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by Charalambos Pissouros

Investor Morale Improves, but Questions Over US Stimulus Remain

The US dollar tumbled, while Equities gained yesterday as a billion-dollar takeover for Sunrise Communication, Tesla’s announcement over a stock split, and higher-than-expected US inflation, boosted risk appetite. However, talks between the Trump administration and Democrats in Congress over a coronavirus-aid bill remain deadlocked, while top US and Chinese officials are expected to discuss the Phase-One trade accord on Saturday, amid increased tensions between the world’s two largest economies.

USD Slides, Equities Gain, but US Stimulus Talks Stay in Limbo

The dollar traded lower against all but one of the other G10 currencies on Wednesday and during the Asian morning Thursday. It lost the most versus NOK, SEK, CHF, and EUR in that order, while it underperformed the least against GBP. The greenback was found virtually unchanged against JPY.

USD performance G10 currencies

The weakness of the US dollar and the Japanese yen suggests that risk appetite rebounded again yesterday. However, the fact that the Swiss franc was among the main gainers points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU and US indices were a sea of green, with the upbeat morale rolling somewhat into the Asian session today. Although Hong Kong’s Hang Seng is currently down 0.24%, Japan’s Nikkei 225 and China’s Shanghai Composite are up 1.83% and 0.29% respectively.

Major global stock indices performance

European shares may have received a boost yesterday after the US firm Liberty Global launched a takeover offer for the Swiss company Sunrise Communications in a deal valued at USD 7.4bn. In the US, Nasdaq rallied the most as Tesla Inc announced a five-for-one stock split in an attempt to make its shares more accessible to employees and investors. The fact that US inflation accelerated by more than anticipated may have also fueled sentiment.

Having said all that though, even if equities continue to gain for a while more, we prefer to take a more cautious approach as another day has passed without talks between the White House and Democrats in Congress over a coronavirus-aid bill. US Treasury Secretary Steven Mnuchin said that the two sides may not be able to reach a deal, while House Speaker Nancy Pelosi noted that they remain far apart regarding any agreement. On top of that, on Saturday, top US and Chinese officials are scheduled to meet and review the first six months of the Phase-One trade accord. With tensions between the world’s two largest economies flaring up again recently, it will be interesting to see whether the discussion will hit further hopes over additional progress. In our view, for investors to continue increasing their risk exposures, the Trump administration may have to agree with Congress Democrats over a new fiscal package, and US and Chinese officials may need to provide encouraging remarks over their nations’ trade relationship.

Back to the currencies, the dollar tumbled although inflation in the US accelerated by more than anticipated. As we noted in the recent past, the US currency appears to be wearing its safe-haven suit recently and thus, any data or headlines suggesting that the US economy was not hurt as many believe encourage investors to abandon safe havens in favor of riskier assets, like equities and commodity-linked currencies. The opposite is true when developments undermine the broader investor morale.

Euro Stoxx 50 – Technical Outlook

Euro Stoxx 50 continues to slowly grind higher, while balancing above a short-term upside support line taken from the low of July 31st. The RSI and the MACD are still indicating a rising upside price momentum, which suggests that the index still has a chance to continue drifting higher. Also, as long as the price remains above that upside line, we will stay positive.

Yesterday, the index went for a higher high by breaking the 3349 barrier, marked by the high of August 11th. The Euro Stoxx 50 could continue with the uprise for a little more, potentially ending up testing the 3401 hurdle, marked by the high of July 23rd, where it may get a temporary hold-up. If that hurdle is too difficult to overcome straight away, the index might go for a small correction lower. That said, if the price remains above the 3349 zone, or even above the aforementioned upside support line, that may still keep the bulls interested. If Euro Stoxx 50 climbs back up closer to the 3401 area and breaks it this time, such a move could open the door towards the next possible resistance level, at 3450, marked by the highest point of July.

Alternatively, a break of the previously-discussed upside line and a price-drop below the 3293 hurdle, marked by the high of August 5th and near an intraday swing low of August 11th, could signal a short-term reversal to the downside. The index may drift to the 3276 obstacle, a break of which might open the door the 3218 support level. That level marks the low of August 7th.

Euro Stoxx 50 4-hour chart technical analysis

USD/CAD – Technical Outlook

USD/CAD is currently trading near the 1.3228 and 1.3233 levels. Last time the pair was around that area was on August 5th. Overall, the rate continues to sit below its short-term downside resistance line drawn from the high of July 14th. The RSI and the MACD are indicating an increasing downside momentum. All this suggests that there might be more downside in the near-term, however we would prefer to wait for a drop below the 1.3228 hurdle first, before examining larger extensions to the downside.

Eventually, if the pair falls below the 1.3228 zone, marked by yesterday’s low, that will confirm a forthcoming lower low and might invite more sellers into the game. USD/CAD could then slide to the 1.3200 hurdle, which could temporarily stall the pair from moving further south. That said, if the bulls cannot find strength to lift the rate back up again, a break of that 1.3200 hurdle could send USD/CAD to the 1.3154 level, marked by the low of January 28th.

In order to examine higher areas, a break of the previously mentioned downside line would be needed. In addition to that a rate-rise above the 1.3347 barrier, marked by the high of August 8th, could attract more buying-interest and potentially allow USD/CAD to rise to its next resistance area, at around 1.3400, which is the high of August 7th. If the pair fails to move above that barrier straight away and takes a small turn to the downside, we may class this move lower as a temporary correction, especially if USD/CAD manages to remain above the aforementioned downside line. If so, that could result in another upmove, potentially sending the rate back to the 1.3400 area, a break of which might set the stage for a push to the 1.3459 level, marked by the high of July 30th.

USD/CAD 4-hour chart technical analysis

 As for Today’s Events

The calendar appears relatively light today, with the only releases worth mentioning being Germany’s final CPIs for July and the US initial jobless claims for last week. As it is always the case, Germany’s final CPIs are expected to confirm their preliminary estimates, while the US initial jobless claims are forecast to have slowed slightly, to 1.120mn from 1.186mn the week before.

As for tonight, during the Asian morning Friday, China’s industrial production, fixed asset investment, and retail sales, all for July, are due to be released. Industrial production is forecast to have accelerated somewhat, to +5.1% yoy from +4.8%, while fixed asset investment is forecast to have slid 1.6% yoy after falling 3.1% in June. Retail sales are anticipated to have rebounded 0.1% after falling 1.8%.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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