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Australian Dollar Lower, Trump Tweets Against Xi Stoke Risk Aversion

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Australian Dollar, US-China Tensions, Reserve Bank of Australia Governor Philip Lowe Speech, Talking Points:

  • AUD/USD headed lower with S&P 500 futures
  • US President Donald Trump appeared to blame Xi Jinping personally for ‘propaganda’ attacks on the US
  • RBA Governor Lowe lauded financial resilience in the face of Covid but said confidence was key

The Australian Dollar drifted lower on Thursday as risk aversion grew in the Asia-Pacific session on what appeared to be a ramping up of tensions between China and the United States.

US President Donald Trump directly criticized his Chinese counterpart, Xi Jinping, in a series of Tweets suggesting Xi’s direct responsibility for a disinformation and propaganda attack on the United States and Europe.”

Trump went on to Tweet that “it all comes from the top,” in clear reference to Xi.

Previously Trump has been at pains to emphasize the strength of his personal connection to the Chinese president, even as he has blamed China for its handling of the coronavirus. Now however the administration seems much keener to make things personal when it comes to apportioning blame.

This increase in tensions saw the US Dollar gain at the expense of growth-linked currencies such as the Australian and New Zealand Dollars, while stock markets traded mixed in the region. S&P 500 futures headed lower.

Reserve Bank of Australia Governor Philip Lowe spoke Thursday at a panel webinar under the auspices of the Financial Services Institute of Australia. There was nothing new for Aussie-Dollar watchers in his short presentation which lauded the resilience of the domestic banking sector while acknowledging the Covid outbreak as a headwind of the first magnitude.

Lowe said the critical issue was the restoration and maintenance of confidence among economic agents and that the RBA was prepared to scale up its stimulative bond purchases if needed. He also pointed out that monetary policy alone has clear limits when it comes to economic revival. AUDUSD continued to head lower through the session, from its Wednesday peak of 66.16.

Austrlaian Dollar Vs US Dollar, 5-Minute Chart

The RBA cut interest rates twice in March as part of Australia’s economic response to the contagion, taking the Official Cash Rate down to a new record low of 0.25%. However it has declined so far to cut further, despite asserting that all options remain on the table, presumably including zero interest rates.

AUD/USD
MIXED

Data provided by



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily -1% -2% -2%
Weekly -19% 21% 4%

More broadly the Australian Dollar has shared in the strength seen from most similarly risk-correlated assets since the Covid-induced lows of March. Massive monetary and fiscal action from various central banks, led by the US Federal Reserve’s multi-trillion-efforts, was seen to have at least fended off the prospect of the sort of catastrophic, immediate, ‘credit effect’ which saw the global economy implode in 2008.

However, AUD/USD’s climb since then paused as investors considered the terrible immediate reality of guaranteed world recession and massive joblessness. Now the currency seems to be riding optimism higher, as policymakers hope that recovery will be sharp when it comes percolate through the markets.

Australian Dollar Vs US Dollar, Daily Chart

Economic re-opening is a very gradual process, however, and the prospect of second-wave infections has hardly diminished. It also seems highly unlikely that many former economic staples such as hospitality, sporting events and even office work will be returning to their former status anytime soon. In short, the growth-correlated market, including that for the Australian Dollar, may still be pricing in a quicker reversion to normality than seems likely.

Australian Dollar 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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Forex

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

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Canadian Dollar Talking Points

USD/CAD holds near the monthly low (1.3468) as the Bank of Canada (BoC) keeps the benchmark interest rate at the “effective lower bound of ¼ percent” in June, but the update to Canada’s Employment report may influence the exchange rate as the economy is expected to shed 500K jobs in May.

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

USD/CAD extends the series of lower highs and lows from the start of the month as the BoC announces that the “Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”

Image of BoC interest rate

The decision suggests the BoC led by Tiff Macklem will scale back the dovish forward guidance as the central bank emphasizes that “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.

Image of DailyFX economic calendar for Canada

It remains to be seen if the update to Canada’s Employment report will influence the monetary policy outlook as the economy is expected to shed 500K jobs in May, while the jobless rate is projected to hit 15%, which would mark the highest reading since the data series began in 1976.

The ongoing deterioration in the labor market may put pressure on the BoC to further support the economy as “the level of real GDP in the second quarter will likely show a further decline of 10-20 percent,” but Governor Macklem and Co. may carry out a wait-and-see approach over the coming months as “the Bank expects the economy to resume growth in the third quarter.

In turn, the BoC may continue to rule out a negative interest rate policy as “the Bank’s programs to improve market function are having their intended effect,” and the central bank may alter the forward guidance at the next meeting on July 15 as the “decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown.”

With that said, the Canadian Dollar may continue to outperform its US counterpart as the Federal Reserveprepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June, and the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD snaps the range bound price action from April.

The Relative Strength Index (RSI) highlights a similar dynamic as the indicator tracks the downward trend from May, but the bearish momentum may abate over the coming days as the oscillator struggles to push into oversold territory.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, recent price action suggests the pullback from the yearly high (1.4667) will continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as the Relative Strength Index (RSI) extends the downward trend from the previous month.
  • Will keep a close eye on the RSI as it flirts with oversold territory, but the bearish momentum may abate over the coming days if the oscillator fails to hold below 30.
  • Need a break/close below the Fibonacci overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) to fill the price gap from March, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement).

