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Key Points:

• China's sovereign debt rating downgraded.
• Rising risks of an FX intervention from the PBOC.
• Watch for continual Yuan depreciation in the weeks ahead.

The last 24 hours has been a watershed moment for the Chinese economy, as well as the Yuan, as Moody's have moved to decisively downgrade the countries credit rating from A1 to Aa3. Although markets have reacted with shock, the reality is that macro economists have, for some time, questioned the veracity of China's economic reporting. Subsequently, it comes as no surprise that Moody's have finally taken action to confirm a negative outlook for the manufacturing power house. However, it remains to be seen what impact the downgrade will have specifically on the FX markets.

Subsequently, at the time of writing, the USDCNY is currently trading around the 6.8945 mark and the pair has seen plenty of upside momentum which is likely to continue in the coming session. This is a direct effect from the credit downgrade as the market starts to focus on the rising Chinese debt levels and stalling economy. In addition, most economists have suggested that indirect and contingent liabilities will continue to increase and that we are likely to see debt levels around 40% of GDP by 2018. Clearly, this sentiment is likely to be reflected in the FX markets in the coming weeks as traders continue to pile up against the Yuan.

The first impact has largely been to do with restricting capital flows in the aftermath of the credit downgrade. This has seen the PBOC setting stronger daily Yuan fixings to offset some of the capital outflow pressures that have been evident during today's session. However, this is little respite given the trading pressures around the onshore Yuan and the high demand for the U.S. Dollar. Subsequently, despite firmer fixings, the capital outflows are likely to accelerate in the face of the credit downgrade and this poses a problem for the PBOC in their management of the Yuan.

Subsequently, the Chinese authorities are likely to have to revert to FX interventions in an attempt to help stem the flow of capital from the Asian powerhouse. However, this poses its own difficulties as the nation will need to access their foreign currency reserves to stump up the Yuan's value and, typically, that can be a losing proposition given the difficulties in holding back the market.

Ultimately, the next few months are likely to be relatively rough for both the onshore and offshore Yuan and a slow but concerted depreciation is likely to be the order of the day. However, be mindful of the risk of FX intervention by the PBOC because, in all likelihood, they are going to be unwilling to give up the battlefield without a solid fight first. Whichever way you look at it, concern about an economic slowdown in China is likely to grow beyond the implications for an FX market, especially if there is a further fall in global trade.

Daily Pivots: (S1) 0.8605; (P) 0.8639; (R1) 0.8661; More...

A temporary top is in place at 0.8674 and intraday bias in EUR/GBP is turned neutral first. Further rise is expected as long as 0.8523 support holds. Above 0.8674 will extend the rise from 0.8312 to 0.8786 resistance. Note again that price actions 0.9304 are viewed as a medium term corrective pattern that is extending. Break of 0.8786 would now pave the way to retest 0.9304 high. However, break of 0.8523 will indicate that rebound from 0.8312 has completed and turn bias back to the downside.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. In case of deeper fall, we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside. Rise from 0.6935 (2015 low) will resume at a later stage to 0.9799 (2008 high). However, sustained break of 0.8116 could bring deeper decline to next key support level at 0.7564 before the correction completes.

Short Term Elliott Wave view in ES_F suggests the rally to 2403.75 ended Minor wave A. Minor wave B unfolded as an Expanded Flat Elliott Wave structure where Minute wave ((a)) ended at 2379, Minute wave ((b)) ended at 2404.5, and Minute wave ((c)) of B ended at 2344.5. After ending the pullback, the Index started a new leg higher and the rally from 2344.5 low looks to be unfolding as a 5 waves Elliott Wave impulse structure where Minutte wave (i) ended at 2375, Minutte wave (ii) ended at 2361, Minutte wave (iii) ended at 2388 and Minutte wave (iv) ended at 2378. Minutte wave (v) is in progress and the Index has scope to extend higher towards 2404.2 – 2410.5 area and this last push higher should also end Minute wave ((a)).

