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Trump stokes trade fears again as EM currencies falter

Market Overview

The positive market sentiment that came with the drive towards a (seemingly rushed) deal in the NAFTA renegotiations has just begun to slip away again. This has come as reports suggest the US is ready to go to the next level with China and impose tariffs on $200bn of imports from China, whilst also Donald Trump has also said in an interview with Bloomberg that the EU offer to have no tariffs on cars is “not good enough”. What he giveth with one hand, he taketh with another. This comes as pressure mounts further on emerging markets (EM) currencies, with the Argentinian peso and the Turkish lira both coming under huge strain in recent days. The weakness of the Turkish lira, which dominated the outlook for risk appetite a couple of weeks ago has now lost over 10% of its value again this week, whilst the Argentinian peso is 12% weaker today! This concern for EM currencies (especially those with painful current account deficits) has helped to support the dollar once more in recent days. Watching how Chinese assets move on this apparent move to ratchet up tensions in the trade dispute could now give a gauge for broader market direction. The Shanghai B Index was mildly lower today, whilst interestingly, the yuan has clawed back yesterday’s losses. The elevated fear of the renewed trade dispute, exacerbated by Donald Trump criticizing the WTO, has seen Wall Street dropping back overnight, but futures are relatively stable at the moment. There is also the added aspect of China PMIs which improved overnight. China Manufacturing PMI rising to 51.3 (51.0 exp, 51.2 last) whilst China Non-Manufacturing PMI improved to 54.2 (53.8 exp, 54.0 last month), however the good news was tempered by a disappointment in the new export orders which suggests future data may not look as positive.

China US trade dispute

Wall Street closed lower to break a run of gains this week, with the S&P 500 -0.4% at 2901, with futures basically flat today. This means that Asian markets have been mixed overnight (the Nikkei has been all but flat overnight) whilst European markets are just ticking mildly lower in early moves, but the DAX is likely to underperform. In forex, there is a sense that G4 currencies are all relatively stable, but the commodity currencies are seeing weakness on the ramp up in trade tensions, with AUD and NZD weaker again. In commodities, gold has found a degree of support with a lack of decisive direction on the dollar still, whilst oil is broadly supported again in its rally.

The month ends with traders turning focus to Eurozone inflation. There was a slight hint on German inflation yesterday that there could be a touch of a downward surprise on Eurozone inflation today, announced at 1000BST. Consensus is not expecting any move on headline inflation for August which is forecast to come in at +2.1% (+2.1% in July), whilst core inflation is expected to remain at +1.1% (+1.1% in July).  Eurozone unemployment for July is also at 1000BST and is expected to show a dip to 8.2% (from 8.3% in June). Traders will also be watching for the revised Michigan Sentiment at 1500BST which is expected to see a mild positive revision to 95.5 (from 95.3 as the prelim) which would be confirmed as down from 97.9.


Chart of the Day – AUD/JPY   

As the market broke the key support at 80.50 in mid-August the outlook looked to be turning decidedly more negative. The ensuing technical rally has now given traders another chance to sell the rally. The reaction of the market in the past few sessions would suggest that perhaps they are ready to move. A repeated failure at 81.80 throughout the past week suggests the bulls have been struggling for momentum, whilst yesterday’s decisive bear candle points to a shift in sentiment again. A mini uptrend channel has been broken, and the market is already testing the old range low at 80.50 which is now a key higher low in the recent rebound. The resistance built up this week also comes as a six week downtrend also kicks back in. The RSI has unwound to turn lower again around 50 which is a concern on momentum whilst the Stochastics have also crossed lower and MACD turned down. A breach of initial support at 80.50 opens a retest of the August low at 79.70. A move above 81.80 implies a move back towards the old mid-range pivot at 82.60 again.



The bulls have just taken a step back in the past few sessions and the intensity of the rally has come off. Since the run to Tuesday’s high of $1.1735 there has been a consolidation that has seen the market drift sideways in a move that has now breached the two week uptrend. Yesterday’s negative candle which lost over 30 pips has not changed the outlook but it does also mean that the market has backed away from a test of the key July highs at $1.1745. The key move would be if the market now posted a second bear candle and also closed back below the near term pivot around $1.1630. That would then begin to question the recovery. Momentum indicators have plateaued as the market has consolidated. The hourly chart reflects this consolidation, with initial support at $1.1640.



Since the outlook changing candle on Wednesday which took Cable decisively higher, the sterling recovery has just started to consolidate. Yesterday’s minor decline has done little to unwind the move higher and actually is more of a confirmation move, given the dollar strength that was broadly seen across the majors yesterday. The recovery in the momentum indicators subsequently remains on track and the market is holding on to $1.3000 once more this morning. There is now a basis of support at $1.2955, whilst the uptrend is supportive at $1.2870 today. With intraday weakness now being supported, there is initial resistance at $1.3040 on the hourly chart, and a move above $1.3080 would now continue the rally and open $1.3170/$1.3215.



For several weeks it has been difficult for USD/JPY to gain any real traction and once more just when it looked as though the bulls were ready to make a decisive move, they get reigned back in again. Wednesday’s bull candle that drove a break above 111.40 has been completely unwound by a corrective slip again yesterday as a bear candle cut 70 pips off the price yesterday to bring the market back to the early week consolidation levels. This is now dragging on the improvement on momentum indicators. It also means that another negative candle posted today would then see the outlook flipping lower to eye a test of 110.00 pivot and the August low at 109.75 once more. However, what is more likely is that the choppy trading will continue for a while yet and the hourly chart is again showing the market stretched on the oscillating momentum indicators and ready to tick higher today as yesterday’s move unwinds. We are still waiting for a catalyst on Dollar/Yen and it would appear that we are no closer to finding it.



The mini uptrend of recovery in the past two weeks is just now being breached as the market continues to consolidate sideways. The recovery momentum of earlier in the week has gradually ebbed away as the market has consolidated around $1200. Taken in concert, this run of candlesticks is very neutral throughout this week, leading to momentum indicators losing their recovery momentum on the daily chart. This is reflected on the hourly chart as the indicators take on a more neutral standing around flat moving averages. Support at $1195 with resistance at $1208 protecting $1214, however, this is another market increasingly in need of a catalyst now. A close below $1195 would suggest the bears are regaining control.



A solid positive session has continued the recovery higher on WTI and is now testing the key resistance between $69.90/$71.10. Momentum indicators continue to advance strongly in the recovery, with the RSI well above 50 and MACD lines accelerating higher and Stochastics above 80. The two week uptrend is supportive at $68.40 today which comes in above the higher low of $68.20 from earlier in the week. Intraday corrective moves continue to be seen as a chance to buy.  The hourly chart shows $68.75/$69.50 is initially supportive. A closing breakout above $71.10 would be strongly bullish now.


Dow Jones Industrial Average

How the market reacts to the first negative close of the week will be interesting. The run higher has just been showing signs of losing upside momentum in the past couple of sessions and now with the negative close and bearish candlestick, will this induce a mini bout of profit taking? The two week uptrend has been broken, whilst the RSI has just slipped back from the high 60s again (a level deemed limited during July and August). The hourly chart is showing a series of mini bear divergences on the hourly RSI, MACD and Stochastics, so a slip back could easily be seen now. A retreat to the 76.4% Fib level at 25,845 and previous breakout support at 25,888 would give a chance to unwind stretched momentum and renew upside potential.  The bulls will remain in control whilst the support at 25,608 is intact.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.