Fundamental Forecast for CNH: Neutral
- The Chinese Yuan and equites could take further hits from additional US-China tariff battles.
- No significant drop in China’s foreign reserves may help to improve market confidence.
- A controlled expansion in lending may leave room for PBOC to cut RRR further.
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The Chinese Yuan had a volatile week: it escalated losses from last week and dipped an 11-month low against the U.S. Dollar, then bounced back by more than 1100 pips following multiple PBOC officials’ expressing confidence in the currency. On Friday, Yuan’s volatility continued amid both US and China’s tariffs kicking in; it eventually lost against the U.S. Dollar on a weekly basis. Chinese equities improved on Friday, though on a weekly basis remained week, with Shanghai Composite Index sinking for the seventh week in a row.
Looking forward, the US-China trade war will continue to be a top driver to the Yuan and Chinese equities. China sees the trade war has officially begun after the US tariffs went into effect. It is expected that the largest two economies in the world will launch more tit-for-tat attacks against each other; what unknown is how much more tariffs will be imposed and how long the battles will last. Over the weekend, both sides could release details of further moves and thus worth to keep a close eye on.
In terms of the timing for the two countries returning to the negotiating table, it may be determined by how much pressure American farmers and manufacturers can bring to the White House, especially those who have voted US President Trump into the office. Chinese tariffs directly target at them: agriculture, aquatic and auto producers. Next week, China will release the trade prints for June. A breakdown in Chinese imports may reveal some clues on how much American exporters have suffered from the US-China trade disputes.
Yet, even if bilateral talks resumed, challenges remain as China would need to reach deals with divided US groups with different goals: cutting US trade deficit and changing China’s industrial policy. The first one is more negotiable and a deal was close to reach; the latter one reflects the increasing competition between the two countries, which may not be easily to solve very soon.
Besides uncertainties around the trade, the Yuan and Chinese equities will bear event risks next week. The June Foreign Reserves will be released on Monday. No significant drop may help to improve market confidence in financial stability, which may help to further ease the selling pressure in the Yuan and stocks. According to Bloomberg, the gauge is expected to fell slightly from $3110.62 billion in the prior month to $3101.80 billion.
Another important indicator is the New Yuan Loans, which the PBOC follows closely as a measure of financial risks. Cutting leverage is one of the regulator’s top focuses. It could make the financial system healthier in the long run, while in the short-term a liquidity shortage may worry the equity market. Thus, the regulator will need to balance the both. A controlled expansion in lending could leave more room for the PBOC to cut reserve requirement ratio again, which will help to ease the tension in the equity market.
— Written by Renee Mu, Currency Analyst with DailyFX
USD/JPY Rate Risks Fresh Monthly Highs as Overbought Signal Persists
Japanese Yen Talking Points
USD/JPY remains overbought as Federal Reserve Chairman Jerome Powell strikes a hawkish outlook in front of U.S. lawmakers, and recent price action keeps the topside targets on the radar as the exchange rate initiates a fresh series of higher highs & lows.
USD/JPY Rate Risks Fresh Monthly Highs as Overbought Signal Persists
USD/JPY bounces back from the session-low (112.71) even as U.S. Housing Starts contract 12.3% in June, with Building Permits narrowing 2.2% during the same period, and the dollar-yen exchange rate may continue to appreciate over the remainder of the week as the Federal Reserve appears to be on track to further normalize monetary policy in 2018.
The testimony from Governor Powell suggests the Federal Open Market Committee (FOMC) will continue to embark on its hiking-cycle over the coming months as ‘incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year.’ In turn, Fed officials may show a greater willingness to implement four rate-hikes this year as the committee ‘believes that–for now–the best way forward is to keep gradually raising the federal funds rate,’ and the FOMC may continue to prepare U.S. households and businesses for higher borrowing-costs despite the growing threat of a trade war with China.
Keep in mind, Fed Fund Futures now highlight a greater than 60% probability for a December rate-hike, and expectations for higher interest rates may continue to prop up USD/JPY especially as the Bank of Japan (BoJ) sticks to its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.
With that said, USD/JPY may continue to exhibit a bullish behavior as the exchange rate initiates a bullish sequence and pushes to a fresh monthly-high (113.14), and the topside targets will stay on the radar as long as the Relative Strength Index (RSI) sits in overbought territory.
USD/JPY Daily Chart
- Broader outlook for USD/JPY remains constructive as both price and the RSI preserve the bullish trends from earlier this year, with the pair at risk of extending the advance from earlier this week as it carves a string of higher highs & lows.
