Delays, Delays - from Brexit to China-US Trade Talks, Dollar Climbs

Michael Moran

Michael Moran is an experienced global markets professional who currently writes a daily markets commentary. Moran has traded currencies for over 30 years, having worked in dealing rooms of major banks all over the globe. He lives in Sydney with his wife, 5 children, 2 grandsons and another coming. He still loves trading and talking about the currency markets. All of them! Michael began his career as an assistant dealer in money markets and foreign exchange with Lloyds Bank. He has worked in Hongkong, Manila, Tokyo, Singapore and Sydney. He’s traded through the 1985 Plaza Accord, Paul Keating’s 1986 “banana republic” statement, the Asian Currency Crisis in 1997, and the 9/11 New York Twin Tower terrorist strike. He took the task of speaking to sales team of the banks he worked at (Lloyds, NAB, CBA) during the daily morning meetings. Other traders hated this job. But he developed a liking for commentating and putting forward his views on currencies, in the process helping others. Which he still does today. Moran wrote briefly for Invast Global before taking the position as senior analyst for Royal Financial Trading. He currently is a Responsible Manager in Compliance for Transferwise Ltd, Pty, a global money transfer firm where he advises the Treasury team. Having spent the last 10 years of his trading career managing the Emerging Markets and Asian currency desks of NAB and CBA, he formulates much of his market analysis from their movements. His favourite description for global markets today comes a 1968 hit tune from the group Blood, Sweat and Tears – “What goes up, must come down, spinning wheel got to go round.”

volatility

Delays, Delays – from Brexit to China-US Trade Talks, Dollar Climbs

March 15, 2019

Summary: Sterling settled after the UK Parliament voted to delay Brexit, as expected. The British Pound slipped from over 8-month highs (1.3382) yesterday to settle at 1.3230.  A slump in Gold prices and a higher US 10-year yield saw the Dollar Index (USD/DXY) climb to 96.78 (96.490), up 0.24%. USD/JPY rallied 0.44% to 111.72 from 111.12 ahead of today’s Bank of Japan policy meeting. The Euro slipped off its highs, finishing at 1.1304 (1.1334).
Wall Street stocks slipped following reports that China suggested linking a trade agreement with an official state visit by President Xi-Jinping. Combining both will result in a delay. The Dow finished 0.20% lower while the S&P 500 fell 0.3%.

Forex Factory China January Industrial Production Chart - 15 March 2019
Forex Factory China January Industrial Production Chart – 15 March 2019

The yield on the benchmark US 10-year note climbed to 2.63% from 2.62%.
Spot Gold prices slumped over 1% to 1296.20 after testing 2-week highs yesterday (1312.00).
Data releases yesterday were mixed. Chinese Industrial Production slowed to 5.3%, it’s lowest in 17 years. China’s Retail Sales beat forecasts (8.2% vs 8.1%) while Fixed Asset Investment in February climbed to 6.1% from 5.9%. Germany’s Final CPI slipped to 0.4% from 0.5%. US Import prices (a gauge of inflation) beat forecasts of 0.3%, rising to 0.6%, the most in 9-months. US New Home Sales in February slumped to 607,000 from an upwardly revised 652,000 units in January.

  • GBP/USD – Sterling settled at 1.3230 following its spike to 1.3382 highs in early trade yesterday. UK lawmakers passed the motion of the government to seek a delay of Brexit. With uncertainty lingering over Brexit, the Pound is in for further roller-coaster rides. Strap yourselves in.
  • USD/JPY – the Dollar climbed 0.44% to 111.71 against the Japanese currency, boosted by a higher US 10-year yield ahead of today’s BOJ rates policy meeting. The Bank of Japan is expected to leave its Policy rate unchanged. With the Fed and global central bank peers shifting to a more dovish stance given the global economic slowdown, BOJ Governor Haruhiko Kuroda will be glad to oblige.
  • EUR/USD – the Single currency failed to make that clean break above 1.1340, slipping to 1.1304. The set-back may be temporary as speculators remain short of Euro bets. Euro-Zone inflation report is released later today.
  • Spot GOLD – prices slipped 1.01% below the US$1,300. resistance level after hitting 2-week highs yesterday. Any further set-back in the yellow metal may see added US Dollar support.

