Risk Appetite got a small boost yesterday, as headlines surrounding the US-China trade saga may have added to hopes that the next round of negotiations may bear some fruit. That said, market moves suggest that investors stayed on guard ahead of tomorrow’s ECB decision, as they may be eager to find out whether the Bank will deliver just a 10bps cut in the deposit rate, or more.
The US dollar traded mixed against the other currencies yesterday and during the Asian morning Wednesday, but within a narrow range of ±0.30%. It gained against JPY, NOK, NZD and SEK in that order, while it was found lower versus CAD, AUD, GBP, CHF and EUR.
Despite the slight weakening of the Kiwi and the strengthening of the franc, the slide in the yen and the outperformance of the Loonie and the Aussie suggest that investors’ appetite may have been somewhat supported yesterday. Indeed, most major EU and US indices traded slightly in the positive territory, with the exceptions being Italy’s FTSE MIB, which dropped 0.55%, and Nasdaq, which closed fractionally negative (-0.04%). The catalyst behind the tumble in Italian shares may have been a report saying that the new governing coalition plans to increase its budget deficit target for 2020 to +2.3% of GDP, just shy of the +2.4% level that nearly triggered disciplinary actions by the EU against Italy this year. As for today, during the Asian morning, Japan’s Nikkei 225 gained 0.96%, while China’s Shanghai Composite closed 0.41% down.
The small boost in risk appetite may have been the result of relatively optimistic headlines regarding the US-China trade saga. During the European morning, Chinese Premier Li Keqiang said he hopes that trade talks will make progress and that the two nations should find solutions to the dispute. Later in the day, a report said that China has offered to buy US products in exchange for the US delaying fresh tariffs and easing the ban against the tech giant Huawei Technologies. It was also noted that China could offer more market access and better protection for intellectual property.
Following last week’s headlines that the world’s two largest economies are willing to return to the negotiating table in early October, the aforementioned developments add to hopes that this round of talks may indeed bear some fruit. That said, although anything pointing towards a “trade truce” could continue being supportive for risk assets, we are still reluctant to trust a long-lasting healthy recovery. Hopes that a deal is getting closer have been dashed many times in the past, and even after negotiation rounds that have ended on a positive note, at least according to officials’ remarks after the talks. Thus, unless we see handshakes and signatures, we cannot rule out things falling apart again.
Back to the FX world, the Canadian dollar was the main gainer, despite the slide in oil prices. Both WTI and Brent came under selling pressure after US President Donald Trump fired National Security Adviser John Bolton. Bolton is considered a hawk with regards to Iran policy and thus, the news raised hopes of easing tensions between the two nations. Apart from the somewhat sanguine market sentiment, the Loonie may have stood tall due to monetary policy reasons. Remember that at its latest gathering, the BoC maintained its neutral stance, staying among the very few major central banks that have not turned their eyes to the cut button yet.
On the other side of the spectrum, the yen was the main loser, which apart from safe-haven outflows, may have been sold off on reports saying that the BoJ is more open to discussing the likelihood of fresh stimulus measures at its upcoming meeting next week.
With what we have in hand now, we believe that further optimism in the financial world may allow CAD/JPY to continue drifting higher, and perhaps outperform other risk-related proxies. AUD/JPY and NZD/JPY are also decent gauges of the broader market sentiment, but expectations around further RBA and RBNZ rate cuts may not allow for as decent gains as in CAD/JPY during periods of market euphoria.
For now though, we believe that investors may stay somewhat more cautious. After all, they didn’t add much to their risk exposures yesterday, perhaps as they stayed on guard ahead of tomorrow’s ECB meeting. A 10bps cut in the deposit rate is a done deal in the eyes of investors, but they are eager to see whether the Bank will deliver more. ECB officials expressed contradictive views recently, with Governing Council member Olli Rehn saying that “it is important that we come up with a significant and impactful policy package”, but Executive Board member Sabine Lautenschläger and Governing Council member Klass Knot agreeing that it is too early for a huge package now.
From the beginning of this week, Nasdaq 100 drifted lower, but yesterday it managed to test its short-term upside support line taken from the low of August 25th, from which it was then able to rebound strongly. Now we are seeing that the cash index is moving further up, away from that upside line, hence why we will remain somewhat bullish for now.
Given the strong rebound from the aforementioned upside line, we will continue aiming higher. But in order to get slightly more comfortable with the upside, we will wait for a clear break above the 7890 barrier, marked by the high of last week. This way, Nasdaq 100 would confirm a forthcoming higher high and it could travel to the next potential resistance area, at 7940, which is marked by the low of July 29th and by an intraday swing low of July 30th. If the buyers see that area only as a temporary obstacle on the way higher, its break could send the price further north, possibly aiming for the psychological 8000 level, marked near the high of August 1st.
On the downside, we will start examining lower areas if we see a break of the aforementioned upside line and a price-drop below the 7740 hurdle, marked by yesterday’s low. This way the index could slide to the 7661 zone, which is an intraday swing low of September 4th. Nasdaq 100 might get a hold-up around there, or even correct slightly higher. But if the price continues to trade below the 7740 barrier, this might be seen as another opportunity for the sellers to step in and drive the index down. If this time the 7661 zone is not able to withstand the bear-pressure, its break could lead the price to the 7583 level, marked by the low of September 3rd.
After its reversal to the upside on August 25th, CAD/JPY continues to drift higher, trading above a short-term tentative upside line taken from the low of that day. But the latest rally has forced the pair to distance itself from that line, so although the rate may continue accelerating further north, there is a possibility to see some correction before another leg of buying, hence why we will stay cautiously bullish for now.
If the pair moves a bit higher but struggles to push through the 82.13 barrier right now, which is marked by the low July 23rd, it may be forced to correct slightly lower, possibly sliding back to the 81.60 hurdle, marked by yesterday’s intraday swing high. If the bulls see that area as a good opportunity to step back in, the rate could once again accelerate higher, potentially aiming for the 82.13 zone, a break of which could send CAD/JPY towards the 82.36 hurdle, or even the 82.81 level, marked by the low and the high of July 31st, respectively.
Alternatively, If the rate starts sliding below the 81.30 hurdle, marked by yesterday’s low, this could trigger some short-term selling activity, which may push the pair for a larger correction down. CAD/JPY could then bypass the 81.03 obstacle and target the area between the 80.59 and 80.72, marked by the low of September 9th and by an intraday swing high of August 13th. Also, this is where the rate might test the 200 EMA on the 4-hour chart. That said, if the bears are still feeling comfortable, they may continue pressuring the pair and it may slide to the 80.24 zone, which is near the highs of August 29th and 30th. Around there, CAD/JPY could also test the aforementioned upside line, which could provide some additional support.
From the US, the PPIs for August are coming out, just a day ahead of the CPIs. Both the headline and core rates are expected to have ticked up to +1.8% yoy and +2.2% yoy from +1.7% and 2.1% respectively, which could raise speculation that the CPIs may move in a similar fashion.
With regards to the energy market, the EIA (Energy Information Administration) weekly report on crude oil inventories. Expectations are for a 2.600mn barrels slide following a 4.771mn decline the week before. However, bearing in mind that, yesterday, the API report revealed a 7.200mn tumble, we would consider the risks surrounding the EIA forecast as tilted to the downside.
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