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A US-China Trade War Thaw Doesn’t Spark Risk Trends, EUR/USD Notches Large Wick

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Talking Points:

  • President Trump tweeted support for a Chinese mobile phone maker, but the market didn’t register it as ‘trade war averted’
  • There was little to offer a strong foothold for Dollar recovery, but EUR/USD Monday upper wick raises technical interest
  • Chinese and UK labor data is noteworthy, discrete event risk ahead; but the best tech pictures (NZD, CHF) don’t have cues

What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 2Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.

President Trump’s Tweet Does Not Restore Speculative Appetite Lost Through Trade Wars

Over the past two to three months, movement towards protectionism by some of the largest economies in the world had finally tipped the scales to outright trade war engagement. Fear that the US was withdrawing from the global economy and would incur retaliation from its major peers added to the scrutiny over a speculative run these past few years in particular that had grown increasingly dependent on the status quo. While we haven’t seen more recent events spur progress with critical breaks that usher in full, self-sustaining bear trends; there remains a bias on this front where bad news will further undermine market confidence while the alleviation of tension will not put the smashed tea cup of speculative appetite back together. Over the weekend, US President Donald Trump tweeted that he was working with Chinese President Xi Jinping to reverse a sanction on Chinese telecom ZTE imposed in 2017. While some see this as the administration walking back on its tough stance on trade through metals and intellectual property theft, it can also be read that there is easing on a stark and aggressive trade front. That said, the market’s didn’t respond with measurable enthusiasm. Neither the US benchmark indices (S&P 500, Dow), the Chinese markets (Shanghai Composite) or trade and risk sensitive assets (emerging markets) showed much relief – much less confidence.

A US-China Trade War Thaw Doesn't Spark Risk Trends, EUR/USD Notches Large Wick

Dollar Retreat Stalls with Competing Signs of Stall and Pause

The Dollar’s two-day retreat to end this past week didn’t pick back up immediately on the bearish charge to start things off Monday. While the Greenback did ease through the morning, momentum never showed up and the market made a quick turn to put the currency back on the bid. The result for the EUR/USD was the largest ‘upper wick’ since January 29. This has strong history for calling short-term turns, but it is by no means a sign of certainty that the benchmark pair is going to immediately return to its month-long – and still emergent – bullish reversal. For other Dollar-based pairs, we are still standing at key thresholds (USD resistance) such as GBP/USD, NZD/USD and USD/CHF. One of the complicating factors to the revival of trend is the lack of an explicit catalyst. The Dollar’s recovery is finding more motivation from a collective weakening of counterparts and rebalancing of extreme net short USD holdings than a clear cut driver like rising interest rate expectations or binary as a NFPs release. The ingredients are there, but the speculative reaction will unfold slowly until an accelerant is added.

A US-China Trade War Thaw Doesn't Spark Risk Trends, EUR/USD Notches Large Wick

China and UK Labor Data is Key Event Risk

There are a few notable economic releases on the docket for the upcoming session. For the US Dollar, we have: Fed speak to fine tune a locked in interest rate forecast; testimony by two Fed candidates (Clarida and Bowman) to fill two of the four empty FOMC Board seats and the March TIC flows which will tell us whether trade wars have incurred any measurable financial consequence for the US. The Euro meanwhile is scheduled for the Eurozone investor sentiment survey for ZEW where we can establish concerns over lingering issues for this economic giant. Neither currency is likely to elicit a strong reaction from the event risk. That said, the employment data from the UK and China have far greater capacity. The UK jobs figures has a history of sparking drama for the Pound when it sufficiently surprises. This has its greatest potential for putting pairs like GBP/USD and EUR/GBP on new trend through BoE timing through wage statistics, but that may be a reach. Watch for the volatility response. As for the Chinese data, we have the standard retail sales, industrial production and fixed assets figures. The real interest is in the new jobs series. This data has a poor track record of charging trend; but it is very important as an economic update nonetheless.

A US-China Trade War Thaw Doesn't Spark Risk Trends, EUR/USD Notches Large Wick

The Best Technicals Don’t Have Good Fundamental Triggers

While there is some moderate potential for fundamentally-triggered movement for the Dollar, Euro and Pound; the best looking broad-spectrum charts don’t have any high profile data or event on tap. I’m particularly intrigued by the conditions reflected in the Swiss franc and New Zealand Dollar. Both have shown exceptional technical patterns on a trade-weighted basis and particularly among their crosses. The franc has slid consistently over weeks to the pleasure of the SNB, but its recent congestion suggests pause that could boost the potential for reversal. A USD/CHF turn looks like it could be particularly dramatic, but it doesn’t align to the slow progress of the Dollar and my view on EUR/USD. If I were to take a perspective on the franc, it would be through EUR/CHF or CAD/CHF. In a similar fashion, the Kiwi has sunk aggressively of late, and is now pressuring a further break lower. Amongst the NZD crosses, there are a number of pairs that are at the technical cusp – NZD/USD, NZD/CAD, NZD/JPY – which I will monitor for technical course setting an a more reliable fundamental backdrop. We discuss all of this in today’s Trading Video.

