Yesterday’s day was not an eventful one economic data wise, but certainly it was an active one in regard to the political developments, which had their negative effect on the market. Today, we will get employment and inflation data from the UK and the US, respectively, which could give us an indication of how the economies of the two countries are currently performing.
Although yesterday, the economic calendar did not have any meaningful events on it, the world was taken hostage by various geopolitical shocks. On Monday, all eyes were on the Hong Kong protesters, who managed to disrupt all the operations in the Hong Kong airport. Flights were cancelled, causing for thousands of passengers’ delays in their travels. The protesters are trying to attract more international attention to the problems they are facing. According to some reports, these activists are fighting for a better standard of life, as the economic inequality has widened drastically in recent years. Also, Hong Kong always saw itself as an independent state and still wants to become more autonomous. The protesters are demanding more freedom from mainland China, to which China’s response is categorically negative. Beijing is accusing the activists for the economic disruptions and riots, and keeps threatening to use force against them, if this does not end. But the demonstrations are believed to continue.
The financial markets have reacted negatively, as such events add more fuel into the whole risk-off environment which is currently playing out. Yesterday, the major US indices have slid more than 1% each. Today, the top Asian bourses like the Nikkei, or the Shanghai Composite, all have closed well in the red. Hong Kong’s Hang Seng index fell the most, where it ended today’s trading session with around 2% loss.
In addition to all the negativity, we saw the safe-haven currencies, like the yen and the Swiss franc, strengthening as investors tried to reduce their exposure to riskier assets and move into something safer. Due to these global issues, we believe that, overall, the yen, the Swiss franc and gold could be on the buyer’s list, as investors seek protection against the shaky equity markets.
China already has to deal with the trade negotiations between them and the United States, which are stuck in a deadlock. It is believed that there might not be any deal reached on that front, as the US keeps holding on to all the tariffs, which they have already imposed, and China is thinking of waiting this one out until the US presidential elections of 2020. Also, due to the ongoing trade war, the People’s Bank of China, on Monday, had set the official midpoint level for the yuan against the US dollar, at 7.0211. As we know, last week, the yuan surpassed the 7 mark against its US counterpart, which sparked fury from the US president, as once again, he accused Beijing in currency manipulation. Such actions from the Chinese side make their goods and services more attractive on the market for foreign consumers and investors, which Trump is aggressively trying to prevent.
There was one index that took a major hit and that was the Argentinian Merval, which lost around 48% of its value. This has been triggered, not only by the general negativity in the global equity markets, but also by the country’s internal political situation. During the Argentinian primary election outcome, where Mauricio Macri, who is the current president of the country, had suffered a defeat. Let us remind the reader that the Argentinian primary elections take place in order to cut down on the number of candidates running for president. The final presidential election will be held in October 27th of this year. The market sees Macri as a more favourable candidate than his opponent, the left-wing Alberto Fernandez. But the current president lost the primary elections by around 15%, which means that the more likely candidate to take control of the country in the end of October could be Mr Fernandez. All this forced Argentina’s stock market to collapse and the peso to tumble against the US dollar. At one point, USD/ARS was trading at 62.00, which is a historic low for the Argentinian currency.
Today’s focus will fall on the economic data that we get from the United Kingdom. The country is set to release their employment numbers for the month of June. The unemployment rate is believed to have remained the same as previous, at 3.8%. Also, the country will show us how their average earnings including bonuses have performed in June. The expectation here is that the number had gone up from +3.4% to +3.7%. This would be considered as a decent reading and if the real number comes out as forecasted, or even above, there is a possibility to see the British pound rising slightly. However, that rise might be short-lived, as the Brexit issues and the uncertainty around it remains, which overall, could continue pressuring GBP.
Later on, in the day, the US will release their inflation numbers for the month of July. The headline YoY one is believed to have moved up by a tenth of a percent, from +1.6% to +1.7%. The core YoY CPI is forecasted to come out the same as previous, at +2.1%. Still, traders and investors will remain focused more on the Fed and it rate cuts. According to the Fed Fund Futures, for now, the market participants are expecting at least 2 more cuts by the end of the year.
Overall, USD/JPY is still trading below its medium-term tentative downside resistance line taken from the high of April 24th. Yesterday, the pair took another dive and drifted below its key support area, at 105.58, a break of which might have opened the path for further declines. This morning, the rate tested that area again, but this time from underneath, and failed to move above it, hence why we will remain bearish at least for now.
A further move lower and a break of yesterday’s low, at 105.05, would confirm a forthcoming lower low and could send the rate towards the next potential support zone, at 104.64, which is the lowest point of March 2018. If the selling is still too strong and that zone fails to withstand the bear-pressure, a break of that hurdle could force the pair to slide to the 103.84 obstacle, marked by the low of November 7th, 2016.
Alternatively, a push back above the 105.58 barrier, may increase the pair’s chances of moving a bit higher, in order to recover some of its losses. This is when we will examine the next potential resistance zone, at 106.24, a break of which could lead USD/JPY for a larger correction, possibly aiming for the 106.64 level, marked by the intraday swing high of August 6th.
The Nikkei 225 index continues to trade below its short-term tentative downside resistance line taken from the high of August 1st. The buyers tried a few times to bring the price above that line, but unsuccessfully, as the sellers seem to be taking advantage of the Japanese index every time it rises a bit higher. For now, as long as that line remains intact, we will continue aiming lower, at least for a short while more.
If the index falls below its yesterday’s low, at 20226, this may open the door to a further move down, which could bring the price below the psychological 20000 and test the 19987 zone, which is the low of August 6th. Even though we could see a small rebound from there, if the downside line is still able to keep the price down, we will continue aiming lower. Slightly below the 19987 area lies another good potential support level, at 19918, marked by the low of last week.
On the upside, if the aforementioned downside line breaks, this could raise concerns about the sellers’ capabilities to push the index down in the short run. But if the price climbs above the 20486 barrier, marked by today’s high, this is when the bears might get spooked and the index may drift towards the 20597 hurdle, which is yesterday’s high. If the buying is still strong, a break of the 20597 obstacle may lead Nikkei 225 to the 20811 level, marked by the high of August 8th.
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