Current Developments – Sentiment Falls Apart At the Last Minute
Risk appetite fell apart towards the end of Thursday’s trading session as comments from the White House appeared to have spooked the markets. US President Donald Trump, ahead of his summit with North Korean Leader Kim Jong Un, said that there will be no deal if the country does not give up its nuclear program. Back in May, a top defector from North Korea said that the country would never completely give it up.
In addition, the markets are also heading into what could be a heated G-7 leaders summit on Friday and into the weekend. Last week, Mr. Trump went ahead with imposing metal tariffs on Canada, Mexico and the European Union. Ahead of the meeting, French President Emmanuel Macron urged others to stand up to the American president. With that in mind, it is not surprising to see the markets turn to safety in preparation.
US bond yields tumbled and prices rose as demand rose for havens. At a quick glance, Wall Street appeared finish the day rather mixed with the Dow Jones up 0.38%. The S&P 500 on the other hand was 0.07% lower. This was mainly due to gaps higher at market open which helped to keep some of the indexes in the green by the end of the day.
The anti-risk Japanese Yen and Swiss Franc were some of the best performing majors with USD/JPY putting in its largest daily decline since May 29. Meanwhile, the sentiment-linked Australian and New Zealand Dollars underperformed. The former was also hurt by a weaker-than-expected local trade balance report earlier in the session.
The Canadian Dollar experienced a rather choppy session, also finishing cautiously lower. Though comments from Bank of Canada’s Governor Stephon Poloz helped to give the commodity currency some relief. Mr. Poloz that that they see solid economic expansion ahead. He added that at their next rate decision in July, they will incorporate tariff impacts into their outlook.
A Look Ahead – Japanese Yen May Gain
A lack of critical economic data during Friday’s Asian session will probably allow risk trends to continue brewing. If stocks follow Wall Street lower, then the Japanese Yen could gain at the expense of sentiment-linked currencies like the New Zealand Dollar. Meanwhile, at an unspecified time today, we will get Chinese trade balance data which may have a knock-on effect on the Australian Dollar.
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IG Client Sentiment Index Chart of the Day: USD/JPY
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Retail trader data shows 49.1% of USD/JPY traders are net-long with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 3.6% lower than yesterday and 2.3% lower from last week, while the number of traders net-short is 13.6% higher than yesterday and 27.3% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.
Five Things Traders are Reading:
- Dollar-Yen Rate Snaps Bullish Sequence Ahead of May-High by David Song, Currency Analyst
- USD/JPY Technical Outlook: Decision Time for the Japanese Yen by Michael Boutros, Currency Strategist
- Dow Jones: Bullish Break of Wedge on Way to Fresh Two-Month Highs by James Stanley, Currency Strategist
- AUD/USD Forecast: Higher-Lows to Keep Trendline Resistance on Radar by David Song, Currency Analyst
- EUR/USD Squeezed as Euro Recovers, but Can it Become Something More? by James Stanley, Currency Strategist
— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
US Sanctions Against Iran May Spark 1970s-Style Oil Crisis Fears
TALKING POINTS – Iran, Sanctions, CRUDE Oil, Trump, Emerging markets
- US oil export sanctions against Iran will be enforced on November 4th
- Net-importers in emerging markets likely to suffer from higher prices
- 1970’s oil crisis, embargo may haunt markets as Trump buckles down
The Trump administration’s trade wars and economic nationalism have caused severe volatility for most of 2018. The White House also withdrew from the 2015 multilateral Iran nuclear deal – known as the Joint Comprehensive Plan of Action – in May, and has re-imposed sanctions. The most devastating will be an oil embargo that is scheduled to be take effect on November 4th.
In the 1970’s, the US imposed an oil embargo against Iran that led to a surge in prices. The jump in energy costs radically affected markets. The US – which at the time was coming on the heels of massive public spending programs– had its inflationary pressure skyrocket.
The administration’s public spending agenda, coupled with the sanctions against Iran, echo a dangerously similar narrative the world saw 39 years ago.
1979 OIL CRISIS
In 1979 – amid the turmoil of the Iranian Revolution – political radicals stormed the US Embassy and took 52 Americans hostage. In response, US President Jimmy Carter froze billions of dollars’ worth of Iranian assets in the United States and enforced an oil embargo.
The decrease in oil exports – adding to growing fears of further disruptions – caused prices to climb. Adjusted for inflation, the price per barrel stood at around $55 in 1978. In 1979, the cost skyrocketed to $97 and peaked at $122 in 1980. In 1981, the hostages were released and the price began to fall.
See our full interactive history of trade wars here.
Some economists and historians argue that “precautionary demand” was an influential contributing factor to the increased cost of oil. This same fear may be rearing its ugly ahead again today.