A US-China Trade War Thaw Doesn't Spark Risk Trends, EUR/USD Notches Large Wick



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Forex

EURUSD Elliott Wave from February 2018 Concludes

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EURUSD Elliott Wave at high probability the bottom is in

We began building our short EURUSD position in two separate occasions from April 10 at 1.2350 and April 26 at 1.2153 in anticipation of a developing bearish impulse wave. Though our first target of 1.1554 was hit on May 29, the bearish impulse wave appeared incomplete. As of May 29, we could count three of the five Elliott Wave impulse waves lower, which implied a fourth wave correction and fifth wave sell off still to come.

EURUSD bearish impulse wave concludes with elliott wave labels shown.

On August 6, we closed down half of the position (booking +791 pips) and tightened the stop loss on the remaining short EURUSD to 1.1750. We are now going to tighten the stop loss further as evidence is growing the bearish impulse wave from February 2018 has ended or is about to end with one more dip. Therefore, we are moving the stop loss on the remaining short EURUSD position to the August 6 low of 1.1530.

If EURUSD pops above 1.1530, then we will gladly book the remaining profits and head to the sidelines as EURUSD may be in the beginning stages of a multi-month rally that may drive to 1.17-1.22.

Elliott Wave Theory FAQ

What Elliott Wave is EURUSD in right now?

Our analysis points to a bearish impulse wave ending from February 2018 to August 15, 2018. This bearish impulse wave is likely wave 1 of a larger bearish impulse wave or wave A of a larger zigzag wave.

Our beginner and advanced Elliott Wave guides share with you typical waveforms and structure that include tips on how to trade with the waves.

Why do traders lose money?

Regardless of the style of analysis, many traders do lose money because they do not take the time to study the market and the effect of leverage. At DailyFX, we have studied millions of live trades and boiled our study down into a Traits of Successful Traders guide. You will find how leverage and human nature affects our trading so you can implement tactics like ones described in the trading idea above.

New to FX trading? We created this guide just for you.

—Written by Jeremy Wagner, CEWA-M

Jeremy Wagner is a Certified Elliott Wave Analyst with a Master’s designation. Jeremy provides Elliott Wave analysis on key markets as well as Elliott Wave educational resources. Read more of Jeremy’s Elliott Wave reports via his bio page.

Communicate with Jeremy and have your shout below by posting in the comments area. Feel free to include your Elliott Wave count as well.

Discuss this market with Jeremy in Monday’s US Opening Bell webinar.

Follow on twitter @JWagnerFXTrader .



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Australian Dollar May Get Some Respite If Only For Lack Of News

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AUDUSD

Fundamental Australian Dollar Forecast: Neutral

AUD Talking Points

  • The Australian Dollar remains in a pervasive downtrend against its US cousin
  • Interest rate differentials and twitchy risk appetite will probably ensure it stays ther
  • But this week could offer some pause

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page

The Australian Dollar faces multiple sources of downward pressure but the coming week’s light economic data schedule may offer it some probably temporary reprieve.

The widening interest rate differential in favor of the US Dollar does not appear to be going anywhere soon. Reserve Bank of Australia Governor Phillip Lowe testified before Parliament last week that, although the RBA still thinks the next move, when it comes, will be a rise, there’s no near-term case for any such move.

Indeed local futures markets do not now price in any change to the record-low, 1.50% Official Cash Rate until at least the start of 2020.

But the Aussie’s worries go a little deeper than simple rate comparisons. Risk aversion sparked first by global trade worries and then by thy collapse of the Turkish Lira has also weighed on the growth-linked currency. Morever, signs that the best of China’s growth for the year may now be behind us have also done it no favours. Official industrial production and capital investment data out of China missed forecasts significantly last week. They were also the first look at figures for July, and suggested that 2018’s second half may well be tougher than its first, with or without a trade settlement between Washington and Beijing.

So, given all of the above the Australian Dollar backdrop looks just about as gloomy as ever, especially as the markets also suspect that the RBA doesn’t mind its weakness at all given how often it talks about a weaker currency making growth and inflation goals easier to hit.

But the week doesn’t offer much in the way of Australian economic numbers. We will get the minutes of the last RBA monetary policy meeting. However, seeing as investors heard from the governor himself only a few days ago, scope for big moves on the minutes would seem very limited.

Make no mistake, the Australian Dollar is still biased lower against its US big brother, but it has been hit fairly hard in the last couple of weeks. The coming sessions could offer some breathing space and consolidation so it’s a neutral call.

AUDUSD

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

— Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!