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— Written by David Song, Currency Strategist

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What is Fueling the Rally?

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Dow Jones, Nasdaq 100, S&P 500 Price Outlook:

  • The S&P 500 reclaimed the psychologically significant 3,000 mark last week
  • Meanwhile, the Nasdaq 100 continues to edge closer to the all-time highs it saw in February
  • The Dow Jones remains a laggard but has posted gains of its own in recent weeks

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

The Dow Jones, Nasdaq and S&P 500 have continued to melt higher in recent days even as bullish catalysts seem to sputter out. Following the initial crash in February and early March, gains were quickly established in what many believed to be a “bear market rally” as governments and central banks offered aid in many shapes and sizes.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (February – June)

Nasdaq 100 price chart

In the weeks that followed, market pundits attributed the continuation rally to slowing coronavirus cases and the efficacy of quarantine procedures. Now the three equity indices are approaching prior levels, but more than 40 million Americans are unemployed, bankruptcies have been declared, supply chains have been disrupted and other fundamental concerns have been ignited. Still, the Dow Jones, Nasdaq and S&P climb. So what exactly is fueling this recovery rally?

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Well, to be sure, not every market move has to have a single and easily identifiable catalyst. Similarly, markets can stay irrational for extended periods of time, so gains can be built even when the underlying fundamental landscape may suggest otherwise. This phenomenon could be seen, at least to some degree, in late January and early February when it was becoming more apparent the coronavirus would become a global ordeal.

S&P 500, Crude Oil and Copper Daily Price Chart (August 2019 – January 2020)

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

Chart created with TradingView. Taken from Twitter.

While other equity markets, risk-sensitive currencies and commodities like crude oil plummeted, the three US indices trudged higher still. At the time, I noted the relationship between crude oil and the S&P 500, highlighting the infrequency of such a divergence.

At present, the catalysts for a continuation rally beyond all-time highs seem few and far between. Further still, domestic unrest will likely dent coronavirus recovery efforts and US-China tensions have soared. When taken together, it seems unlikely the Dow Jones, Nasdaq and S&P 500 will reach new heights, but other risk sensitive assets like the Australian, Canadian and New Zealand Dollars have rallied, exhibiting widespread risk appetite.

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Thus, it can be argued US equity prices have become detached from their underlying fundamentals, but shorter-term trading involves price, not necessarily economic principles, and weeks of gains would suggest the current trend is higher still, however unfounded it may seem.

While I am of the opinion that some of these gains will have to be forfeited eventually, attempting to call the top at each leg higher is presumptuous. With that in mind, it may be prudent to wait on the sidelines until a catalyst can spark selling that is met with conviction if you possess a bearish bias, because it seems that none of the current threats have sparked such a move yet. In the meantime, follow @PeterHanksFX on Twitter for updates and keep close tabs on the price action in the days to come.

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–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



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Index Surges Through Price Gap, Can it Continue?

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FTSE 100 Price Outlook:

FTSE 100 Forecast: Index Surges Through Price Gap, Can it Continue?

The FTSE 100 surged to its highest level since early June on Wednesday after the equity index pierced a longstanding technical barrier around 6,200. The zone marked confluent Fibonacci levels and had worked to stall bullish attempts higher in the past, notably coinciding with the swing-high in late April. All in all, the ascending channel with which the FTSE 100 trades remains intact and passing through resistance allowed for bulls to capitalize on open air above.

FTSE 100 Price Chart: 4 – Hour Time Frame (March – June)

FTSE 100 price chart

With a price gap ranging from roughly 6,200 to 6,400, the bullish break above resistance at 6,200 opened the door to a quick continuation – due to the nature of price gaps – and the FTSE must now negotiate secondary resistance around 6,400. 6,400 aligns not only with the top of the gap, but also another Fibonacci level. With that said, the spot is likely to influence price, at least to some degree, in the days ahead.

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If sentiment shifts and risk appetite diminishes, the FTSE 100 may retreat from resistance at 6,400 and fall back into the 6,400 to 6,200 range. Since the gap was filled, price movement should be met with more resistance – regardless of direction. Either way, the FTSE 100 should now enjoy support from prior resistance at 6,200, and due to the level’s influence in the past, it may prove to be a vital staging ground for bullish attempts down the road.

FTSE 100
BEARISH

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Change in Longs Shorts OI
Daily 7% -1% 3%
Weekly 14% -5% 3%

With the ascending channel intact and a series of higher-highs and higher-lows, FTSE 100 price action suggests further strength may be on the horizon. Coupled with IG Client Sentiment Data which reveals retail clients are net-short, it seems as though the shorter-term trend is leaning toward a continuation higher.

That being said, I have my reservations about current stock market activity and suspect the risk-reward relationship for many indices is currently skewed to the downside – a topic discussed at length in my webinar. Nevertheless, price is unemotional and unfeeling and recent price action is hardly a harbinger of bearish reversals so price may continue higher in the shorter-term regardless of the underlying fundamentals. In the meantime, follow @PeterHanksFX on Twitter for updates.

–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



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