Equities tumbled, while the safe-haven yen skyrocketed after US President Trump threatened to impose fresh tariffs on the remaining of the Chinese products imported to the US. The fears of further escalation in the US-China trade dispute prompted investors to increase their Fed-cut bets, which may be adjusted again today after the US jobs data are out. Yesterday, we also had a BoE decision, with British policymakers keeping their policy and guidance unchanged.
The dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained against AUD, GBP, NZD and NOK in that order, while it depreciated against JPY, CHF EUR and SEK. The greenback was found virtually unchanged against CAD.
The skyrocketing of the yen, alongside the strengthening of the franc and the weakening of the commodity-linked currencies, suggests that, at some point, investors were spooked, reduced their risk exposure and sought shelter in safe havens. This is evident by the performance in the equity market as well. Although most major EU bourses closed in positive territory, all three of the US indices traded south, with the beating rolling into the Asian trading today. Both Japan’s Nikkei 225 and China’s Shanghai Composite fell 2.20% and 1.41% respectively.
The trigger behind the turbulence was comments by US President Trump, who said that he will proceed with a 10% tariff rate on the remaining Chinese imports, starting on September 1st. The announcement comes just a day after a round of negotiations in Shanghai, which was reportedly constructive and allowed more talks to follow in September. That said, it seems that Trump was not so satisfied and decided to end the ceasefire he agreed just a month ago with his Chinese counterpart Xi Jinping at the G20 summit. There were also reports that the US President is scheduled to make a statement on trade with the EU today, where fresh threats may throw the financial world into a deeper turmoil.
The news hit oil prices as well, as fears of escalating tensions also mean concerns over global oil demand. What’s more, investors brought forth again their bets with regards to more cuts by the Fed, as a prolonged trade war may have more adverse effects on the US economy and thereby force policymakers to cut more aggressively than they hinted on Wednesday. According to the Fed funds futures, the chance for the next quarter-point cut to take place in September has surged to nearly 87% from around 57% yesterday morning, while such a move is more-than-fully priced in for October. A third cut is brought back to January, after being pushed to June on Wednesday due to the FOMC’s “hawkish” cut.
What could affect those expectations today is the US employment report for July. Nonfarm payrolls are anticipated to have risen 164k, less than June’s 224k, while the unemployment rate is expected to have held steady at 3.7%. Average hourly earnings are forecast to have grown +0.2% mom, the same pace as in June, which may leave the yoy rate unchanged at +3.1%. Overall, the forecasts point to a decent report, suggesting that another Fed cut is not imminent. Thus, encouraging prints may ease somewhat investors' expectations over a September cut. However, given the increasing fears over further escalation in the US-China trade dispute, we doubt that market participants will be confident enough to adjust their bets back to the levels they were after the FOMC decision.
Flying from the US to the UK, yesterday, we also had a BoE policy decision. The Bank decided to keep monetary policy unchanged and maintained the view that conditional upon a smooth Brexit, increases in interest rates at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target. In the Inflation Report, officials downgraded their growth projections, but upgraded their inflation ones, while noting that whatever form Brexit takes, the response will not be automatic and could be in either direction.
The pound traded slightly higher in the aftermath of the decision, perhaps due to the fact that heading into the meeting, there were decent expectations that the Bank may abandon its hiking bias. However, the gains were short-lived, with the currency coming back under selling interest. Today, it was found lower against all but one of the other G10s, with the exception being the Australian dollar. In our view, the British currency failed to hold onto its gains as the increased fears over a no-deal Brexit did not allow investors to trust the Bank’s guidance which is conditional upon an orderly divorce. With Brexit being the main driver in town for the pound, we stick to our guns that PM Johnson’s position to exit the EU with or without a deal, combined with the EU’s stance that the deal agreed with Theresa May is not negotiable, is likely to keep the overall downtrend intact.
Yesterday, it seemed that Nasdaq 100 had a good chance to move higher, as the index made a comeback to the psychological 8000 zone. But Trump mixed the cards up again by threatening to impose new tariffs on China, which the market did not take in a positive way. The index sold off heavily and broke its short-term tentative upside line taken from the low of June 25th. The slide continued and the index formed a new low for the week. The price even moved lower after hours on the cash index, where it found support near the 7748 hurdle. At the same time, Nasdaq 100 is back below the 200 EMA on the 4-hour chart, which may worry buyers. There is a possibility to see a small correction back up again, but given the current risk-off sentiment, the index might drift to the downside, at least in the short run.
A small rise in the price could lift it to the 7807 area, marked by the intraday swing low of July 31st, or even a bit higher, to test the 200 EMA. If the index struggles to push above those two obstacles, this is when the sellers may re-enter the game and send Nasdaq 100 lower, initially aiming for the recent low, at 7748. A break of that zone may put even more pressure on the index, as it would confirm a forthcoming lower low and the price may slide to the 7718 mark, which is the lowest point of July. If that support area is a no-match for the sellers, a break of that mark may open the door for further declines, targeting the 7637 level, marked by the low of June 28th.
In order to aim higher again, ideally, we would like to see a move back above the aforementioned upside line and a push above the 7938 barrier, marked by the low of July 29th and by the intraday swing low of July 30th. This way more buyers could see this as a good opportunity to step in and drive Nasdaq 100 to the psychological 8000 obstacle, a break of which could clear the path to the 8034 level, which is the current all-time high.
After an increased yen-buying yesterday, all the major currencies sold off against it, with GBP being no exception. The pound was already very much on the weaker side recently, and the yen buying has pushed GBP/JPY further down, to trade at November 2016 levels. The pair is still trading below a short-term tentative downside resistance line taken from the high of May 21st. We believe that, even if the rate corrects slightly higher, still the Brexit drama and the current risk-off mood may weigh in on the pair, and force it to slide further, hence why will remain bearish for now.
A small move lower again could test one of the key support areas, at 129.07, which is the high of November 1st and the low of November 6th, 2016. The rate might rebound from there and move back up for a bit of correction. But if the pair struggles move back above the 130.24 hurdle, which is the high of November 6th, 2016, we may see the bears re-entering the field and driving GBP/JPY back down. First, we will target the 129.07 obstacle, a break of which could open the door to the 126.70 level, marked by the low of November 9th.
If rate suddenly climbs higher and breaks above the 131.55 hurdle, marked by the low of July 30th, this may attract a few more buyers and lead GBP/JPY to a larger correction. The pair could then move closer to the 133.00 area, which is the high of July 31st. It might stall there initially, or even correct to the downside a bit. But if the bulls are still feeling comfortable in pushing the pair a bit higher, a break of that resistance area, at 133.00, could send GBP/JPY to the 133.85 level, or even closer to the aforementioned downside line for a quick test.
Apart from the US employment report, we also get the Eurozone’s retail sales for June, which are expected to have rebounded 0.2% after falling 0.3% in May. The UK construction PMI for July is coming out as well and expectations are for a rise to 46.0 from 43.1. In Canada, trade figures for June are forecast to show that the nation’s surplus has turned into a deficit.
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