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Chinese Yuan, Hong Kong Dollar Eye on Central Banks’ Defense At Key Levels

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USD/CNH chart

FUNDAMENTAL FORECAST FOR CNH: Neutral

How to trade news? Learn with DailyFX Free Trading Guides!

  • PBOC stepped in twice when the USD/CNH broke above 6.90, a key threshold below 7.0.
  • US-China Trade war and weak Chinese fundamentals add difficulties to support the Yuan.
  • USD/HKD touched the lower limit of 7.85, a level that HKMA will continue to defend.

The offshore Chinese Yuan gained against the U.S. Dollar this week after nine consecutive losses, amid the PBOC’s further intervention to defend the Yuan. Overall, the Chinese currency rose against seven of the G10 currencies, except the CAD, JPY and NZD. The Hong Kong Dollar, used in one of China’s autonomous territories, touched the lower band of its pegged currency regime and triggered local monetary authority’s intervention. Looking forward, both currencies will continue to eye on policymakers for support, amid both internal and external pressure.

PBOC Watches USD/CNH’s Key Levels of 6.9 & 7.0

China’s Central Bank shut down channels for commercial banks to deposit or lend the Yuan to the offshore market through the free trade zone scheme, after the USD/CNH jumped above 6.90 on Wednesday. This basically tightened the offshore Yuan liquidity and increased the cost of Yuan short. Following the move, the USD/CNH fell back below 6.90.

USD/CNH 1-Week

Chinese Yuan, Hong Kong Dollar Eye on Central Banks' Defense At Key Levels

Two weeks, the PBOC hiked the reserve requirement ratio on FX forwards last week, after the USD/CNH hit above 6.90 for the first time in 15 months. Breaking above this level could spark further selling sentiment, as it approaches the record low level of 6.9865 for the Yuan. In addition, it leaves little buffer area before the rate can touch the critical psychological level of 7.0. The last time the Yuan at 7.0 was more than 10 years ago, even before the offshore Yuan exchange rate regime was introduced.

The PBOC has clearly stated in the Q2 report that it will counter against the excessive selling in the Yuan driven by sentiment. Coupled with resumed plunges in Chinese equities seen this week (Shanghai Composite Index dipped to 17-month low), calming markets will be one of the policymaker’s top priorities next week. Besides the above two uncommon measures, the regulator issues the daily reference rate, which has been held below 6.90 as well.

Challenges to Defend the Yuan

Uncertainties around the US-China trade war remain. The two parties will resume negotiations in late August but both have become cautious, with only Vice Ministers attending the meetings; this is downgraded from Minister-level-and-above meetings seen in April and May, when the two sides failed to reach a consensus. At the same time, the tit-for-tat attacks are underway: US tariffs on $16 billion Chinese goods, the second batch of a total $50 billion, will enter effect on August 23; China’s retaliation on the same amount of US goods will follow immediately. The uneased tensions in trade could dampen market sentiment in the Yuan.

China’s fundamentals are less likely to help much either. The July Retail Sales and Industrial Production both dropped from the last month and below expectations, hinting weak consumption and production. In addition, Fixed Assets Investment, which is considered to expand at around the same rate of GDP, set a new record-low of 5.5% in July. Besides the domestic difficulties, the contagion of high volatility in emerging-market currencies seen recently has the Yuan at risk as well.

HKMA Eyes on USD/HKD’s Key Level of 7.85

The USD/HKD touched 7.85, the lower limit for the Hong Kong Dollar’s trading band under the current pegged exchange rate regime. In order to maintain the regime, Hong Kong Monetary Authority (HKMA), which serves as an independent central bank in Hong Kong Special Administrative Region, purchased a total of HK$16.8 billion during three consecutive days from August 14. This is equivalent to sell US$2.1 billion to the market.

Read More: A Tale of Two Currencies: Hong Kong Dollar and Chinese Yuan

The recent plunge in emerging market currencies was a trigger to the Hong Kong Dollar’s weakness this week. Yet, the main contributor was the widened interest rate spread between the HKD and USD. Since the U.S. Fed began to increase rate in late March, the pressure on the Hong Kong Dollar has become intensified.

USD/HKD 1-Week

Chinese Yuan, Hong Kong Dollar Eye on Central Banks' Defense At Key Levels

On April 12, the USD/HKD hit 7.85 for the first time in 35 years. This triggered HKMA’s intervention for the first time since HKD’s trading band of 7.75 to 7.85 was set in 2005. Since then, the monetary authority has stepped in 18 times and purchased a total of HK$87.1 billion (US$11.1 billion) from the market. This cost about 2% of Hong Kong’s foreign reserves (US$424.3 billion, according to the July figure).

Next week, with the Jackson Hole meeting and FOMC minutes underway, the Hong Kong Dollar will likely continue to bear downward pressure, which means HKMA will need to continue to sell the USD and purchase the HKD to maintain the pegged exchange rate regime.

— Written by Renee Mu, Currency Analyst with DailyFX



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