The dollar slid and equities took a dive yesterday due to US President Trump’s comments against China at the United Nations, with the tumble extending after Democrats of the House of Representatives decided to launch a formal impeachment inquiry against the President. Elsewhere, the Kiwi was the main gainer among the G10s, as the RBNZ did not suggested that a November cut is a done deal, while the pound rose after the UK Supreme Court ruled UK PM Johnson’s decision to suspend Parliament as unlawful.
The dollar traded lower against all of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed the most against NZD, CHF and GBP, while the currencies against which it lost the least where CAD and EUR.
In the equity world, stock indices tumbled during the US session, with the negative sentiment rolling into the Asian trading today. The initial driver behind the risk aversion was US President Trump’s harsh comments against China at the United Nations, which raised doubts as to whether the two nations will be able to find common ground and secure a deal sometime soon. Remember that following the latest wave of optimism with regards the US-China sequel, we remained reluctant to assume a long-lasting recovery in investors’ morale, adding that we cannot rule out things falling apart again. Trump’s comments are just a reminder of that possibility and add more credence to our cautious stance.
Nonetheless, the news that weighed even more on the broader market sentiment were headlines that Democrats of the House of Representatives will launch a formal impeachment inquiry against Trump, with the accusation of pressuring Ukraine’s President to investigate former Vice President Joe Biden, a front-runner for the Democratic presidential nomination.
That said, removing Trump from office appears to be a hard task. Even if the House, which is led by Democrats, officially votes in favor of the impeachment, the two-thirds of the Senate would have to support the motion as well. Bearing in mind that the Senate is controlled by Republicans, we see such a case as highly unlikely. This whole story could just weigh on his probabilities of being re-elected next year. Now, it would be interesting to see whether this story would affect his policies, and especially his stance over a deal with China. Will he soften his stance in order to secure a deal as soon as possible in an attempt to revive his chances of being re-elected, or will he trigger another round of escalation, which may leave marks on the US economy during a potential Democratic presidency?
After failing to reach its all-time high on September 12th, near the 3028 level, the S&P 500 started moving sideways. Yesterday, it fell below one of its key support zones, at 2980, which kept the price up from September 16th. The index slid slightly below its 200 EMA on the 4-hour chart, where it tested the 2957 hurdle, which is another strong support area, and then bounced back above its 200 EMA. Given that the S&P 500 experienced a sharp fall below its 2980 support, but remained above its 200 EMA, we will take a cautiously-bearish approach and wait for a break below yesterday’s low before examining further declines.
A drop below the 2957 hurdle, which marks an intraday swing low of September 5th and the lows of September 10th and 24th, could invite more sellers into the game and lead the index to the 2945 zone, or even to the 2936 area, marked near the highs of August 9th, 22nd and 23rd. This is where the price may stall for a bit, or it could correct slightly higher. That said, as long as the index remains below the 2957 barrier, we will consider that move higher as a temporary correction before another leg of selling. Another slide might bring the S&P 500 back to the 2936 obstacle, a break of which could send it towards the 2922 level, marked by an intraday swing low of September 4th.
Alternatively, if the price manages to climb back above the 2980 barrier, which was broken yesterday, this could be a sign that the buyers are not willing to give up yet. The index could then travel to the 3008 zone, marked by the high of September 24th, a break of which may set the stage for another push higher. This is when we will examine 3022 area as our next potential resistance, which is marked near the highs of September 13th and 19th.
Back to the FX world, the Kiwi was the main gainer coming under strong buying interest after the RBNZ kept interest rates unchanged at +1.00%, maintained its easing bias, but did not provide hints that a November cut is a done deal. The Committee agreed that new information since August did not warrant a significant change to the policy outlook, and added that there is still scope for more fiscal and monetary stimulus, “if necessary”, in order to support the economy and maintain their inflation and employment objectives.
In our view, the “if necessary” part is what raises doubts as to whether the Bank will reduce rates further in November. That said, the market still believes that officials are more likely than not to do so, assigning a 66% chance for a 25bps November cut according the New Zealand’s OIS (Overnight Index Swaps). Even if the New Zealand dollar continues to gain for a while more in the aftermath of the decision, softness in domestic data heading into the next meeting, as well as new tensions between the US and China, could bring that percentage higher and the Kiwi under renewed selling interest.
The pound was the third winner in line, being bought after the UK Supreme Court ruled that UK PM Johnson’s decision to suspend Parliament was unlawful. The Prime Minister said that he respects the decision, but he disagrees, adding that Britain would leave the EU by October 31st. The Parliament would reconvene today, and it would be interesting what would be lawmakers’ next steps in order to avert a disorderly divorce with the EU. With Johnson seemingly not willing to abide by the law that requires him to request a new Brexit delay, calls for his resignation could grow and thereby result in a vote of no-confidence.
GBP/NZD continues to trade above its short-term upside support line taken from the low of July 30th. But the pair had distanced itself quite a lot from that line lately, and after finding strong resistance last week near the psychological 2.0000 mark, the rate moved lower. GBP/NZD keeps moving down at a gradual pace and it seems that there is a good chance that we may see a bit more downside, given that there is still plenty of room between the line and where the rate is right now. That said, with the recent somewhat positive developments around Brexit, we will be very careful with the downside scenario, as everything could change very quickly, hence why we will take a cautiously-bearish stance for now.
A drop below the 1.9630 hurdle, which was an intraday swing low of September 17th and was near the low of the following day, could attract more bears into the field and open the door for further declines. This is when we will aim for the 1.9452 zone, marked by the low of September 16th. Slightly below that runs the aforementioned upside line, which may provide additional support if the 19452 zone fails to do that.
On the upside, in order for us to start abandoning the bearish case, we need to see the rate climbing back above the 1.9800 barrier, or even the 1.9875 hurdle, which is the low of September 20th. This way more buyers could see this as an opportunity to step in and lift the pair to the high of last week, near the psychological 2.0000 mark, a break of which would confirm a forthcoming higher high and we could see GBP/NZD moving further in the northern direction. This is when we will examine our next possible aim, at 2.0100, marked near the high of October 16th of last year.
The only noteworthy releases on today’s agenda are the US new home sales for August and the EIA (Energy Information Administration) weekly report on crude oil inventories. New home sales are expected to have rebounded 3.5% after tumbling 12.8% in July, while the EIA report is forecast to show that inventories slid 0.733mn barrels in the week ending on Friday 20th, after increasing 0.437mn the week before. That said, bearing in mind that yesterday, the API report revealed a 1.4mn inventory build, we see the risks surrounding the EIA forecast as tilted to the upside.
We also have four speakers on today’s agenda: Chicago Fed President Charles Evans, Kansas City Fed President Esther George, Fed Board Governor Lael Brainard, and ECB Executive Board member Benoit Coeure.
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