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Thursday’s US President Trump decision to escalate the trade war by imposing 10% tariffs on $300b of Chinese goods by Sept 1 has really hit the Achilles heel of the risk curve, with capital scrambling to bid the Yen, bonds and gold in a text-book ‘risk-off’ day. The strength of the Japanese Yen, especially, defies gravity but it also reflects the renewed conces by market participants that this latest action by Trump will be quite costly for global growth and the extension of suppressed inflation. The Swiss Franc also managed to find solid bids as safe-haven flows swiftly moved into safe-haven assets. The US Dollar traded quite stable, barely changed on a daily net basis as the market digests the news of additional tariffs on China in a month time and what the dovish repercussions for the Fed and the rest of Central Banks. The Aussie, Kiwi, and Cable kept the bearish inertia that has characterized these 3 currencies since mid-July. Meanwhile, the EUR and CAD trade relatively unfazed, especially the former, while the Loonie does feel the pressure of ‘risk-off’ dynamics much more so. Today’s Non-Farm Payrolls report is the next key even if the tariffs news has stolen the limelight.
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.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The market was sent on a tailspin with stocks imploding, while Yen & Gold went gangbuster after US President Trump announced via Twitter a fresh round of 10% tariffs on the remaining $300 million of Chinese goods to the US. The bombshell, at a time when the market was still digesting the ‘hawkish cut’ by the FOMC, has caught the market by absolute surprise as Trump flexes his muscles after being briefed that the face-to-face trade talks in China, led by Treasury Secretary Mnuchin and Trade Representative Robert Lighthizer, failed to yield any results.
The excerpt of Trump’s tweet acting as the catalyst for the unwinding of risk trades read: “Trade talks are continuing, and……during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…..We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”
What makes the renewed tensions in the US-China trade saga even more worrisome is the fact that this was a cabinet team effort, with CNBC reporting that it was Trump’s trade team, including the big guns Treasury Secretary Mnuchin, Acting COS Mulvaney, trade advisor Navarro, and NEC Director Kudlow, that assisted the President in drafting the tariff tweet. It does imply that the intentions of the Administration have the backup of the big influencers in trade.
There has been no leakage of information to help us understand what exactly prompted Trump to kickstart another episode of escalation in the trade war. US President Trump’s latest action is meant to put further pressure on China, hoping that they cave to US demands. But the Chinese economic data has been improving recently, which gives them time to muddle through and makes the prospects to offer many concessions to the US a highly unlikely scenario. Watch for China to fight back via direct measures towards non-tariff barriers to US companies, and if necessary, they will not hesitate to provide further stimulus to the economy.
This move by the Trump administration has caused the chances of another rate cut by the Fed to skyrocket up to 85% by the end of business in New York as the news may see subdued global inflation to extend as Chinese manufacturers get squeezed and global growth takes a hit. For the Fed and the majority of Central Banks for this matter, an escalation of the trade war runs the clear risk of causing the long-lasting easing cycle to stimulate waning domestic growth.
To potentially make matters worse, U.S. President Trump will make an announcement on EU trade matters at 13:45 Easte (18:45) on Friday, per the White House schedule.
Another waing signs out of the US came in the form of US July ISM manufacturing index, missing expectations at 51.2 vs 52.0 expected, with the employment subcomponent the major drag at 51.7 vs 54.7 prior, while new orders saw a marginal uptick.
The BOE left its bank rate unchanged at 0.75% with unanimous votes 0-0-9. As the Central Bank fleshed out its new updates on the inflation outlook and growth forecasts, the patte, with the dark clouds of Brexit hovering around, was to decide across-the-board downgrades. The BOE stuck to its guns by not making a hard–Brexit its main working assumption. In the press conference, Goveor Caey did not give much away from the initial statement.
China’s Caixin manufacturing PMI for July came at 49.9 vs 49.6 estimates as new orders retued to a modest growth path, while new export orders remained week and factories still cutting jobs. The data, hardly encouraging despite the uptick, has been eclipsed by Trump’s trade tariff tweet today, hence making its influence in the pricing of risk assets largely irrelevant.
Recent Economic Indicators & Events Ahead
The trade war escalation has stolen the show away from this Friday’s Non-Farm Payrolls report, even if this is an event that still must be treated with the same amount of prudence. Should the NFP headline number and/or the wage inflation disappoint, alongside renewed fears of a protracted trade war and a FED in easing mode, it may lead to a rethink towards holding USD, especially at such elevated prices. However, with true risk-off hitting financial markets, the currency tends to find dip buyers looking for a safe-haven, and that’s USD positive too. If we look at key leading indicators ahead of the NFP, such as the ADP Employment Report, the ISM Manufacturing Survey employment component or the 4-week moving average of initial unemployment claims, it suggests the risk of a headline disappointment is not that high, with expectations ranging from 170-200k range. Note, we will also have to pay attention to the jobless rate and wage growth to decipher the full picture.
A Dive Into The Charts
Some of the currencies displaying the strongest trends have strengthened to a magnitude that makes it hard to reinstate longs unless there is a significant pullback. I am talking about the JPY, CHF and to a lesser extent the USD indexes. It doesn’t mean that short-term the Yen won’t find further follow through as momentum strategies may easily pile in, just be aware that adding strategic longs as a position trader will cause you to pay a high price. The levels of the CHF are not as dramatic vs the JPY, but the index has reached such a key resistance, so be aware. Remember, the CHF has been on an absolute tear after it rejected July’s POC on July 25th.
The weakest currencies, as per the technicals in the indexes, include the GBP, recently smashed by hard-Brexit risks, and the Oceanic currencies, as both Central Banks (RBA, RBNZ) send signals that the easing cycle is here to stay for as long as it takes. Caught in the crossfire of volatility we find the EUR and CAD. The former still finding buyers after the ECB under-delivered on overly dovish expectations pre-event last week, while the latter is still in an uptrend vs G8 FX but it’s finding mounting selling pressure as true ‘risk-off’ takes its toll.
The first chart to bring to the reader’s attention in the CHF/JPY as it looks to have landed on a key juncture where a rebound may be seen, even if not a trade for the faint-hearted with tight stops. Note, this should be seen as a mean reversal type of trade as it against the strong momentum. But the area currently tested aligns with the 100% proj target, a key horizontal support, and last but not least, 108.00 has really proven the line in the sand this year (3 failed tests).
Smashed by risk-off trades and fears of an intensification in global slowdown (traders price in less demand of energy products), Crude Oil looks set to further extend its losses and any retest of the area marked circle may see sellers re-grouping to keep control of price action. Note, Thursday’s price action is quite conclusive in that players indicate acceptance below the previous swing low, which validates a new cycle low, hence sell on strength makes technical sense.
The upper shadow in the S&P 500 with a close below support as volume increases dramatically is a recipe to see further follow-through supply in the index. Besides, the bearish price action on Thursday has broken the bullish structure by closing below the previous swing low on July 17th. Technical evidence of more pain ahead.
Gold has been a huge beneficiary of the escalation in the US-China trade war as reflected by the sizeable bullish outside day printed, which makes the prospects for an extension into new highs a logical expectation when considering both fundamentals and technicals.
- Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
- Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
- POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
- Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
- Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
- Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
- Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
- Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
- Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection