After a soft risk-off start, volatility picked up across the board on Wednesday, closing the week with a rather interesting price action. The Japanese Yen was one of the few currencies that lost ground against the Greenback; and considering the scarce economic data coming out of the country of the rising sun, we can only think of risk appetite and buoyant bullish momentum as causes. On the US Dollar front, some selling pressure took place in the first half of the week, due to a lessened demand on the safe haven on behalf of positive expectations regarding the ongoing trade negotiations between the 2 super powers, i.e., USA and China. However, such optimism could not hold grid when weaker-than-expected inflation figures hit the wires on Thursday, leading investors back to the US Dollar and its reserve status.
U.S. President Donald Trump is likely to announce a new round of tariffs on Chinese exports for about $200 billion as early as Monday, as reported by Reuters on Saturday.
On Friday, White House spokeswoman Lindsay Walters said Trump “has been clear that he and his administration will continue to take action to address China’s unfair trade practices. We encourage China to address the long-standing concerns raised by the Unites States.”
On the national front, Mr. Trump has already directed aides aimed at offsetting the collateral impact of such new tariffs, despite of Treasury Secretary Steven Mnuchin’s attempts to reestablish commercial talks with China. The reports drove China’s offshore yuan even lower after originally falling on mixed economic data.
The major indices reported gains in the previous week. NASDAQ took the lead among US peers with a growth of 1.36%; the DOW JONES managed an increase of 0.92%. The Nikkei index was the biggest gainer of the week with an astonishing 3.53% plus.
As we highlighted earlier this week, we expected NDX to turn back lower after having tested the key 0,618% Fibonacci retracement level. We await confirmation that this level will firmly halt price from extending higher next week, before positioning ourselves on the downside for a plunge to at least 7475.
On the daily chart, we can see price retracing over the past six weeks, and reaching the key support zone of 11900.8-11742.4.This level also happens to coincide with the lower band of the descending channel along with the 88.6% Fibonacci. Price is technically expected to recover back again to the upper side of this channel.
In spite of disappointing inflation and retail sales data released on Thursday, the USD Index managed to recover some of the lost ground afterwards, closing the previous week with indecisiveness about future moves. However, such a recovery is expected to be short-lived as the underlying economic indicators lack of the strenght to represent any serious impact on monetary policy. In fact, last week we experienced a typical case of market participants using fundamentals as means to print more liquidity and to reposition themselves by given economics a contrarian reading.
US Trade Representative Robert Lighthizer just finished a meeting with European Trade Commissioner Cecilia Malmstrom in Brussels yesterday. Malmstrom said in a tweet that “Lighthizer discussed how the EU-US achieves concrete results in the short to medium term towards a free trade agreement.” And they’ll meet again by the end of September.Lighthizer’s office described the talks as constructive. Additional work would be done in October to identify those tariff and non-tariff barriers that could be cut; a decisive meeting is expected in November, when both parties will most likely show final results. However, analysts do not predict treaty conclusions as soon as White House administration would like.
The common currency rose the first part of the previous week as wires hit easing concerns in relation to Italian debt. This followed after Italian Minister Giovanni Tria predicted on Monday that yields would drop as the government lays out its much-anticipated budget for 2019. Unlike past years, bond´s news have less power to set the pace for this currency in the long run, unless unexpected scenarios occurs.
The European Central Bank (ECB) captured all attention on Thursday when they decided to leave interest rates on hold in a widely anticipated decision; they also reiterated that rates will remain unchanged at least through the summer of 2019.
As announced at its June’s meeting, Mr. Draghi kept accommodative unwinding plans unchanged, as the asset purchase program is expected to end in December after halving it to €15 billion per month starting in October, from €30 billion at present.