On the Lookout: Economic data released yesterday presented a mixed picture. While Chinese Industrial Production rose to 5.3% in January, it is the lowest in 17 years. China’s Unemployment Rate rose to 5.3% from 4.9%. While Retail Sales saw a modest rise to 8.2% which just beat forecasts, the data is alarming for the global growth outlook. US data fared no better with a marked fall in New Home Sales and a rise in Jobless Claims offsetting higher US Import prices.
China’s suggestion of an official state visit by President Xi linked to a trade deal will see the meeting take place in late April, a delay to the much-anticipated March finish. Not good for risk and stocks, probably supportive of the Dollar.
Today sees the Bank of Japan’s Rates Decision, Policy Statement followed by BOJ President Kuroda’s Press conference. The Eurozone sees its Final Headline and Core CPI data released as well as German Wholesale Prices and UK Consumer Inflation Expectations. US Capacity Utilisation for February, Industrial Production, Empire State Manufacturing Index, JOLTS Job Openings, Preliminary University of Michigan Consumer Sentiment and TIC Long Term Purchases finish off the day’s data.

Trading Perspective: Weaker risk appetite and higher US bond yields are mildly supportive of the Dollar. We mentioned yesterday that the Dollar Index (USD/DXY) had fallen from 97.71 last Friday to a low of 96.49 yesterday with consolidation likely ahead of strong support at 96.40. Given the modest fall in risk appetite and climb in the US 10-year yield, we should see more of the same today. The Dollar has found short-term support, but the market remains long. Sterling meantime will continue to be choppy.

Daily FX.Com - USD JPY Chart - 15 March 2019
Daily FX.Com – USD JPY Chart – 15 March 2019
  1. USD/JPY – The Dollar grinded higher to 111.72 on the rise in the US 10-year yield and today’s BOJ meeting. The Bank of Japan is expected to keep its rates unchanged and maintain its ultra-dovish policy, possibly downgrading the economy. This is support of USD/JPY. We noted in Wednesday’s commentary that market positioning in the Yen saw a rise in JPY shorts by over 11,000 contracts to a net total of -JPY 51,306 contracts. Immediate resistance can be found at 111.80 and 112.10. Immediate support lies at 111.40 followed by 111.10. Look to sell rallies to 112.00 today.
  2. GBP/USDYesterday’s flash spike to 1.3382 in thin early Sydney trade smacks of a short stop triggered. The rejection vote had been anticipated but the market is short. Yesterday’s agreement to pass the Brexit extension was also expected and the Pound slumped back 0.5% to 1.3230. The overall stronger US Dollar also pressurized Sterling. Expect further volatility in true Cable fashion with immediate resistance found at 1.3270 today. Support comes in at 1.3200 and 1.3170. Would stand aside first up but look to get involved between the extremes of 1.30 and 1.34, leaving tight stops if you do.
  3. EUR/USDThe strong resistance level at 1.1340 held and we slid to 1.1300. Today sees Euro Zone inflation data which is expected to remain unchanged. Any signs of slower consumer prices could see the Euro back to 1.1280 possibly 1.1250. The immediate resistance at 1.1340/50 needs to break in order for the Euro to move further north. Let’s not forget that net Speculative Euro shorts are the biggest in a year. And we are not far from May 2017 lows (1.1170). Look to buy dips ideally to 1.1270 today.
  4. AUD/USD – The Aussie fell under the weight of an overall stronger US Dollar and the weak Chinese industrial production report. The snag in China-US trade talks will also weigh on the antipodean currency. The Australian Dollar closed at 0.7067 after opening at 0.7098 and trading to an overnight low of 0.7041. Like the other currencies, speculators are short of Aussie bets which should provide a base for the Battler. Immediate support found at 0.7040 should hold today. Immediate resistance lies at 0.7090 today and we can expect a likely 0.7040-90 range. Prefer to buy dips.

Happy Friday and trading all.

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