Once Minute wave ((a)) is complete, the Index is expected to pullback within Minute wave ((b)) in 3, 7, or 11 swing to correct cycle from 5/18 low (2344.7) before the rally resumes again. Ideally the last push higher in Minutte wave (v) of ((a)) breaks above the previous peak at 2404.5 as a break above that level will give confirmation that the Index has started the next leg higher. If Minute wave ((a)) can end above 2404.5, there’s a better chance that Minute wave ((b)) pullback can hold above 2344.7 for the next leg higher. We don’t like selling the proposed pullback and expect buyers to appear again once Minute wave ((b)) pullback is complete at later stage, provided that pivot at 2344.7 low remains intact.

ES_F 1 Hour Elliott Wave Chart

Daily Pivots: (S1) 1.4906; (P) 1.4981; (R1) 1.5028; More...

Intraday bias in EUR/AUD remains neutral as consolidation from 1.5074 continues. Another fall cannot be ruled out but downside should be contained above 1.4669 support and bring rise resumption. We're holding on to the bullish view that the medium term trend has reversed. Break of 1.5094 resistance will extend the rally from 1.3624 to next medium term fibonacci level at 1.5455. However, considering bearish divergence condition in 4 hour MACD, break of 1.4669 will confirm short term topping and bring deeper pull back, possibly to 55 day EMA (now at 1.4469).

In the bigger picture, price actions from 1.6587 medium term top are viewed as a corrective pattern. Such correction should be completed at 1.3624 after defending 1.3671 key support. Rise from 1.3642 is now expected to target 61.8% retracement of 1.6587 to 1.3624 at 1.5455 and above. In any case, outlook will now stay cautiously bullish as long as 1.4309 resistance turned support holds.

STOCKS

Overall markets are mixed globally. Dow and Dax could re-test crucial resistances in the near term while Nikkei is in a consolidation phase. Shanghai could start moving up soon and Nifty may also bounce back from near term support levels.

Dow (20937.91, +0.21%) and Dax (12659.15, +0.31%) have risen slightly. Both Dow and Dax has important resistances in the 21000-21200 region and 12800-13200 region respectively and while that holds, the indices could consolidate sideways if not fall to lower levels in the near term.

Shanghai (3042.75, -0.64%) has tested the support on the 3-day candle charts and if that holds, it may move up towards 3150-3170 in the medium term. While above 3000, trend looks bullish.

Nikkei (19707.87, +0.48%) has been trying to move up towards resistance near 20000 again but movement has been very narrow in the past few sessions. Trade within 20000-19400 region may be seen in the coming sessions without much attempt to break on either side just now.

Nifty (9386.15, -0.55%) is tested decent support at 9370 yesterday before closing at slightly higher levels. 9350-9370 is an important near term support zone and while that holds, a bounce could be expected in the near term.

COMMODITIES

Gold (1252) could not hold its ground above 1260 levels and fell towards its crucial support of 1249, which could be a level where the price action has to be checked to assess the chances of further bounce to 1260-80 regions. A failure to hold 1249 could keep the price range-bound in the 1220-1250 regions.

Similar kind of trading pattern has been seen in silver (17.01) also though the same it still above its crucial support of 16.90. The recent trading range could be 17.50-16.90 and we will remain bearish while it is trading below 17.50 levels. A close below 16.90 could open up 16.50 levels as well.

Copper (2.57) has found resistance at 2.62 levels. Only above 2.62, higher resistances of 2.68-72 can come into consideration. In the medium term 2.55 are going to be a strong support now but a close below that could open up 2.44-35 levels as well.

Both Brent (54.20) and the current NYMEX July contract of WTI (51.64) are trading within the range of 54.20 – 56.32 and 51.28 – 53 respectively. Both the contracts are highly overbought in near term time frame thus a correction will be anticipated. Besides we have U.S crude oil inventory data today at 8.00 P.M with an expectation of a decrease of 2.4 MB. If the actual figures are higher than the expected, we might be able to see further rally (less preferred view) otherwise a move below the respective supports could drag Brent and WTI towards 52 and 50 levels.