Finally, the Union’s Central Bank changed its inflation forecast while leaving its growth prediction unaltered:
ECB growth forecasts:
2018 at 2% v. 2.1% in June
2019 at 1.8% v. 1.9% in June
2020 at 1.7% v. 1.7% in June
2018 at 1.7% v. 1.7% in June
2019 at 1.7% v. 1.7% in June
2020 at 1.7% v. 1.7% in June
In the week ahead, Mr. Draghi will be once more at the spotlight on Tuesday and Wednesday as he is expected to provide further information on monetary policy. We should also keep an eye on the Italian Parliament when then start negotiations regarding their budget.
Previous week saw a nourished Sterling at the expense of positive and constructive Brexit comments from government officials on both EU and UK sides. In fact, Barnier said in a forum in Slovenia that “if we are realistic we are able to reach an agreement on the first stage of the negotiation, which is the Brexit treaty, within 6 or 8 weeks;” (and) “taking into account the time necessary for the ratification process, the House of Commons on one side, the European Parliament and the Council on the other side … we must reach an agreement before the beginning of November. I think it is possible.”
However, the Bank of England (BoE) kept a more cautious tone on Thursday during its Monetary Policy Meeting where they also kept interest rates on hold, a month after having raised the borrowing costs for only for the second time in more than a decade: “since the Committee’s previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the (European Union) withdrawal process,” said the central bank. In a more positive fashion, the MPC revised their growth forecast higher for the third quarter of the year from 0.4 to 0.5 percent, partly due to a stronger consumer spending over an “unusually warm summer”.
Earlier on Thursday, Governor Mark Carney, whose own term was extended this week until January 2020 to help smooth the post-Brexit transition, briefed Prime Minister May and senior ministers on preparations for a ‘no deal’ Brexit. Carney warned legislators last week that if Britain left the EU without a trade deal, economic difficulties could squeeze British households’ incomes for years to come.
Moreover, BoE stated on Thursday that risks to global growth have risen, especially if the United States and China implemented protectionist trade measures.
Next week, eyes will be on CPI figures on Wednesday which is expected to fall a little from the last reading at 2.5% to reach 2.4%; also the retail sales on Thursday, expecting a decrease of -0.1%
Canada and the US will restart high-level trade talks in Washington next week. Whether it’s still NAFTA or not, the two sides reached a deadlock in three key issues: Canadian dairy market access; cultural exemption for Canada; and Chapter 19 dispute resolution mechanism. Secrecy regarding the ongoing of the negotiation is much expected.
Canadian Prime Minister Justin Trudeau just reiterated yesterday that “we continue to work hard and we are positively optimistic that we can get a win-win-win for all three countries.” Foreign Minister Chrystia Freeland, who’ll be in Washington today, said last week that the negotiation has entered into a “very intense phase” and the officials have been working 24-7.
Needlessly to mention, a positive conclusion of negotiations, regardless of its particularities, is expected to result in a further reinvigoration of the Loonie.
As for the Kiwi, next week will bring us GDP figures for the second quarter. This decisive data will might confirm our bullish positioning as we saw a clear rebound from key support last week. On the contrary, a weak GDP reading could take price back to lows, making us reconsider our approach. Now, on a strictly EW and technical perspective, the NZD/USD rise is highly likely; moreover, with this kind of clear ending diagonal on the last 5th wave and daily Doji candle confirmation, a retrace upward is rather likely to materialize next week. This is still a highly attractive trade from the risk-reward ratio perspective and reversal should draw at least 3 legs up. We are staying strong bullish here, with the target at the beginning of the ED.
Oil prices recovered on Friday from the prior session’s sharp decline and remained on track for solid weekly gains as investors looked ahead to the latest gauge of U.S. production. Both barrels were still on track for weekly gains of 1.8% and 2.0%, respectively, as traders await the latest data on U.S. crude production from Baker Hughes.
The U.S. rig count, an early indicator of future output, rose by 2 to 862 last week, hovering near its highest levels since March 2015.
Last week price continued its ranging move between support at 66.2-64.15 and resistance at 74.45-72.45. After having breached the ascending trend, price turned back to the support zone with a bounce from an ascending trend as shown on the daily chart below. Price is now “pin bar” retesting this zone, as we expect bullish momentum to build up towards the 72.45-74.45 level.
