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by Charalambos Pissouros

“Risk-On” Prevails on US-China Hopes, ECB Enters the Spotlight

Risk appetite remained supported yesterday and during the Asian morning today, following more sanguine headlines surrounding the US-China trade saga. China revealed a list of US goods to be exempted from tariffs, while US President Trump announced a delay in tariff increases scheduled for October 1st.  As for today, the spotlight is likely to turn to the ECB, which decides on monetary policy. Investors will be eager to find out whether the Bank will just deliver a 10bps cut in the deposit rate, or something beyond that.

Risk Assets Continue to Gain on US-China “Goodwill” Gestures

The dollar traded higher against most of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained the most against JPY, EUR, and CAD in that order, while it lost ground only against AUD and NZD. The greenback was found virtually unchanged versus NOK and SEK.

USD performance G10 currencies

Despite the Loonie being among the losers, the strengthening of the Aussie and Kiwi combined with the weakening of the yen and franc suggest that market participants continued trading in a risk-on mood. Indeed, major EU and US indices ended their trading in the green, with the exemption being Spain’s IBEX 35, while during the Asian morning today, both Japan’s Nikkei 225 and China’s Shanghai Composite gained 0.75% each.

major global stock indices performance

Once again, the fuel was headlines surrounding the US-China trade sequel. During the early European morning, China’s finance ministry unveiled a list of US goods that would be exempted from tariffs, with the exemptions taking effect on September 17th, while later, during the Asian morning today, US President Donald Trump agreed to delay by two weeks the tariff increases scheduled for October 1st. These gestures increase further investors’ hopes that the world’s two largest economies could find some common ground at the upcoming negotiating round, expected in early October.

That said, our view has not changed. Yes, headlines adding to the likelihood of an eventual “trade truce” may keep market sentiment supported, but we are still reluctant to assume that this could last for long. As we noted yesterday, hopes that a deal is getting closer have been dashed many times in the past, and even after negotiating rounds that have ended on a positive note. Thus, unless we see handshakes and signatures, we cannot rule out things falling apart again.

On Tuesday, we saw the Loonie staying strong despite the slide in oil prices after Trump fired Bolton. However, this was not the case yesterday. Oil prices tumbled again, and to a larger extend yesterday, with the Canadian currency failing to resist. That’s probably why it was the only commodity-linked currency on the weak side of the performance table. The catalyst behind the tumble in oil prices may have been reports saying that Trump discussed easing sanctions imposed on Iran, so it can achieve a meeting with the nation’s President later this month. The same report also added that the ex National Security Advisor John Bolton was against such a step.

Yesterday, we noted that CAD/JPY may be the best proxy for taking advantage of the latest risk-on round of trading. That said, it seems that developments around Iran constitute a risk to that view, as they raise hopes for the Iranian oil production to return to the market at some point soon. This could keep oil prices under selling interest, which could thereby weigh on the Loonie. Thus, it would be good to pay close attention to other sentiment gauges as well. For example, FX pairs that consist of a risk-linked currency and a safe haven, like AUD/JPY, AUD/CHF, NZD/JPY and NZD/CHF.

NZD/CHF – Technical Outlook

From the end of August, NZD/CHF continues to form higher lows, while trading above a short-term upside support line drawn from the low of August 25th. The pair is now trading above its 200 EMA on the 4-hour chart, but is seen struggling to overcome the its key resistance barrier, at 0.6403. For now, we will remain cautiously bullish and wait for a clear break of that resistance barrier before we get excited about more upside.

A break of the above-mentioned 0.6403 zone would confirm a forthcoming higher high and the rate could accelerate to the 0.6425 hurdle, marked by the lows of June 23rd and 24th. If that zone is no match for the buyers, a break of it could lead the pair to the 0.6460 obstacle, which may slow down the rate-acceleration. NZD/CHF might even correct back down from there. But as long as the rate stays above the 0.6403 mark, we will see the path of least resistance to the upside. If NZD/CHF gets quickly picked up by the bulls, they might push it beyond the 0.6460 area and target the 0.6490 level, marked near the highs of June 25th and August 2nd.

Alternatively, a rate-drop below the 0.6360 hurdle, marked by yesterday’s low, could raise concerns over the short-term upside perspective. This is when the pair could slide again towards the 0.6331 zone, which is the low of September 8th, this way placing itself below the 200 EMA. A further decline might target the 0.6304 area, or the aforementioned upside line, which may help support NZD/CHF from moving lower. 

