New US-China Tensions Hit Sentiment, BoJ Decides on Policy

Equities and other risk-linked assets slid during the US session yesterday, as well as during the Asian trading today. The catalyst behind the slide may have been fresh tensions between the US and China, as well as the scaling back of California’s economic reopening. As for tonight, during the Asian morning Wednesday, the BoJ announces its monetary policy decision.

Equities Slide as US-China Tensions Flare, BoJ Expected to Stand Pat

The dollar traded higher against all but one of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained the most versus GBP, NZD, NOK, and AUD in that order, while it eked out the least gains against SEK, CHF, and JPY. The greenback lost some ground only versus EUR.

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The Kiwi and the Aussie were among the main losers, while the safe-havens franc and yen were among the currencies that lost the least against the US dollar, which suggests that risk appetite took a hit at some point during the day. Indeed, although major EU indices traded in the green, in the US, the S&P 500 and Nasdaq fell 0.94% and 2.13% respectively. The DJIA finished virtually unchanged. The negative investor morale rolled over into the Asian session today, with Japan’s Nikkei 225 and China’s Shanghai Composite sliding 0.94% and 1.81% respectively.

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EU shares rose as two experimental coronavirus vaccines by Pfizer and BionTech received the US Food and Drug Administration’s “fast track” designation. That said, the party was short-lived, with market sentiment taking a dive during the US and Asian sessions, perhaps due to California scaling back its reopening, as well as due to fresh tensions between the US and China. On Monday, the US rejected China’s claims to offshore resources in most of the South China Sea, while the Trump Administration announced that it is planning to scrap a 2013 auditing agreement between the US and China, that could foreshadow a broader crackdown on Chinese companies listed in the US.

On Friday, we noted that with the several US states halting or reversing their reopening, and with daily coronavirus infections keep hitting record highs, we will turn neutral with regards to the broader market sentiment. We will stick to that view for now. Despite yesterday’s decent slide, it is too early to argue for a bearish reversal, while on the other hand, with some nations reintroducing lockdown measures, and the US-China tensions flaring up again, the bulls may have lost their strength. Thus, we prefer to wait for clearer signs with regards to the market’s forthcoming direction.

Tonight, during the Asian morning Wednesday, we have a central bank announcing its monetary policy decision, and this is the BoJ. The last time they met, Japanese officials maintained short-term interest rates at -0.1% and the target of the 10-year government bond yields at around 0% as was widely expected, noting that the economy will likely improve as the fallout from the pandemic subsides. That said, they noted that they are likely to increase the size of money pumped out via market operations and lending facilities to combat the virus, from the current JPY 75trln to JPY 110trln. Policymakers are not expected to proceed with any changes to their main policy tools this time either, but it would be interesting to see whether they will expand further some of their emergency lending programs. In any case, we doubt that the yen will react massively to this decision. We expect the safe-haven currency to stay mostly linked to headlines and developments surrounding the broader market sentiment, and especially anything surrounding the coronavirus.

DAX — Technical Outlook

After hitting the 12878 barrier on Monday, the German DAX corrected a bit lower. The cash index continued to slide during the US trading hours and is now seen willing to move further south. That said, even if the price drifts a bit lower, as long as it remains above a short-term tentative upside support line drawn from the low of June 15 th, the outlook may stay positive overall.

A drop below yesterday’s low, at 12530, could lead the index to the 12400 hurdle, marked by the low of last week, or to the aforementioned upside line. If, once again, that upside line helps keep the price from moving lower, the bulls could take their chance again and step in. If so, DAX might travel back to the 12530 obstacle, or even the 12684 hurdle, marked by an intraday swing low of July 13 th. If the buying doesn’t stop there, the next possible resistance area could be near the current highest point of this week, at 12878, or near the highest point of June, at 12931.

On the downside, a break of the previously-discussed upside line and a price-drop below the 12230 hurdle, marked by the low of July 2 nd, would also place DAX below its 200 EMA on the 4-hour chart. This move may spark interest among a few more sellers, this way potentially sending the index even lower. That’s when the price might test the 12081 obstacle, a break of which could clear the way to the 11956 level, marked near the lows of June 25 thand 29 th.

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USD/JPY — Technical Outlook

From July 1 st, USD/JPY continues to trade below a short-term downside line taken from the high of that day. At the same time, the pair is balancing above a short-term tentative upside support line drawn from the low of June 23 rd. As long as those two lines stay intact, the rate could continue trading between them.

If the aforementioned downside line stays intact, USD/JPY may slide again, potentially overcoming the 107.10 hurdle, marked by low of July 9 thand by an intraday swing high of July 13 th. A few more sellers might join in and help drive the pair a bit lower, towards an intraday swing high of July 10 th, at 106.95, or to the previously-discussed upside line, which could help stop the fall.

Alternatively, a break of the above-mentioned downside line may invite more buyers into the game, especially if the rate climbs above the 107.40 barrier, marked by the high of July 9 th. At the same time, USD/JPY would be placed above the 200 EMA, which could also be seen as a positive move. The pair might then travel to the 107.60 obstacle, a break of which may clear the way to the 107.75 level, marked by the high of July 7 th.

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During the early EU morning, we already got the UK GDP, as well as the industrial and manufacturing production rates, all for May. GDP rebounded 1.8% mom after tumbling 20.4% in April, while both IP and MP improved by more than anticipated. That said, the pound barely reacted to this set of data, perhaps as GBP-traders keep their gaze locked on Brexit, with the next round of negotiations scheduled to take place in Brussels this week.

From Sweden, we have the inflation numbers for June. Both the headline CPI and CPIF rates are expected to have risen to +0.5% yoy from 0.0%, but as it is always the case, we prefer to pay more attention to the core CPIF metric, which excludes the volatile items of energy. That rate rose to +1.2% yoy in May from +1.0% in April.

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At its latest gathering, the Riksbank decided to extend its framework for its asset purchases from SEK 300bn to SEK 500bn, up to the end of June 2021, while it announced that in September, it will start purchasing corporate bonds. The Board also decided to cut interest rates and extend maturities on lending to banks, despite keeping the repo rate unchanged at 0%. With all this in mind, we don’t expect a potential acceleration in the nation’s inflation to alter the Bank’s plans for providing support to the economic recovery.

Germany’s ZEW survey for July and Eurozone’s industrial production for May are also coming out. With regards to the ZEW survey, the current conditions index is expected to have risen to -65.0 from -83.1, while the economic sentiment one is anticipated to have slid to 60.0 from 63.4. Eurozone’s industrial production is forecast to have rebounded 14.5% mom after tumbling 17.1%.

Later in the day, we have the US CPIs for June. The headline rate is expected to have risen to +0.6% yoy from +0.1%, but the core one is anticipated to have ticked down to +1.1% yoy from +1.2%. The API (American Petroleum Institute) weekly report on crude oil inventories is also coming out, but as it is always the case, no forecast is available.

As for the speakers, we have two on today’s agenda: Fed Board Governor Lael Brainard and St. Louis Fed President James Bullard.


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Originally published at on July 14, 2020.

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