2018 OIL EMBARGO ON IRAN
After unilaterally pulling out of the nuclear deal – due to allegations that Iran was not cooperating with the International Atomic Agency – the Trump administration hit Tehran with two waves of sanctions. The first included a ban on any transactions involving the US Dollar, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal. The White House has also banned imports of Iranian carpets and foodstuffs.
The second wave will be the oil embargo. Trump warned that anybody who conducted business in the Iranian market would face “severe consequences”. The ban requires that all importers have to immediately cut off their supply from Iran by November 4th. Any countries that violate the ban face the possibility of sanctions. The EU responded by pledging to protect European firms by activating a blocking statute established in 1996. It allows European businesses to operate under US sanctions without incurring any penalties.
The EU’s defiance to the US adds to the growing tension between allies amid the escalating trade wars. The sanctions also empower hardliners in the Iranian government. This makes the possibility of repairing relations and easing international tension much more difficult.
EFFECT ON MARKETS
If the US imposes sanctions or tariffs against the EU for conducting business with Iran, they will almost certainly retaliate. In that event, sentiment-linked assets are likely to suffer and anti-risk currencies like the Japanese Yen or Swiss Franc will probably rise.
Euro Falling on Trump’s Iran Sanctions Announcement
Crude oil has reached a four-year high, with the Brent benchmark trading at around $84/barrel. Rising prices are damaging for net importers in emerging markets. If Trump digs his heels in and commits to limiting Iran’s oil exports, emerging markets are likely to suffer.
Indonesian Rupiah and South African Rand vs the Dollar and Rising Oil Prices
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter
GBP/USD Gaps Lower on Brexit Stall, Eyes CPI and Carney Speech
- GBP gapped lower versus USD, responding to Theresa May’s rejecting of an exit deal
- GBP/USD’s downside momentum continues dominant downtrend for majority of 2018
- Key economic data and BOE Gov. Carney’s speech may further influence the British Pound
Find out what retail traders’ British Pound buy and sell decisions say about the coming price trend!
The British Pound fell against the US Dollar during weekend trading as Brexit negotiations between the United Kingdom and the European Union hit an impasse. UK Prime Minister Theresa May’s Brexit Secretary Dominic Raab and EU Chief Negotiation Michael Barnier were unable to reach an agreement on a draft treaty, leading PM May to label the deal a “non-starter”. Barnier later mentioned that some key issues remain open, including the Irish backstop.
GBP/USD 1-Hour Chart
This is the latest in ongoing Brexit turmoil, and could possibly bode ill for the Sterling’s recent upside momentum. If a deal is not reached, the United Kingdom would exit the EU and be subject to World Trade Organization rules, potentially causing declines in GBP. Furthermore, longstanding political uncertainty and tensions regarding Brexit have caused the GBP to weaken for the majority of this year. Furthermore, an increasingly hawkish Federal Reserve and haven demand amidst EM contagion fears and trade wars have caused the greenback to strengthen, intensifying the currency pair’s bearish action since April 2018.
GBP/USD Daily Chart
Looking ahead, this is a week of high economic activity for the British Pound. On Wednesday, the UK Statistics Office will release consumer inflation data for the month of September. In addition, Bank of England Governor Mark Carney is set to give a speech on Thursday, with forward guidance possibly dictating next moves for the Pound. However, ongoing Brexit negotiations will continue to take center stage and overshadow economic data’s influence on the Sterling. Developments upcoming summit of European Union leaders focusing on Brexit could cause volatility shocks to the currency pair.
GBP/USD Trading Resources
— Written by Megha Torpunuri, DailyFX Research Team
Unsteady Risk Trends Increase Scrutiny on China, Italy and Brexit
Market participants will return with caution this week. Following the rout in speculative assets from shares to emerging markets to Yen crosses, there is an understandable tension amongst investors. In this environment troubling news in trade wars, Chinese growth, Euro-area stability or any number of key themes can readily find traction.
Fresh developments coming out of the U.S. economy may curb the recent selloff in USD/JPY as Federal Reserve officials see a risk for above-neutral interest rates.
After trading to four year highs to open the month, Crude has come off the highs along with risk sentiment, but you crude appears to have fundamental support that could keep bulls confident.
It may be uncomfortable but sitting on the fence is the best place to be ahead of next week’s Brexit updates and EU Summit
Gold was the beneficiary of safe haven demand this week after the Dow lost over 1,300 points in just two days.
The Australian Dollar held up quite well to the intensification of one or two factors which have stymied it this year. Don’t rely on that continuing
China’s weak economic growth could add more bearish momentum to the Yuan; at the same time, Chinese regulators may try to avoid extreme volatility.
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.
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