar as traders shrugged off the political implications of the defeat of constitutional reforms in Italy.

Heading into the North American session we do have the Bank of Canada rate statement today to be followed by commentary from the Bank governor. At the last meeting we had a bit of shock when Governor Poloz indicated that rate cuts were still not off the table. While the Canadian economy seems to be muddling along despite the devastation in oil and gas there remains a good chance that loonie bulls get caught offside especially considering the 2.5 cent gain we have seen in the Canadian dollar in the wake of the OPEC announcement. Markets have a tendency to get ahead of themselves on both the upside and downside, so those that expect continued CAD strength in the short term may be caught off-side by sudden reversals simply due to market perceptions of any commentary coming from the Bank of Canada or Federal Reserve over the next week and a half. Either way, the currency markets are always a fairly exciting place to be and no matter what happens, it looks like the elevated volatility we have seen over the last few years is here to stay.

 

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