Relevant for this pair next week is the SNB monetary policy meeting; however, we do not expect any changes. As the SNB is closely following the ECB, it is not expected for the prior to make any move in relation to its current stance. EUR/CHF is in a clear downward trend since it tested the previous broken peg 1.20 on April 2018. A clear Head and shoulders pattern, plus strong resistance suggest us that sellers are back into the battlefield as we expect downward momentum ahead. Some pullback is nevertheless not discarded in the process.
A technical analysis on a daily timeframe indicates us that price is likely to recover some upward grounds after having punched support several times, due to:
1. The 1.127-1.119 support area has proven solid;
2. The presence of a wedge reversal pattern;
3. The AB=CD harmonic pattern;
4. Finally the RSI divergence
Our first target next week is 1.1435.
The previous week saw price for this pair to swing from the 1.247 support to the 1.271 resistance, before closing at 1.2595. Currently, price seems to be shaping a H&S reversal pattern which requires a clear breach through 1.271 as confirmation.
Additionally, RSI divergence suggests us that this pair is likely to reach resistance at 1.285 during the incoming week, the same level where the upper edge of the descending channel is.
We saw price attempting to break through the key support level of 72.62. However, we believe that price is likely to reverse back to 74.00-50 next week, due to:
1. Support at 72.65-72.35 as proven solid on several occasions;
2. The lower band of the descending channel will likely hold price;
3. The AB=CD harmonic pattern as shown in the chart below;
4. The formation of a double bottom reversal pattern;
5. RSI divergence.
A similar scenario took place for the CAD-CHF last week as price unsuccessfully tried to break the ascending support trend line. We expect price to recover back to the 0.762 resistance area due to:
1. Support at 0.732 is a rather solid pivot;
2. The ascending trend line from the low of 2016 halted price;
3. Gartley harmonic pattern;
4. A wedge reversal pattern;
5. RSI at oversold territory.
OTHER KEY ECONOMIC DATA IN THE INCOMING WEEK
Japanese Monetary Policy Decision – Japanese Yen
The Bank of Japan remains as the most dovish central bank among those of the selective club of most industrialized nations worldwide; this is not likely to change any time soon and for valid reasons. Core inflation persists depressed, distant from the Bank of Japan’s 2% target. The BOJ recently made remarkable tweaks to its bond-buying plan, extending it to a wider range of qualifying assets.
Governor Haruhiko Kuroda will present updates in his press conference. An upbeat remark on the fresh rise in GDP could drive the yen a little higher. BOJ isn’t expected to hike the interest rate, in fact, they are looking to keep it unchanged in negative territory.
New Zealand Dollar- Gross Domestic Product
GDP figures are due on Wednesday. The small nation issues Gross Domestic Products just once, giving a larger sprinkle in every episode. The economics gained by a quarterly expansion rate of 0.5% in Q1 2018. A tiny pick may be seen now: a strong expansion rate of 0.8% is on the boards.
SNB Monetary Policy – Swiss Franc
This data is due on Thursday. The Swiss National Bank has kept its policy consistent since the memorable day it lifted the peg below EUR/CHF, January 15th, 2015. Since then, it controls the Libor Rate at -0.75%, low into the negative region.
It also vowed to intervene as required to weaken the franc. With EUR/CHF lately nearing and reaching the 1.20 level, the SNB has not been engaged in the forex market for quite some time.
They are not foreseen to modify their policy in the forthcoming meeting. Still, they may commence arguing about an exit plan from the negative interest rate, a movement that could heighten the rate of the CHF.
Canadian Dollar- Inflation
CPI is coming out on Friday. The Bank of Canada expects to boost rates in October, expecting a prosperous NAFTA deal is struck. But Stephen Poloz and his collaborators will need data to back such a movement.
Headline inflation accelerated by 0.5% in July while Core CPI lingered back with 0.2% rate. Notable inflation is required to explain a progress. Retail sales for July are released at the same time. Both headline and core sales diminished in June.