- Another close above the 112.40 (61.8% retracement) to 112.80 (38.2% expansion) region opens up the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
- Will keep a close eye on the RSI as it trades in overbought territory, with a move below 70 raising the risk for a pullback in the exchange rate as the bullish momentum wanes.
For more in-depth analysis, check out the Q3 Forecast for the Japanese Yen
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— Written by David Song, Currency Analyst
Follow me on Twitter at @DavidJSong.
EUR/CAD Chart Triangulating, Downside Break Favored
Check out the DailyFX Q3 Euro Forecast forecast for our intermediate-term fundamental and technical perspective.
EUR/CAD is a cross-rate we’ve been watching recently given its technical positioning on the daily/weekly chart and its price action on the 4-hr chart. The top and drop in late-June put price back below a slope rising up from February 2017 in addition to the bottom of a shorter-term channel since the end of May.
Since declining below these thresholds we’ve seen a weak response. Looking at the 4-hr chart, we initially viewed the price sequence over the past month+ as an upward leaning head-and-shoulders pattern, but more recently with a contraction in price action we are seeing a triangle form. It could make for a complex right shoulder, but focus is now centered on the developing wedge. (Either way, whether one considers it a bearish wedge break or H&S breakdown, bias is the same…)
Given the context of the aforementioned daily slope/channel as well as the chart leaning lower off the March high, a downside break of the wedge is preferred. An undercut will initially have a swing-low from mid-June in focus in the vicinity of 15150/115, followed by a line running over January right around 15000 (yes, this t-line could be the neckline of a broader head-and-shoulders pattern). Beneath there lies the low near 14900 from the end of May.
EUR/CAD Daily Chart (Slope in play)
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EUR/CAD 4-hr Chart
We’ll take it one step at a time. A break below the bottom of the pattern on the 4-hr will have the trade in motion, with a stop placed back inside the pattern. Targeting 15150/115, 15000/4917. We’ll play it by ear as targets near – if momentum is strong, then looking to extend the trade, if momentum stalls then look to start peeling off the position.
On the flip-side, in the event of a breakout to the top-side and recapture of the aforementioned slope, traders may want to play the wedge breakout from the long-side – but given it will be uphill, on this end it is likely a trade which will be avoided.
***Updates will be provided on this idea and others in the trading/technical outlook webinars held on Wednesday and Friday. If you are looking for ideas and feedback on how to improve your overall approach to trading, join me on Thursday’s for the Becoming a Better Trader webinar series.
For another recently expressed bearish bias on this cross, check out Tyler Yell’s take on EUR/CAD.
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Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.
—Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX
British Pound May Rebound on UK Inflation Uptick
TALKING POINTS – UK CPI, BRITISH POUND, POWELL, BEIGE BOOK, US DOLLAR
- First UK CPI gain in seven months might boost British Pound
- US Dollar may extend gains on Powell testimony, Beige Book
- Lull in top-tier event risk makes for quiet Asia Pacific trade
A lull in high-profile event risk translated into quiet consolidation across the G10 FX space in Asia Pacific trade. Volatility might make a comeback in European market hours however as UK CPI data comes across the wires. The headline on-year inflation rate is expected to rise to 2.6 percent, marking the first increase in seven months.
The British Pound suffered heavy losses yesterday ahead of a House of Commons vote on an amendment that would force the UK into the EU customs union if no new post-Brexit trade agreement were reached. Prime Minister Theresa May opposed the move and speculation that it might pass anyway stoked worries about an imminent leadership challenge.
The government prevailed by a razor-thin majority, de-escalating the situation at least somewhat. That coupled with a strong CPI print that reminds investors of an incoming BOE interest rate hike might offer Sterling a lifeline. The priced-in policy path reflected in OIS rates puts the probability of tightening at Augusts’ meeting of the rate-setting MPC committee at a healthy 77.6 percent.
Later in the day, another day of testimony from Fed Chair Powell is in focus. This time, he will appear in the House of Representatives having spoken before a Senate Committee yesterday. A hawkish lean in those comments drove the US Dollar higher yesterday, as expected. More of the same coupled with an upbeat Fed Beige Book survey might keep the greenback on the offensive.
See our free guide to learn how to use economic news in your trading strategy!
ASIA PACIFIC TRADING SESSION
EUROPEAN TRADING SESSION
** All times listed in GMT. See the full economic calendar here.
FX TRADING RESOURCES
— Written by Ilya Spivak, Currency Strategist for DailyFX.com
To contact Ilya, use the comments section below or @IlyaSpivak on Twitter
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