Major EU indices ended another day in the red, while the US ones rebounded perhaps due to remarks by the White House economic adviser, who said that they are still planning to hold more trade talks in September. However, Asian bourses traded mixed as USD/CNH turned north again, following the PBOC’s decision to still set the onshore USD/CNY rate higher. Among the G10 currencies, the Kiwi was the main loser, tumbling after the RBNZ decided to deliver a 50bps rate cut.
Investors Keep Gaze Locked on the US-China Saga
The dollar traded higher or unchanged against all but one of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained against NZD, AUD and CAD, and slightly against CHF, while it was found virtually unchanged versus EUR, GBP, NOK and SEK. The only currency against which the greenback lost some ground was JPY.
The strengthening of the yen and the weakening of the commodity-linked currencies suggests that market sentiment remained subdued. That said, looking at the performance in the equity world, the picture is rather mixed. Major EU indices ended another day in the red, shrugging off China’s steps to halt the yuan’s slide, but all three of the US ones rebounded by more than 1% each. The catalyst behind the slight improvement during the US trading may have been comments by White House economic adviser Larry Kudlow, who said that they are still planning to invite Chinese officials for more negotiations in September. As for today, Asian bourses were mixed, with both Japan’s Nikkei 225 and China’s Shanghai Composite sliding 0.33% and 0.32% respectively.
Back to the currencies, USD/CNH continued correcting lower yesterday, but it never returned back below the 7.00 mark. It hit support at around 7.0415 at midday in Europe, and during the Asian session today, it traded higher again. The catalyst may have been the PBOC’s decision to still set the onshore USD/CNY rate higher, to 6.9994 from 6.9683 yesterday, despite earlier reports saying that PBOC officials won’t allow the currency to weaken significantly. This may have also been the reason behind the buying of the yen, as well as the mixed performance in Asian equities after the earlier rebound in Wall Street.
As for our view, even if China and the US hold another round of trade-negotiations in September, we find it hard to imagine that a deal could be struck soon. Remember that after China let the yuan fall past the 7.00 per dollar mark on Monday, the US designated the nation as a “currency manipulator”. Thus, if the US judges that China is not taking serious steps towards supporting its currency, it may decide to take additional action, perhaps raising the potential tariff rate on the remaining Chinese imports from 10% to 25%. The latest developments may have also slashed hopes with regards to an accord ahead of the November 2020 US election. On the one hand, this may be of preference for Chinese officials, as they may have the opportunity to negotiate a better deal with a new US President. On the other hand, allowing the chaos to continue may increases the risks for the global economy to slip into recession.
As far as the markets are concerned, as long as USD/CNH remains above 7.00, we would treat any recovery in risk sentiment as temporary. We believe that the longest the pair trades above that mark, the higher the chances are for the US to hit again. This could bring equities and risk-linked currencies under renewed pressure, while the safe havens, like the yen, may stay relatively strong.
DJIA — Technical Outlook
Yesterday, the DJIA recovered a bit more than half of Monday’s drop, but found resistance just slightly above the psychological 26000 level. This is where it met the 21 EMA on the 4-hour chart, which also helped to keep the price down. Although we saw a decent recovery yesterday, the DJIA remains in a short-term downtrend, which could continue pressuring the index and could force it to slide again. This is why, for now, we will take a somewhat bearish approach and aim for the recent lows again.
If we see the price falling below the 25700 hurdle, marked near the high of May 28 th, this may open the door to some lower areas. We will then examine a possibility of testing the 25325 obstacle, a break of which may lead the index to the lowest point of this week, at 25075. We could see the price stalling around there, but if the bears are still feeling more comfortable than the bulls, a break of the 25075 zone might bring DJIA to the 24932 level, marked by the high of June 3 rd.