FOREX

Dollar Index (97.37) held previous day's low of 96.80 to recover to a minor degree but the corrective bounce can reach 98.30 at best if it manages to break and sustain above the interim resistance of 97.45. Our downside target of 96.50-00 remains unchanged. Euro (1.1179) is seeing a normal correction while the larger uptrend remains intact so far. This correction can take it to 1.1100-1.1075 where fresh buying can be expected again. Repeat - if any profit booking is seen in Euro either near 1.1300-30 or near the higher long term resistance of 1.1400-50, then corresponding short covering can be expected in Dollar near 96.50 or 96.00.

Dollar Yen (111.90) is testing the upper end of the near term range of 110-112. A firm break above 112 may open up the higher levels of 112.80 or even 113.40. From a larger perspective, the price action in the coming 5-10 days may be contained in the broader range of 11.50-114.00 with no major direction.

Pound (1.2968) is still lacking the bullish momentum. The chances of a fresh high above 1.3050 can't be ruled out but a without a break above 1.3100 soon, it may be very difficult for the currency to sustain the higher levels. Immediate support comes at 1.2950 and 1.2900.

Aussie (0.7451) hit a high of 0.7517, rising above the resistance of 0.7500 just for a brief moment before coming down. The key support at this point comes at 0.7430-20 which must hold to keep the chances of another bounce open. In case 0.7420 gives way, a sharp decline to 0.7330-00 can be seen.

Coming to Dollar Rupee (64.55). the rise above 64.67-72 has negated the immediate bearish momentum and the closing at the day high of 64.89 indicates possible testing of 65.10-25, provided the bullish momentum remains intact. The price action near 65.10-25 may determine the next course of action.

INTEREST RATES

The US yields has risen as expected. The 5Yr (1.83%), 10YR (2.28%) and the 30Yr (2.94%) are all up from 1.79%, 2.25% and 2.91% respectively. The yields could continue to move up in the near term.

The Japan-US (2.23%) has bounced from support near v2.17% and while that holds, we could expect a rise in the yield spread as well as Dollar-Yen.

The German-US 10 Yr (-1.87%) and German-US 2Yr (-2.00%) have fallen sharply pulling down Euro also to levels below 1.12. The 10Yr yield spread has come off from resistance and while that holds, some downward correction is possible in the near term.

Daily Pivots: (S1) 1.0897; (P) 1.0920; (R1) 1.0936; More...

Intraday bias in EUR/CHF remains neutral as consolidation from 1.0986 is still in progress. Deeper fall could be seen but downside is expected to be contained by 1.0791/0872 support zone to bring rise resumption. As noted before, the consolidative pattern from 1.1198 should be completed. Firm break of 1.0999 resistance will pave the way for a retest on 1.1198 high.

In the bigger picture, the price actions from 1.1198 are seen as a corrective move. Current strong rebound is raising the chance that it's completed after defending 38.2% retracement of 0.9771 to 1.1198 at 1.0653. Decisive break of 1.0999 resistance will target a test on 1.1198 high. For now, this will be the preferred case as long as 1.0791 support holds.

Daily Pivots: (S1) 0.7456; (P) 0.7486; (R1) 0.7507; More...

A temporary top is in place at 0.7516 and intraday bias is turned neutral first. With 0.7555 resistance intact, fall from 0.7748 is still expected to continue. Below 0.7405 minor support will turn bias to the downside for 0.7382. Break there will target 0.7144/7158 support zone. However, firm break of 0.7555 will argue that fall from 0.7748 is completed and turn bias back to the upside.

In the bigger picture, we're still treating price actions from 0.6826 low as a corrective pattern. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8115) and above.

