As the trade tensions continue to ratchet up, it seems that traders are taking the glass half full as sentiment remains positive. This latest move by the US to add 10% tariffs on $200bn of Chinese imports has been met by China by a reciprocal tariff on $60bn of US imports. The relief has come in that it could have been worse, with the US tariff of 25% coming in only on 1st January, giving the two sides time to still negotiate. The attitude to risk on this move has been telling though, with equity markets both in Asia and the US (and in Europe for that matter) stronger, whilst the safe haven yen has been the big underperformer. In a further nod to the move back into risk, there was a 5 basis points jump on the US 10 year Treasury yield yesterday. This may have helped Dollar/Yen higher on yield differentials, however, notably there is still a disconnect for yield differentials versus the euro and sterling. The better performance of gold is another indication that market moves that we have seen in recent months are beginning to reverse in their reaction to this trade dispute. This is illustrated by moves on commodity prices such as copper, which have previously been under considerable strain during this trade dispute are suddenly looking more positive, helping the performance of higher risk currencies such as the Aussie dollar this morning. In other news overnight, the Bank of Japan monetary policy meeting showed no change to rates as expected, maintaining the -0.1%.
Wall Street closed decisively higher again with the S&P 500 +0.5% at 2904 whilst futures are ticking marginally higher too. This has helped another positive session in Asia with the Nikkei +1.1% whilst the China Shanghai B was +0.9%. In European markets there is less of a positive reaction but still gains are being seen. In forex majors, the dollar is increasingly corrective against the higher risk major currencies such as the Aussie and Kiwi, whilst the euro is looking to regain some momentum. Furthermore, sterling continues to climb slowly but surely with a key EU summit in Salzburg in the next couple of days. In commodities, the weaker dollar is helping gold higher and oil is steady.
The economic calendar has a little more action on it today, with the Eurozone Current Account at 0900BST to be watched, with the surplus expected to slip a touch to +€22.4bn (from +€23.5bn previously). Sterling traders will be keeping a close eye on UK CPI inflation for August at 0930BST which is expected to show a drop in both headline CPI to +2.4% (from +2.5% in July) and core CPI also expected to decline to +1.8% (from +1.9%). Also watch for the PPI Input Prices which are expected to drop back to +9.1% (from +10.9% in July) having a key link to the strength of sterling and subsequently inflationary pressures further down the line. The US Q2 Current Account is at 1330BST and is expected to improve on the deficit to -$103.5bn (from -124.1bn in Q1). The US Building Permits are at 1330BST and are expected to remain at 1.31m (1.31m in July) with Housing Starts also at 1330BST which are expected to improve to 1.24m (from 1.17m in July). The EIA oil inventories are at 1530BST with crude oil stocks expected to drawdown by -2.5m barrels (-5.3m last week) with distillates building by +0.4m (+6.2m last week) and gasoline drawdown by -0.4m (+1.3m last week).
Chart of the Day – AUD/JPY
We focused on the potential recovery in AUD/JPY last week as the market started to post momentum improvements, however yesterday there seemed to be a decisive shift in sentiment that should help to drive continued recovery. Trump’s latest escalation in the trade dispute was met with a positive risk move. An initial slip back on AUD/JPY bounced almost perfectly off a near term pivot at 79.70 to push above 80.80 to see a near three week high, but more importantly, a break of the two month downtrend. This has been a downtrend that was very well-defined until the breach. The move has also included a close above the previous floor at 80.50 whilst also being confirmed on momentum indicators. The RSI above 50 to a six week high, MACD bull cross and Stochastics accelerating higher. The market is now positioned for a recovery towards the next resistance at 81.80 and corrections will be seen as a chance to buy for the move. The hourly chart shows a band of support 80.50/80.80, with 79.70 support increasingly key now.
A mildly negative candlestick from yesterday’s session has once more seen the market back away from a close above $1.1700 and the resistance at $1.1735/$1.1745 remains firmly in place. This plays into the whole rangebound configuration on EUR/USD and for now thoughts of a significant base pattern have been put on the back burner. Essentially, in isolation, this candlestick is mildly negative but there has been no real lasting impact of this move, unless today’s reaction is for the market to sell down again. The hourly chart shows that the old pivot at $1.1650 has come in as supportive overnight and an uptrend of the past eight days is holding firm. Subsequently it remains an opportunity to buy into weakness and there is a mild positive bias still, despite the disappointment of yesterday’s session. Key near term support is around $1.1610 as a breach would end a series of higher lows and mean a negative twist on the consolidation once more.
Cable continues to trend higher in its recovery of the past two weeks. Yesterday’s session was an almost non-event, with a daily high-low range of just 55 pips it was almost half the current Average True Range of 101 pips. So, looking past a marginal negative candle that has done little to change the outlook, the market remains strongly configured on momentum indicators and corrections remain a chance to buy. Breaking the Four month downtrend has been key and the resistance at $1.3170/$1.3215 is in sight. If these lower highs can be broken then the recovery will gather further momentum and the 38.2% Fibonacci retracement of $1.4276/$1.2660 will come into play. The hourly chart shows $1.3115 as initial support and $1.3050/$1.3085 key. Hourly momentum shows the RSI and MACD lines having unwound to renew upside potential for a test of overhead resistance.
Price action is certainly leading the market higher, with a decisive positive candle (which was also a bullish outside day) closing above 112.15 at a two month high and opening a challenge of 113.15. MACD and Stochastics have been edging higher with the move and are now in positive configuration, but it has been a struggle on the RSI, which only now is inching above 60 and is not leading the market. This still implies a struggle of a rally, even if the market is moving higher now. There is a continuation of the uptrend channel on the hourly chart but this morning we see near term corrective momentum signals on hourly RSI, MACD and Stochastics. This could mean a slip back into the 111.80/112.15 band which is now a basis of support. This would be another chance to buy, but a move below the key higher low at 111.65 would abort the move higher.