On the other hand, if the bulls suddenly give DJIA a good push and bring the price above the 26245 barrier, marked near the low of August 2 nd, this may open the door to the 26496 obstacle, a break of which could lift the index a bit higher, as more buyers might be joining in. Such activity could potentially clear the path to the 26691 level, marked by Friday’s high. That level almost coincides with the 200 EMA on the 4-hour char, which may stall the price for a bit.
RBNZ Surprises Investors With a 50bps Cut
The big loser among the G10s was the Kiwi, which fell off the cliff after the RBNZ decided to cut interest rates by 50bps, to a record low of 1.00%, surprising the financial community which has been positioned for a 25bps decrease. In the statement accompanying the decision, it was noted that in the absence of additional monetary stimulus, employment and inflation wouldlikely ease relative to the Bank’s targets, while in the minutes, it was revealed that even after the “double cut”, the Committee agreed that the balance of risks surrounding employment and inflation was tilted to the downside.
The key takeaway we got from the statement and the minutes was that policymakers remain willing to ease further if needed, and this was made crystal clear by Governor Adrian Orr at the press conference following the decision. The decision to cut by 50bps now does not rule out “further action”, the Governor noted, adding that “It is easily within the realms of possibility that we might have to do negative interest rates”.
Moving ahead, we expect the Kiwi to stay in a downtrend. Although most of the major central banks have cut rates, or showed willingness to do so soon, the RBA and the RBNZ have been the front runners in this race, while making it clear that they are not done. Apart from the aggressive easing bias, the Aussie and the Kiwi have been also feeling the heat of the recent developments surrounding the US-China conflict. Thus, more tensions are likely to add extra pressure to the Kiwi, which could continue underperforming against its US counterpart, even if further trade uncertainty increases speculation for more cuts by the Fed as well.
NZD/USD — Technical Outlook
The New Zealand dollar took a strong hit this morning against its major counterparts, after the RBNZ cut their rate by 50 bps, although the expectations were only for a 25-bps cut. NZD/USD moved around 150 pips to the downside and found support near the 0.6377 hurdle, from which it rebounded back to the 0.6400 zone. The pair is still trading below its short-term tentative downside resistance line taken from the high of July 22 nd. For now, we will stay bearish and continue aiming for slightly lower levels.
Given that the pair is quite oversold at this point in time, we may see a small correction back up. If the rate struggles to get back above the 0.6424 barrier, which is the lowest point of October 2018, then the bears might grab the steering wheel again and send NZD/USD south. This is when we will target the 0.6377 obstacle, a break of which may clear the path for a further decline, where the next potential support zone could be seen around the 0.6347 barrier, marked by the lowest point of 2016.
Alternatively, if the bulls decide to take the pair beyond the 0.6424 hurdle and also push it above the 0.6442 barrier, marked by the low of October 10 thof 2018, this may open the door to a larger correction to the upside. We will then aim for the 0.6465 obstacle, a break of which could lift the rate to the 0.6488 zone, which is the low of August 5 th. If the pair stalls around there, we could see a small throwback, but if eventually the bulls can keep it at least above the 0.6465 zone, then there is a chance for NZD/USD to drift higher again. We will then aim for the aforementioned downside line, which could help keep the rate down.
As for Today’s Events
The calendar appears relatively light today, with the only data worth mentioning being Canada’s Ivey PMI for July and the EIA (Energy Information Administration) weekly report on crude oil inventories. Canada’s Ivey PMI is forecast to have risen to 53.0 from 52.4, while the EIA report is expected to show a 2.845mn barrels slide after the 8.496mn barrels fall the week before.
As for tonight, during the Asian morning Thursday, China’s trade balance for July is coming out and the forecast suggests that the nation’s surplus has declined to USD 44.20bn from USD 50.98bn. Both exports and imports are expected to have slid at a faster pace than in June. Specifically, exports are anticipated to have slid 2.2% yoy after declining 1.3%, while imports are expected to have fallen 7.6% after tumbling 7.3% the previous month.
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Originally published at https://www.jfdbank.com on August 7, 2019.