Most EU indices traded lower yesterday, but the US ones ended in positive territory, despite the further inversion of the US Treasury yield curve. Risk appetite softened again during the Asian day today. In the FX sphere, from Tuesday’s main gainer, the pound was yesterday’s big loser among the G10s, coming under selling interest on PM Johnson’s decision to suspend Parliament.
The dollar kept drifting north against most of its G10 peers on Wednesday and during the Asian morning Thursday. It lost ground only against CHF, while it traded virtually unchanged versus EUR. The currencies that lost the most were GBP, NZD and SEK in that order, while the ones that underperformed the least against their US counterpart were JPY and CAD.
The strengthening of the franc and the relative resistance of the yen suggest that market participants continued to be cautious. That said, that was not the case throughout the whole day. Most major EU indices traded lower, with Spain’s IBEX 35 and the UK’s FTSE 100 being among the exceptions. The latter may have gained due to the weakness in the pound. Remember that many companies of the index generate profits in other currencies, so in a weakening GBP environment, if those profits are converted to pounds, they worth more.
However, the picture during the US session was much different, with all three major indices finishing their session in the green, despite the further inversion of the US Treasury yield curve. The spread between the 10- and 2-year yields remained negative, while the 30-year rate touched an all-time low of 1.905% at some point during the day, before settling at around 1.94%. US indices may have been supported by gains in energy stocks, which rose after the EIA weekly data showed a larger-than-anticipated slide in crude inventories, and/or by the absence of headlines suggesting further escalation in the US-China trade saga. Yes, the Trump administration announced officially the extra 5% increase in the tariff rate on USD 300bn worth of Chinese goods, but this was something already known and expected. In any case, risk appetite softened again during the Asian day today, with Japan’s Nikkei 225 and China’s Shanghai Composite sliding 0.09% and 0.10% respectively.
As for our view, it remains the same as yesterday. Yesterday’s slide in yields, not only in the US, but elsewhere as well (Germany’s 10-year yield also hit a new record low), suggests that bond investors are still worried with regards to the state of the global economy. Thus, we find it very hard to trust that a healthy longer-term recovery in the broader market sentiment is in the works. The developments in the US-China sequel are far from suggesting that a deal is imminent, while further turmoil in the Brexit-land could potentially add to fears of slowing global growth. With what we have in hand now, we believe that what could keep any morale-deterioration in check may be willingness from central banks worldwide to do even more in order to support their economies.
AUD/JPY traded slightly lower during the Asian morning today. It hit resistance slightly below 71.60, and broke below the 71.25 barrier, which provided support on Tuesday and Wednesday. Overall, the pair continues to trade within the sideways range that’s been containing most of the price action since August 5th and thus, we would stay flat with regards to short-term picture.
Now, the rate looks to be heading towards the lower end of the range, at around 70.90, but we prefer to wait for a decisive dip below that zone before we start examining the bearish case. Something like that may wake up more bears, who could accelerate the slide towards the psychological round figure of 70.00, which is fractionally above Monday’s low.
Shifting attention to our short-term oscillators, we see that the RSI lies below 50 and points down, while the MACD already negative, has just touched its toe below its trigger line. These indicators suggest that the rate may indeed have the necessary momentum to challenge and break the 70.90 hurdle.
In order to start assessing whether the bulls have gained the upper hand, we would like to see a strong break above the upper bound of the range, which is at around 72.40. Such a move could encourage extensions towards the high of August 13th, near 72.95, the break of which may set the stage for the 73.90 zone, marked by the low of June 18th.
From Tuesday’s main gainer to Wednesday’s big loser. The pound came under strong selling interest yesterday and responsible for that was UK Prime Minister Boris Johnson. The currency took an initial hit on rumors that the government is looking to stop Parliament’s effort to avert a no-deal Brexit, and continued to slide up until Johnson announced that he asked for a Queen’s speech to be held on October 14th, something that will suspend Parliament from around mid-September up and until the speech.
