- The first day of the G-7 meeting resulted in the exact cold reception for the US expected amid charged trade tensions
- Not only will the Dollar find itself buffetted by trade war developments, it has a FOMC decision expected to produce a hike
- Other key events ahead include: an ECB decision; a run of Brexit-related votes; a Swiss currency vote and much more
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An Icey Reception at the G-7 Summit
As expected, the G-7 summit in Canada proved the antithesis of unity that we had seen come from these events in the past. Trade wars inflamed tension among these key economies’ leaders even if that exact term wasn’t uttered at the discussions. The Trump administration’s decision to move forward with the steel and aluminum tariffs against the European Union, Canada and Mexico on May 31st marked a definitive escalation in an already unstable course for global relations and the collective growth and market gains that has resulted from these fluid connections over the past years. By the close of the first day, there wasn’t definitive ‘breakdown’ during the event – most of these leaders are too well-practiced to purposefully or even inadvertently cause a panic. However, the snubs, the threatened refusal of an official communique and the early departure by President Trump all signaled that this was not an event to patch relations. Day two is unlikely to resolve or further divide, but the troubles will linger with the global markets. If complacency remains come Monday, don’t consider it a sign of strength. Rather see it for the anxiety and straining temporary supports (like extreme monetary policy) that it is.
Dollar: The FX Markets Most Risky Member
We typically think of the US Dollar as the last resort safe haven that capital flees to when liquidity is the only thing that matters. If push came to shove, the Greenback would still step up to a frantic need for financial stability – something to consider should the markets start to truly fall apart. However, where global market participants retain a sense of differentiation for their risk-reward balance, the US currency is perhaps the most risky player on the board. It finds itself at the center of the growing trade wars by design. While the move to implement tariffs on China, the EU and its North American neighbors was meant to confer benefit upon the economy; its ultimate impact will be loss by its being ostracized by an angry collective. If you want to gauge how significant the change in sentiment surrounding global trade is following the G-7 summit, measure through the Dollar. In the event the Greenback refuses to extend its retreat or revive its general bull trend of the past two months, look ahead to the Fed rate decision on Wednesday. This event is heavily expected to end with a hike which makes it easier to disappoint than to impress. Beyond the move at this particular meeting, the assessment of pace moving forward amid economic trends and a troubled trade environment will be evaluated thoroughly in the Summary of Economic Projections and the Chairman’s press conference.
Euro: The Second Most Intense Volatility Windup
Next to the Dollar, the Euro is the second most at-risk currency in the week ahead. While the US and China seem to be dealing with the largest negotiation terms through tariffs, the health of the relationship between the United States and European Union is far more critical to global health and stability. That makes EUR/USD an unexpected but nevertheless critical baseline for the path for global trade. Beyond this particular theme though, we have unique fundamental concerns and themes to deal with on the Euro’s side over the coming week and beyond. Though we have seen the tenor of headlines related to Italian politics cool lately, the situation is far from resolved. A populist government formed out of a coalition of members that have clear anti-EU and anti-Euro beliefs is still in power. At the top of the docket, we also have Thursday’s ECB rate decision. This too is a ‘quarterly’ event where more insight is expected than usual. Over the past few weeks, we have seen speculation over a definitive shift in monetary policy ramp up. The anticipation is for plans of a full taper to be announced and the path towards the first hike to be paved. Here too, it is easier to disappoint than it is impress.
Closer to the Fire (Emerging Markets) or Further Away (Aussie Dollar)
Moving forward, it is important to monitor the bearing and breadth of risk trends. Trade wars, monetary policy and most other key themes are generally catalysts for more systemic changes in the current of speculative sentiment. It is important not to concentrate completely on the spark to the exception of the true fire. The US tech sector in US equity indices are particular attuned to the ebb and flow. If we wanted to look at the bleeding edge of the curve, the FAANG group is even closer to the core of performance over the past three to four years. Another leveraged asset class through sentiment is emerging markets. The EEM ETF failed in its break higher this past week, but the pain is more obvious in EM FX. The drop from the South African rand and Indian rupee are good examples of the trend developing these past weeks. Rebounds from the Turkish lira and Brazilian real recently were leveraged by extreme intervention and anticipation of rate hikes. On the opposite end of the spectrum, we can look to the Australian Dollar and Swiss franc as more disconnected currencies. Normally, one is a carry and the other a safe haven, but those roles have been unseated by extreme monetary policy and cross winds. We discuss all of this and more in this weekend Trading Video.
If you want to download my Manic-Crisis calendar, you can find the updated file here.
Demand for Safe Havens Weakens as Market Sentiment Improves
Safe haven prices, news and analysis:
– Confidence is returning to financial markets, lessening the demand for safe-haven assets.
– However, the recovery is precarious and they could soon be back in favor.
Check out the IG Client Sentiment data to help you trade profitably.
Market sentiment picks up
Indications that China’s central bank is looking to ease monetary policy are offsetting the continuing concerns about a US-China trade war, lifting market sentiment and prompting investors to move out of safe-haven assets into those seen as more risky and therefore potentially more profitable.
Prices of all the traditional safe-havens, including the Swiss Franc, the Japanese Yen, Gold, US Treasuries and German Bunds, are weakening Wednesday although many hurdles remain, including the possibility that the trade wars could flare up again.
Looking at these individually, USDJPY rose modestly Wednesday after three successive days of falls and the uptrend in the pair remains in place.
USDJPY Price Chart, Daily Timeframe (Year to Date)
Similarly, USDCHF is rallying and it too remains in an uptrend.
