Posted on: 30 Aug, 2019
China left the door open to a US visit next month, which led to an immediate reversal of the risk profile even if we are far from out of the woods. The US Dollar and the Canadian Dollar were the main beneficiaries, even if the performance of the rest of G8 FX leaves the impression that the push up in risk is a half-baked type with participants applying caution.
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The back and forth in the trade war keeps the market guessing, which is causing, as highlighted in yesterday's webinar, an erratic two-way vol in the market. It took only one headline via the Chinese Commerce Ministry stating that discussions are still underway to keep the pretense of further trade talks going for risk appetite to be back in vogue. China also implied that a walk back in its retaliatory actions cannot be ruled out if the US creates the environment to do so. The US Dollar and the Canadian Dollar were the main beneficiaries, even if the performance of the rest of G8 FX leaves the impression that the push up in risk, which was quite aggressive in the S&P 500, is a half-baked type with participants applying caution, with the likes of the Aussie and Kiwi, which you would expect to do well under this environment, lagging behind. Even the Japanese Yen, in particular its equally-weighted index that I monitor every day, is not yet communicating any trend reversal. Same applies to fixed-income, little reaction with the US30y hovering around an all-time low. The Sterling remains in a wait-and-see mode, while the Euro is in no man's land as I elaborate in the currencies' section.
The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
One single headline is all it took: China left the door open to a US visit next month, which led t an immediate reversal of the risk profile even if we are far from out of the woods. Further comments by China's commerce ministry indicated that the important thing is that both sides continue negotiations and are creating the necessary conditions for that, noting that “the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war.” On the flip side, even if dismissed by the market, China reminded journalists that they have ample retaliatory measures to counteract the US tariffs. The headlines confirm that the Sept talks have not been ruled out at a time when one could have assumed they were on the brink of collapse. The market will be on the watch to find out if the talks eventually happen and whether or not these are conducted at the highest level. Meanwhile, Trump said that lower-level US-China trade talks took place on Thursday.
UK's Corbyn aims to revert parliament suspension: UK’s Labour leader Corbyn is looking to gather enough support by MPs to block UK PM Johnson’s decision of shutting down parliament. According to the Labour Party leader, parliament should fast track and draw new legislation rapidly to prevent a no-deal Brexit, adding that he will put a vote of confidence "at the appropriate moment.” So far, the Sterling is not reacting too lively to the headlines and it has traded in a rather uneventful manner in the last 24h.
IMF throws a curveball to the US: The IMF, via Alfred Schipke, IMF's senior resident representative to China, finds no fault in China letting the Yuan weakens if the trade war escalates, according to the South China Morning Post. Alfred notes that “if there is a shock, the exchange rate ought to be part of the adjustment and should be allowed to depreciate. That is what exchange rates are for”, further adding that the market should be the ultimate mechanism where the currency value is determined. This is a thorny topic as China was labeled a ‘currency manipulator’ by Donald Trump in annual review following the decision by the Chinese government to let the Yuan depreciate below 7.00.
ECB's Knot argues against QE: In an interesting turn of events, even if the preponderance of evidence is still largely skewed towards a bold QE package to be announced by Sept 12th, ECB's member Knot said there is no need to resume the QE program in what he thinks are overdone expectations in the Sept meeting. The ECB member sees no 'value-added' in ECB launching a new package of measures. The Euro was given a jolt on the headline, which appears to be aimed at taming a tad the expectations ahead of the Sept meeting, perhaps in an effort to re-calibrate the balance for a stronger bearish effect later on.
ECB's Nowotny joins Knot on hawkish hint: ECB member and Australian Central Bank Governor Nowotny, spoke in an interview to the Wiener Zeitung newspaper, implying that Central banks should be ready to disappoint markets at times. Nowotny said that “in past years we perhaps followed markets' expectations too intensively and avoided disappointing them. I am of the opinion that central banks should be the decisive institution and must therefore sometimes disappoint markets."
But Lagarde throws cold water: Besides, we know the market is a forward-looking discounting mechanism, which is why the positive EUR impact from Knot’s or Nowotny’s hints was more than counterbalanced by the remarks made by the soon-to-be ECB President Christine Lagarde, who wrote in response to a parliamentary question that the economy faces downside risks, inflation is subdued and it’s “therefore clear that monetary policy needs to remain highly accommodative for the foreseeable future”, adding that “the precise mix of instruments deployed will have to depend on the nature of the shocks affecting the outlook for inflation as well as on financial market conditions.”
German CPI softer-than-expected: Another reason why the statements by ECB’s Knot or Nowotny may ultimately fall on deaf ears is due to the mounting arguments that the ECB will act with determination amid the continuous deterioration of the German data, with the latest set of numbers, via the August preliminary CPI, coming softer than expected at -0.2% vs -0.1% m/m expected.
US Q2 growth holds up on stubborn consumers: The story on the other side of the pond (US) is rather contrasting after the Q2 GDP second reading met earlier estimates at +2.0%, which follows a 3.1% in Q1. One of the key drivers to sustain the pace of growth just above the 2% mark was personal consumption, consumer spending on durables as well as corporate profits. Meanwhile, the sluggish performance in business investment, housing and exports continue.