Commodities diverge as Oil settles near its recent highs ahead of tomorrow's OPEC meeting, while Gold feels the pain of a stronger U.S. Dollar.

Crude recovered from its early losses overnight with both Brent and WTI finishing roughly unchanged as both contracts head into a pre-OPEC meeting holding pattern. President Trump's proposal to sell half of the United States' Strategic Petroleum Reserve had only a transitory effect, with guidance from various OPEC Ministers pointing to the likelihood of a six, and possibly nine-month extension, to the production cut arrangement.

As we head into tomorrow's meeting, it does feel as if this has been priced into the both contracts for now raising the possibility of some profit taking once OPEC announces its decision. Attention will then turn to the rather forgotten U.S. Crude Inventory numbers out very late in the New York session.

Brent spot has opened at the top of its recent range in Asia at 54.15 but faces initial resistance just above, at 54.30 followed by 55.50. It is comfortably above its 100-day moving average and first support at 53.40 followed by 52.50.

WTI spot trades at 51.25 near its overnight highs and initial resistance at 51.45. It is followed by the rather more formidable 52.00 level. More importantly, WTI has finally closed above its 100-day moving average and first support at 50.75 with the next support below this at 50.00.

GOLD

Gold fell some 14 dollars overnight giving up all of Monday's gains to finish rather bearishly near its lows around 1251 where it trades in Asia this morning. A resurgent U.S. Dollar and equity markets along with dovish comments on the Euro by various ECB members seem to have taken the wind out of gold's sails for now.

Gold could face more pain if tonight's FOMC minutes shows that the Federal Reserve is still on course for two to three more rate hikes this year and a start to the balance sheet reduction. Any combination of the above most likely being bullish for U.S. Dollars, especially as post a June hike, the market has not priced this possibility in on its forward indicators.

Gold narrowly avoided breaking support overnight at 1250 followed by 1245, a daily double bottom and the 200-day moving average. This average has been a crucial pivot point in gold's price action this year, a daily close below could signal a deeper correction.

Gold has resistance at the 1265 area initially followed by the more important 1271.25 double top.

Daily Pivots: (S1) 1.3469; (P) 1.3497; (R1) 1.3538; More....

Intraday bias in USD/CAD is turned neutral with a temporary low in place at 1.3455. Some consolidation would be seen but recovery should be limited by 1.3641 support turned resistance and bring another decline. Below 1.3455 will target 1.3222 support next. As noted before, corrective rally from 1.2460 could have finished ahead of 1.3838 fibonacci level. Break of 1.3222 will affirm this case and target 1.2968 key support level for confirmation

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. Rise from 1.2460 is seen as the second leg and would end at around 61.8% retracement of 1.4689 to 1.2460 at 1.3838. Break of 1.3222 should indicate the start of the third leg while further break of 1.2968 should confirm. Nonetheless, sustained trading above 1.3838 would pave the way to retest 1.4689 high.

Daily Pivots: (S1) 1.1148; (P) 1.1208 (R1) 1.1241; More....

A temporary top is in place at 1.1267 and intraday bias is turned neutral first. Overall, we'd stay cautious on strong resistance from 1.1245/98 (138.2% projection of 1.0339 to 1.0828 from 1.0569 at 1.1245) resistance zone to limit upside and bring reversal. But decisive break of 1.1298 will carry larger bullish implication and target 1.1615 resistance next. On the downside, though, break of 1.1020 resistance turned support will indicate rejection from 1.1245/98 and turn bias to the downside for 1.0838 support first.

In the bigger picture, the case for medium term reversal continues to build up with EUR/USD now far above 55 week EMA. Also, bullish convergence condition is seen in weekly MACD. Focus will now be on 1.1298 key resistance. Rejection from there will maintain medium term bearishness and would extend the whole down trend from 1.6039 (2008 high). However, firm break of 1.1298 will indicate reversal. In such case, further rally would be seen back to 1.2042 support turned resistance next.