USDCHF Price Chart, Daily Timeframe (Year to Date)
The price of Gold continues to fall and is now down from a high of $1,365.36 per ounce on April 11 to $1,272.17 although any return of risk aversion would slow its decline. The yield on the benchmark US Treasury note – which moves inversely to its price – has increased from a low of 2.77% on May 29 to 2.90% and the yield on the 10-year German Bund is up from 0.255% to 0.367% over the same period.
Resources to help you trade the forex markets
Whether you are a new or an experienced trader, at DailyFX we have many resources to help you: analytical and educational webinars hosted several times per day, trading guides to help you improve your trading performance, and one specifically for those who are new to forex. You can learn how to trade like an expert by reading our guide to the Traits of Successful Traders.
— Written by Martin Essex, Analyst and Editor
Most Asian Shares Rise, Sentiment Better. ASX 200 Tests Breakout
Asian Stocks Talking Points:
- Most Asian shares recover as trade war worries settled down, anti-risk Yen fell
- Next, markets eye a central bank panel with commentary from important officials
- ASX 200 is testing a breakout, opening the door to a resumption of its uptrend
Just getting started trading equities? See our beginners’ guide for FX traders to learn how you can apply this in your strategy!
As expected, Asian shares took a breather from yesterday’s aggressive selloff which was sparked by increased trade tensions between the US and China. A lack of updates as traders await further escalation allowed some stock markets to consolidate.
BACKGROUND: A Brief History of Trade Wars, 1900-Present
In Japan, the Nikkei 225 rose more than 0.30 percent by Wednesday afternoon trade. Most of the gains were from the telecommunication services and health care sectors. Chinese shares were held down though with the Shanghai Composite falling about 0.60 percent. Australia’s ASX 200 climbed, pushed higher by financials and information technology. The KOSPI pulled ahead, rising more than one percent.
On the FX side of things, the lull in trade war rhetoric diminished demand for safe havens. The anti-risk Japanese Yen was cautiously lower while the sentiment-linked Australian and New Zealand Dollars appreciated.
From here, aside from updates on tariff retaliations, all eyes will be on a central bank policy panel that takes place in Sintra, Portugal. We will get commentary from Fed’s Jerome Powell, ECB’s Mario Draghi, RBA’s Philip Lowe and BoJ’s Haruhiko Kuroda.
Amidst last week’s monetary policy announcements from the Fed and ECB, speeches from Mr. Powell and Mr. Draghi can arguably have more potential for FX volatility. If the Fed Chair reiterates last week’s hawkish tone while the ECB President sticks to a more dovish one, then we may see some US Dollar gains at the expense of its European counterpart.
ASX 200 Technical Analysis: More Gains Ahead?
On a daily chart, Australia’s ASX 200 was stuck right below immediate horizontal resistance levels as of Tuesday’s close. These are a combination of the January, May and current June highs between 6,158 and 6,149. However, as of today’s cooldown in trade war fears, the index is attempting a push to the upside for a new 2018 high.
This opens the door to more gains in the coming days as the ASX 200 resumes its uptrend from early April. From here, a push above resistance exposes the 50 percent midpoint of the Fibonacci extension at 6,202 followed by the 61.8% level at 6,264. On the other hand, a turn below if resistance holds places the 23.6% extension as the first target at 6,064. Under that, the index faces a near-term rising support channel going back to late-May.
ASX 200 and other equities Trading Resources:
— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
USD/JPY Could Be Set To Bounce
JAPANESE YEN TECHNICAL ANALYSIS TALKING POINTS:
- The Japanese Yen has seen broad gains against its developed market peers
- However, its overall downtrend remains in place in many cases
- This week could see it reasserted
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The Japanese Yen has caught a quite strong haven bid this week as trade tensions between China and the US bubble back to the surface of market concerns once again.
Technically speaking however, US/JPY has tested the bottom of a minor uptrend channel which has been in place since May 30. It has survived, just but in any case the broader, longer uptrend which has bounded trade all through the year’s second quarter remains very much in place.
The Japanese Yen remains under considerable fundamental pressure from widely diverging interest-rate differentials with the US. The Federal Reserve has just raised interest rates once again and seems determined to continue the process for as long as the data allow. The Bank of Japan meanwhile has been forced to watch the modest inflation resurgence seen early this year collapse, taking with it any prospect that its own ultra-loose monetary policy can be unwound anytime soon.
This week’s official Japanese inflation numbers are likely to underscore that weakness and may put the Yen under renewed pressure, provided that no more bad news appears on market radar from the direction of global trade. Another bout of Yen weakness could see USD/JPY back up to its recent highs of 110.74 in quite short order. That said a return to late May’s peaks in the mid 111s seems unlikely unless some clear resolution to trade difficulties is seen- an unlikely short term prospect.
Reversals for the pair are likely to find support at this week’s 109.49 lows, with the broader channel base of 109.20 waiting below that.
The Japanese Yen’s haven bid has been pretty universal, with the Australian Dollar a particular target. AUD/JPY has been returned to the lows of late May which had not previously been seen since November, 2016.
The cross is now skirting 50% Fibonacci retracement of its long climb up from the lows of mid-2016 to the highs of September, 2017. That comes in at JPY81.40 and seems to be failing. A weekly close below that level would probably bring the next, 61.8% retracement into Aussie bear’s sights. That comes in some way below the market at JPY79.54.
Worryingly for Australian Dollar bulls the currency does not yet look notably oversold, judging by the cross’ Relative Strength Index, and it is likely that momentum to the downside has yet to dissipate.
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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