While calling for a Queen’s speech to lay out plans for the coming year and suspending Parliament is a normal procedure in the UK, the timing of Johnson’s move limits the amount of time MPs have to discuss on ways to prevent a no-deal Brexit. However, it also increases the chances for a no-confidence vote against his government to be held next week, when Parliament returns from its summer recess. On Tuesday, opposition parties agreed to work together in an attempt to stop a no-deal outcome, with Labour Leader Jeremy Corbyn softening his stance over a no-confidence vote and a caretaker government, but yesterday’s developments suggest that MPs may now indeed try to oust Johnson.
Judging by the pound’s reaction, yesterday’s developments increase the chances for a chaotic exit on October 31st, and the currency could stay pressured heading into next week. Now, the ball is on Parliament’s court and it remains to be seen whether MPs will find common ground as early as next week on stopping a no-deal Brexit, either by legislation or by a no-confidence vote. If they succeed, the wounded pound could rebound notably.
GBP/USD tumbled yesterday, after it hit resistance slightly below the downside line drawn from the high of May 3rd. That said, the slide was stopped by the short-term upside line taken from the low of August 12th, and then, the rate rebounded somewhat. The downside resistance line drawn from back in May keeps the longer-term downtrend intact, but we prefer to wait for a move below the short-term upside one before we get confident on more bearish extensions.
A clear and decisive dip below 1.2160 may confirm the break below the short-term upside line and may allow declines towards the 1.2110 zone, which acted as a support on August 21st and 22nd. If, this time, it fails to stop the rate from drifting further south, then we could see the bears driving the battle towards the low of August 20th, at around 1.2060, or towards the low of August 13th, near 1.2040.
Looking at our short-term oscillators, we see that the RSI lies below 50, while the MACD, already below its trigger line, looks ready to fall below zero. Both indicators detect negative momentum, but bearing in mind that the RSI has just ticked up, we prefer to wait for the dip below 1.2160 before turning our eyes to the downside.
On the upside, a clear recovery above 1.2310 may wake up some GBP-bulls, as it would confirm a forthcoming higher high on the 4-hour chart, and also bring the rate above the aforementioned downside line. Such a break could pave the way towards the 1.2380 zone, marked by the inside swing low of July 17th, the break of which may extend the advance towards 1.2425, a resistance defined by the inside swing lows of July 23rd and 24th.
From Norway, we already got GDP data for Q2. The headline qoq rate increased to +0.3% from -0.1%, but this was below the +0.5% qoq forecast. The mainland print showed an acceleration to +0.7% qoq from+0.5%, just a tick below the consensus of +0.8%.
Germany’s preliminary inflation prints for August are also coming out. The HICP rate is expected to have ticked up to +1.2% yoy from +1.1%, but the CPI print is forecast to have declined to +1.5% yoy from +1.7%. The nation’s unemployment rate for the month is also coming out and it is expected to have remained unchanged at 5.0%.
Later in the day, we get the second estimate of the US GDP for Q2 and expectations are for a small downside revision to +2.0% qoq SAAR from +2.1%. That said, bearing in mind that we already have models suggesting how the economy has been performing during Q3, barring any major deviations from the forecast, we will treat this release as outdated. According to the Atlanta GDPNow model, the US economy grew 2.2% qoq SAAR in Q3, while the New York Nowcast points to a growth rate of +1.8%. The pending home sales for July are also due to be released and the forecast suggests a slowdown to +0.1% mom from +2.8% in June. Initially jobless claims for the week ended on August 23rd are also coming out and the forecast suggests a small increase to 215k from 209k the week before.
As for tonight, during the Asian morning Friday, we get the usual end-of-month data dump from Japan. The unemployment rate is anticipated to have ticked up to 2.4% in July from 2.3% in June, while the jobs-to-applications ratio is expected to have remained unchanged at 1.61. The preliminary industrial production for July is forecast to show an increase of 0.3% mom after sliding 3.3% the month before, while retail sales are expected to have slid 0.8% yoy after rising 0.5% in June. The core Tokyo CPI rate for August is anticipated to have declined to +0.8% yoy from +0.9%, but no forecast is currently available for the headline rate.
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