In a relatively quiet day in terms of economic releases, investors kept their gaze locked on developments surrounding the US-China saga yesterday. Following Friday’s risk-off trading due to the announcement of fresh tariffs between China and the US, risk appetite recovered on Monday, after US President Trump said that China offered to return to the negotiating table.
The dollar traded higher against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained versus SEK, GBP, EUR, JPY, NOK and CHF in that order, while it underperformed only against AUD and CAD. The greenback traded virtually unchanged against NZD.
In a relatively quiet day in terms of economic releases, investors kept their gaze locked on developments surrounding the US-China saga. Remember that on Friday, equities sold off and safe havens surged after China announced tariffs on USD 75 billion worth of U.S. goods, prompting US President Trump to demand that US firms move their operation out of China. He even went beyond that, announcing that he will raise the tariff rates on Chinese products by another 5%.
Having said all that though, things took a 180-degree spin during the European morning Monday, after the US President said that China contacted Washington to express willingness for returning to the negotiating table. Although China’s foreign ministry later said that they are not aware of any calls, market sentiment stayed buoyant throughout the day and continued today in Asia as well. Major EU and US indices closed Monday in positive territory, while today, Japan’s Nikkei 225 and China’s Shanghai Composite ended their trading 0.96% and 1.42% up. At this point, it is worth mentioning that among the European indices, Italy’s FTSE MIB was the main gainer, getting an extra boost by news that the FiveStar Movement and the Democratic Party are getting closer to a deal on forming a coalition government, and thereby averting political uncertainty.
As for our view, we believe that market participants turned too optimistic. Phone calls and comments are far from suggesting that the two nations have moved closer in finding common ground. After all, following the “goodwill” calls, neither nation announced that tariffs will be removed. With the US ready to proceed with planned tariffs on September 1st, and China allowing the yuan to depreciate further, uncertainty surrounding the dispute remains elevated in our opinion, and thus, we are reluctant to believe that yesterday’s rebound in risk appetite will lead to a long-lasting recovery. Just a negative headline may be enough to provide investors a reality check. Rhetoric of willingness for resolution has been a very often phenomenon recently, but the prolonged lack of action towards that direction makes it even less convincing, at least to us.
On Friday, we also had Fed Chair Powell’s speech at Jackson Hole, which, even though highly anticipated, was overshadowed by the developments surrounding the US-China sequel. The Fed Chief said that policymakers would “act as appropriate” to keep economic expansion on track, and refrained from repeating its “mid-cycle adjustment” rhetoric. In our view, his comments had a more dovish flavor than the press conference following the latest meeting, and they suggest that he is leaning towards delivering another cut in September. It appears that what drives the Fed’s actions recently is not domestic data. Seen in isolation, we don’t think they paint such a bad picture that requires consecutive cuts. In our view, the main driver is the US-China trade war, and as long as it remains unresolved, concerns with regards to the performance of the economy may continue to rise, and thus, the Fed could cut rates even more in order to prevent a downturn. According to the Fed funds futures, investors remain certain that Powell and his colleagues will push again the cut button when they meet next, while they see another quarter-point reduction by the end of the year.
USD/JPY rallied yesterday, after it hit support slightly below the 104.60 zone, which also provided support on March 23rd and 25th, 2018. The rate returned back within the range that has been containing most of the price action since August 2nd, and thus, we will adopt a neutral stance for now, even though the prevailing longer-term trend remains negative. Then the rate hit resistance slightly above 106.25, and during the Asian morning today, it slid again.
If the bears are willing to stay in charge for the rest of the day, then we may see them pushing the rate further down, towards the lower end of the aforementioned range, at 105.15, which is also the low of the January 2nd “flash crash”. Another break, below 105.15, could extend the slide for another test near the 104.60 area.
Taking a look at our short-term oscillators, we see that the RSI turned down from slightly above 50 and fell back below that equilibrium line, while the MACD, although above its trigger line, lies within its negative zone and shows signs of topping as well. These indicators suggest that the momentum may have started turning to the downside again, which supports the case for some further near-term declines.
On the upside, we would like to see a clear move above the upper bound of the short-term range, which is at 106.75, before abandoning the view of further slide, even within the range. Such a move could pave the way towards the 107.20 area, defined by the inside swing low of July 18th, the break of which could carry larger bullish implications, perhaps paving the way towards the 107.80 barrier, marked by the low of July 23rd.
The Nikkei 225 cash index moved in a similar fashion with USD/JPY. It opened the week with a negative gap, below the lower end of the range that has been containing most of the price action since August 5th, but hit support at 19860, and then, it rebounded strongly back within the range. That said, the recovery was stopped near the 20615 hurdle, from where the index retreated somewhat.
In our view, the cash index could continue losing some ground and a clear dip below 20435 may confirm the case. This could open the gate towards another test near the lower end of the range, at around 20100. Another dip below that bound could extend the slide towards the psychological zone of 20000, or Monday’s low of 19860.
Shifting attention to our short-term oscillators, we see that the RSI topped slightly above 50, and just touched its toe below that level, while the MACD shows signs of topping marginally below its zero line. Both studies suggest that the cash index is gathering negative momentum again and enhance the notion for the current pullback to extend.
In order to start examining higher areas, we prefer to wait for a recovery above 20800, the aforementioned range’s upper bound. Such a move could encourage investors to drive the index towards the peak of August 5th, at around 20950, the break of which could set the stage for extensions towards the high of August 2nd, near 21175.
The agenda appears to relatively light today as well. During the European morning, we already got Germany’s final GDP for Q2, which confirmed that that Eurozone’s economic powerhouse contracted 0.1% qoq.
From the US, we have the US Conference Board consumer confidence index for August, which is forecast to have slid to 130.0 from 135.7, and the API (American Petroleum Institute) weekly report on crude oil inventories, for which no forecast is available.
As for the speakers, there are two on today’s schedule: ECB Vice President Luis de Guindos and BoE MPC member Silvana Tenreyro.
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