NZD/CHF 4-hour chart technical analysis

Investors on the Edge of Their Seats in Anticipation of the ECB

As for today, all lights are likely to fall on the ECB monetary policy decision. At their latest meeting, ECB policymakers officially opened the door to lower rates and added that additional measures, such as a potential QE restart, may also be introduced.

ECB interest rates

Inflation data for August showed that both the headline and core CPI rates remained unchanged at +1.0% yoy and +0.9% yoy respectively, well below the ECB’s objective of “below, but close to 2%”. Coming on top of comments by ECB member Olli Rehn, who said that “it is important that we come up with a significant and impactful policy package”, this data enhances the case that ECB may indeed proceed with a strong stimulus package this week. Having said that though, two hawkish members have lately raised some doubts on that front. Executive Board member Sabine Lautenschläger said “it is much too early for a huge package”, while ECB member Klass Knot added that there is no need for resuming QE now. According to Eurozone money markets, investors are pricing in more than a 10bps cut in the deposit rate for this gathering. Actually, they see the rate nearly 14bps lower. Therefore, given that a 10bps cut is nearly a done deal for the financial world, all the attention is likely to fall on whether the Bank will decide to introduce something beyond that and if so, on what form any additional measures will take.

As for the euro, if the Bank decides to deliver just a 10bps cut in the deposit rate, the currency could rally as this would disappoint market expectations. Officials would have to deliver something beyond that for the common currency to tumble, perhaps a larger rate decrease, or a 10bps cut accompanied by a QE restart.

EUR/AUD – Technical Outlook

EUR/AUD continues to drift south, trading below a short-term tentative downside resistance line taken from the high of August 30th. This morning, we are already seeing the pair moving below its yesterday’s low, which could be clearing the path to some further declines. Technically, as long as the rate continues to trade below the above-discussed downside line, we could remain somewhat bearish. But let’s not forget about the ECB interest rate decision today, where the outcome may totally reshuffle the whole outlook, hence why, for now, we will take a cautiously-bearish approach.

Given that the pair has already broken the 1.6011 area, which is yesterday’s low, such a move creates an opportunity for the sellers to drag the rate lower, possibly aiming for the 1.5945 zone. That zone is marked by an intraday swing low of July 25th. EUR/AUD might stall around there, or even correct back up a bit. But as long as it continues to trade below the previously-mentioned downside line, we will target lower levels. If the pair slides again and falls below the 1.5945 hurdle, this may send the rate to the 1.5894 area, which is near the lowest point of July.

On the upside, if the aforementioned downside line breaks and the rate climbs above the 1.6120 barrier, marked near the highs of September 9th, 10th and 11th, this may attract more buyers and lift EUR/AUD a bit higher, to the 1.6158 hurdle. That hurdle is the low of September 5th. If the buying interest continues to rise, a break of the 1.6158 obstacle may push the pair further north, possibly targeting the 1.6247 level, marked by the high of September 4th

EUR/AUD 4-hour chart technical analysis

As for the Rest of Today’s Events

During the European morning, we get Germany’s final CPIs for August, which are expected to confirm their preliminary numbers, and Eurozone’s industrial production for July, which is forecast to have slid 0.1% mom, after declining 1.6% in June.

Later in the day, we get the US CPIs for August. The headline rate is anticipated to have remained unchanged at +1.8% yoy, while the core one is forecast to have ticked up to +2.3% yoy from +2.2%. That said, bearing in mind that both the PPI rates for the month moved higher yesterday, we see the risks surrounding the headline forecast as tilted somewhat to the upside.

US CPIs inflation

In any case, although underlying inflation is expected to move further above the FOMC’s inflation objective of 2.0%, we doubt that it could alter much expectations around a 25bps cut by the Fed next week. On Friday, Fed Chair Jerome Powell repeated that they would “act as appropriate” to keep economic expansion on track, comments suggesting that he is indeed leaning towards September cut. That said, combined with the latest optimism surrounding the US-China trade saga as well as the better-than-expected wage growth for August, an uptick in the underlying inflation rate may allow investors to price out some of the basis points they expect to be cut after the September gathering. According to the Fed funds futures, apart from a September quarter-point cut, investors nearly anticipate another one by year end. Initially jobless claims for the week ended on September 6th are also coming out and the forecast suggests a small decline to 215k from 217k the week before.

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