The dollar traded higher against most of the other major currencies, while most major equity indices pulled back as risk appetite eased somewhat. The euro edged north following hawkish remarks by ECB President Draghi, while the pound recovered some of Friday’s lost ground on Brexit minister Raab’s comments.
The dollar traded higher against most of the other G10 currencies yesterday. It gained the most versus CHF, NZD, and AUD in that order, while it lost ground only against GBP. The greenback traded virtually unchanged against EUR, NOK and SEK.
Even though the safe-haven yen traded somewhat lower yesterday, the strengthening of the US dollar and the weakening of the commodity-linked Aussie and Kiwi suggest a setback in risk appetite. This is also supported by the performance in equity markets. Most major EU and US indices closed their sessions in the red. The exemption was Nasdaq, which ended fractionally positive. During the Asian morning Tuesday, Japan’s Nikkei 225 closed slightly up, but China’s Shanghai Composite was 0.58% down.
Yesterday, the US tariffs over USD 200bn of Chinese imports went into effect and China retaliated with tariffs on USD 60bn worth of US goods. Although this was something already expected, market sentiment may have got hurt somewhat following weekend reports that China decided to cancel talks with the US scheduled for this week. That said, yesterday the nation noted that it will keep the door open for future negotiations, but only if those are based on mutual respect.
Now, the ball is thrown back to the US court. US President Trump has repeatedly threatened with tariffs on the remaining USD 267bn worth of Chinese imports if China retaliates against his latest round of duties. However, we stick to our guns that further escalation may continue to have diminishing market effects, especially if the measures are already flagged well ahead before the official announcement. Investors have been digesting the idea of a full-blown trade war for months now, and on top of that, they are already aware of what could be the next steps. Yesterday’s market reaction corroborates our view. Although most major equity indices ended their session in the red, very few lost more than 1.00%.
Back to the currencies, the euro ended the day virtually unchanged against its US counterpart, but the ride was not as quiet as it seems. The common currency rallied to hit resistance near 1.1815 against the greenback after ECB President Mario Draghi said that he sees a “relatively vigorous” pickup in underlying inflation as the tightening labor market is resulting accelerating wage growth. That said, the euro pulled back later in the day, to settle near its opening levels.
Draghi’s comments follow weekend remarks from ECB Governing Council member Ewald Nowotny, who said that fixed interest rates for another entire year is something the Council should have a look at and ask if its really sensible. He also noted that he is more optimistic on inflation than the majority in the ECB.
The combination of these remarks may have encouraged some market participants to bring somewhat forth their ECB hike expectations, but we stick to our guns that there is not much more room left for those expectations to come forth further. Even though Nowotny questioned the Bank’s guidance on interest rates, Draghi reiterated the pledge to keep interest rates at current levels “at least through the summer of 2019”, which, in our view, means that interest rates can start rising in September 2019 the earliest. In any case, all these comments increase the likelihood for the September 2019 gathering to be a live one.
Last week, the Dow Jones Industrial Average index managed to hit new all-time highs, by breaking its previous record set on the 29th of January. Looking at the daily chart, the index is still holding on to its medium-term upwards moving support line, taken from the low of the 2nd of July. We can see that, even though the DJIA managed to hit new all-time highs, still, it quickly got back down, below the January’s highest level, which was near 26703. For now, we could see a follow-through of the corrective move to the downside, at least in the short-run, but as long as the aforementioned support line remains intact, we will stay bullish over the near-term outlook.
If the Dow Jones continues to slide, it could easily reach the 26225 area, marked by the low of the 19th of September or the aforementioned upside line. This could also be the area where the price could stall for a while, but the bulls could try and take advantage of it and drive the index back up.
On the other hand, for us to get comfortable with the downside, we would need to see a strong break and a close below 25880. This will confirm the break below the upside support line and thus, we could start examining the potential for the Dow Jones to move down to 25600, which held the price from dropping lower on the 23rd of August. Further declines could open the path to the next potential support around the 25145 hurdle, marked by the low of the 16th of August.
The pound was the main gainer among the G10s yesterday, following comments by Brexit minister Dominic Raab, who said that he is confident that the UK will eventually find a deal with the EU. “We keep on negotiating in good faith, we try and get the best deal we can, but we are ready for all eventualities. We’ll keep negotiating in good faith. I’m confident we’ll get there” the minister said.
On Friday, sterling tumbled following newspaper headlines noting that UK PM May had been “humiliated” in Salzburg and continued to slide after May said that the talks with the EU had hit an impasse, as her blueprint for Brexit was rejected. “No deal is better than a bad deal” she added.
In our view, with any BoE hike expectations well pushed into next year, the pound is meant to stay extremely sensitive on headlines surrounding Brexit. Rhetoric by itself is enough to cause violent swings in both directions, at least until things are finally sorted out, or not. We still believe that the October summit could be the “moment of truth” as EU Chief Negotiator Michel Barnier and the President of the EU Council Donald Tusk noted last week. If the two sides fail to make any material progress at that meeting, this will unwind hopes for a final deal in November and could revive fears for a disorderly Brexit.
After a strong move to the upside last week, it seems that GBP/JPY is starting to lose steam. On Friday, the bulls may have been spooked by the statement delivered by Theresa May. Although the pair rebounded yesterday, the recovery was not enough to convince us that Friday’s correction is over. Looking at the 4-hour chart, we can see that the pair is still trading above its upside support line taken from the low of the 15th of August, which keeps the near-term outlook somewhat positive, but given that the pair currently sits well above that line, there is chance for more correction to the downside, before the pair could make a move higher again.
A move down and a break of the 147.60 level, could open the path lower towards the 146.95 zone, marked by yesterday’s low. If that zone is not able to withhold the rate from dropping further, this could interest even more bears, who could start jumping in driving GBP/JPY lower to the next potential area of support at 146.25, which was the low of the 14th of September. If the bears remain in control, then a further slide could lead to a test of the 145.70, or even of the aforementioned upside support line. The line could act as a potential bouncing ground, where the bulls could take advantage of the lower rate.
Alternatively, a move and a close above the 148.20 barrier, could set the stage for a bit more upside. The next resistance level to watch could be at 149.30, marked by the intraday swing low of the 21st of September. A break of that level, could open the path towards the slightly higher resistance area at 149.70, marked by the peak of the 21st of September.
The calendar appears relatively light today with the only noteworthy releases being the US Conference Board consumer confidence index and the American Petroleum Institute (API) weekly report on crude oil inventory.
Tonight, during the Asian morning Wednesday, New Zealand’s trade balance for August is coming out, as well as the BoJ’s own core CPI for the same month.
As for the speakers, we have three scheduled for today: ECB Chief Economist Peter Praet, ECB Executive Board member Benoit Coeure, and BoE MPC member Gertjan Vlieghe.
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