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by Charalambos Pissouros

Risk Appetite Gets Hit Again as Trade-War Fears Heighten

Market Bear

The dollar traded lower against most of the other G10 currencies on Monday. It gained only against AUD and NZD, while it ended the day virtually unchanged against CAD. The greenback underperformed the most against EUR, GBP and SEK in that order. The safe havens JPY and CHF also gained against their US counterpart.

USD perf 260618

Once again, the main theme for the markets was “Trade war”. Risk currencies and global equity indices underperformed, while safe havens came under buying interest following weekend reports that the US Treasury Department is considering preventing firms with at least 25% of Chinese ownership from investing in US companies involved with “industrially significant technology”. The reports came after Trump’s threat on Friday for imposing 20% tariffs to EU cars imported to the US, with the EU saying that it would retaliate.

On Monday, US Treasury Secretary Steven Mnuchin tweeted that the proposed restrictions on foreign investment in US technology will not only apply to China, but also to “all countries that are trying to steal our technology”. However, hours after, one of Trump’s top trade advisors, Peter Navarro said “There's no plans to impose investment restrictions on any countries that are interfering in any way with our country. This is not the plan”.

Navarro’s comments came in contrast to previous headlines and helped US stock indices to rebound from their lows, but to still close the day in the red. The S&P 500 and the Dow Jones ended the day around 1.4% and 1.3% lower, while Nasdaq 100, which largely consists of tech firms, dropped 2.2%. As for the currency market, JPY and CHF came under some selling interest after Navarro’s remarks, but they quickly recovered again to stay on the front foot against their US counterpart.

As for our view, it seems that this saga will continue with many more episodes ahead of us. On Sunday, China’s central bank (PBOC) said that it would cut its reserve required ratio by 50bps, a move that would release 700 bn yuan in liquidity, as trade-war fears have heightened concerns over the nation’s economic outlook. Although the move was widely expected following signals by the Bank last week, the liquidity amount that would be released may have been bigger than expected and thus, the yuan came under more selling interest. Overnight, China’s press said that the reserve ratio may be lowered again in the second half of the year. If the yuan continues falling against its US counterpart, Chinese exports to the US are likely to become cheaper, something that could offset some of the tariff effects, and thereby keep Chinese goods attractive. This would make it harder for the trade surplus China has with the US to be reduced, which could lead Washington to more threats and actions.

USD/JPY – Technical Outlook

As trade war resumes, it is having its effect on USD/JPY, which, due to yen’s safe-haven status, tends to slide in times of uncertainty. This has forced the pair to move lower and break the mid-term upwards moving trendline, taken from the low of the 25th of March, a break which increases the bearish sentiment and could lead to further declines.

Because the aforementioned upwards moving trendline has been broken, at this point, we will aim for lower levels. Yesterday, USD/JPY found its support at around the 109.35 mark, which if broken today, could open the way towards the 109.20 level, or slightly below that, the 109.00 zone. If the yen-buying continues, then the bears could drive the pair towards the 108.40 or even the 108.10 levels, the last being the lowest point in May.

Alternatively, a strong reversal back up to the psychological 110.00 level could spark the bull interest again, as the move would place USD/JPY above the previously mentioned trendline. If, eventually, we get a break above the 110.00, this could change the short-term outlook towards a more bullish one and the pair could start initially aiming for the 110.20 area, a break of which could move USD/JPY back up to the 110.75 zone. Just a few pips above lies another important level of resistance at 110.90, marked near the high the 15th of June.

2018.06.26 USDJPY 240 Logo

Nasdaq 100 – Technical Outlook

Yesterday, Nasdaq 100 was hit by heavy selling following the reports on tech restrictions. The index tumbled below the mid-term index breaking its mid-term upwards moving trendline, drawn from the lows of the 25th of April, which in our view, turned the short-term outlook to negative.

Yesterday, the index found support at around the 6975 area, from which it bounced back up and closed just a few points below the 7040 level. Today, we are seeing that the cash index is currently trading slightly above yesterday’s close, which could be consider as a corrective move. There is potential for Nasdaq 100 to make a move towards the 7075 zone, from which it could reverse back down and aim for the aforementioned low at around 6975. A break below that level could trigger some more selling and the price could drop to 6885. If that area is not able to withhold, then the next potential area of support to monitor could be the 6823 level, marked by the low of 23rd of May.

On the upside, if Nasdaq 100 breaks the 7075 area and continues to head higher, we could then start considering a touch of the 7135 level, which could act as a strong resistance, because in the recent past, it acted as good support level. If the buying continues and the bulls start feeling confident, we could end up seeing the index moving to test from underneath the previously mentioned upwards moving trendline.

2018.06.26 Nasdaq 100 240 Logo

As for Today’s Events

The calendar appears to be relatively light, with the most important indicator being the US Conference Board Consumer Confidence index for June. Expectations have changed and now suggest that the index slid fractionally, to 127.6 from 128.0 in May.

Tonight, during the Asian morning Wednesday, we get New Zealand’s trade balance data for May.

We also have four speakers on today’s agenda: BoE MPC members Ian McCafferty and Jonathan Haskel, as well as Atlanta Fed President Raphael Bostic and Dallas Fed President Robert Kaplan.

 

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