Australia's Capex a bad omen for the Aussie economy: Australia’s private capital expenditure survey for Q2 (Capex) fell much more than expected at -0.5%, which is a major disappointing result considering that the RBA is also fixated in getting momentum in the economy going via an increase in business investment intentions. The lesser the expectations for capital expenditure, the bleaker the outlook for the jobs market. There was a silver lining though as the "3rd estimate" came in at AUD 113.4bn as expected even if this may not represent an input good enough for the RBA to gain much optimism.
NZ business confidence at 11-year low: NZ Aug business confidence printed -52.3 vs -44.3 last, an 11-year low, with the business outlook index also deteriorating to -0.5 from 5.0. Even the survey on the inflation expectations index came on the soft side at 1.70% from 1.81% prior, lowest since late 2016. In the official statement, the ANZ economics team stated that “the outlook for the economy appears to be deteriorating further, with firms extremely downbeat despite easier monetary conditions, fairly robust commodity prices, and positive population growth. Employment and investment intentions fell, and the outlook for profitability is lowest since mid-2009.
China data on Saturday and tariff hikes on Monday: Over the weekend, we will get China’s official PMI, which may cause some gap risks, especially in the AUD as the favorite proxy to trade the Chinese fundamentals. The data is expected to come around the same levels as the prior month just below the 50.00 level. It’s also worth reminding traders, as a symbolic date, that next Monday marks the start of the new hikes in tariffs from the US to China from a 25% tariff rate on ~$250bn worth of Chinese imports to 30% and 15% tariffs will also come into effect on roughly $110bn worth of additional imports, including agricultural products, antiques, and clothing among others.
The EUR index is located in what I’d consider no man’s land, trapped right in the middle of a 2-week range, with the risk of further buying at wholesale levels of support still a clear outcome I can envision judging by the elevated level of the RWI (risk-weighted index) in orange, which accounts for the S&P 500 and the US 30y bond yields in equal weight distribution. Based on the index alone, there are no clues to be found as per the next direction this Friday.
The GBP index, even if the uncertainty around Brexit continues to reign, the index remains in a stubborn bullish trend, with the latest sell-side episode from Wed when UK PM got the approval by the Queen to suspend parliament for 5 weeks found buyers at the baseline, which as a reminder is the delimitation that acts as a roadmap to determine the bias. Remember, GBP is going to get quite messy to trade with as the Brexit-induced vol ratchets up from Sept.
The USD index has broken into new highs and out of the G8 FX complex, it looks poised to be in pole-position to find further strength as the bullish sentiment has been taken to the next level. As a manifestation of this growing demand for the USD, and technically speaking, the breakout of a key resistance level with a close at the highs of the day bodes well going forward. The elevated levels of risk aversion still present in the market, as the RWI depicts, should still be an overall positive influence for the USD as investors seek protection in the allure of the world’s reserve currency at a time when the chatter of a global shortage of USDs keeps on growing.
The CAD index, in a move akin to the bullish resolution in the USD index, has also broken into new highs not seen since early August as the risk improves, mainly in equities. The reason the RWI remains depressed as bond traders are not buying into the frenzy of trade war headlines, which sooner or later, see price catching down. The outlook for the Canadian Dollar in the next 24h looks quite bright and risks are clearly skewed to the upside.
The AUD index has fallen way short of the demand one would expect on the back of the positive comments by China’s Commerce Ministry, which tells me the underlying buy-side interest remains limited. Technicals also validate this prognosis by price finding a cap in the form of the daily 13-ema (baseline), which makes the risk of further falls from here a real possibility. Remember to pay attention to the weekend Chinese PMI which may create gaps in the AUD.
The NZD index is on a one-way street journey with no signs of abating. If you are a trend-following trader in lower timeframes, the NZD has been an oasis of opportunities. They say the trend is your friend and I see no evidence whatsoever, neither fundamentally nor technically to engage in an activity other than sell-side action in this market. Thursdays ANZ business confidence at a 1-year low was quite a shocker as reflected by the depreciation in the NZD even at a time when the risk dynamics would suggest buyers should have emerged.
The JPY index has forged the strongest uptrend in the forex market during August and if you think the outlook is finally starting to roll over in favor of the bears, think twice. The index is retesting the baseline, which has proven to be a technical bedrock that buyers have leaned against to regroup and jump on the Yen bullish bandwagon. At the state of this Friday, looks like it’s happening again, with buyers re-emerging off the moving average (baseline). The risk-weighted index (in orange) is far from hinting at protracted sell-side pressures.
The CHF index has found an area of support even if the way it is being attacked by sellers via the creation of a bearish outside day does carry the danger of a potential breakout. However, with the RWI (in orange) this high, one would expect the buying interest to be ample. Therefore, I do perceive the potential for value trading as a buyer but technicals are not congruent. What’s clear to me is that until the Swissy breaks support, I find it hard to commit on the CHF.
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