Dollar, Yields, Stocks Plummet; Trade War Escalation Trumps All

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.”

Forex-analysis

Dollar, Yields, Stocks Plummet; Trade War Escalation Trumps All

August 26, 2019

Summary: “Let’s get ready to rumble”, put those tin helmets on as Asian awakens to an escalating trade war, a divided G7 with seemingly impotent central banks. Following the Jackson Hole, Wyoming symposium, Biarritz, France G7 leaders meeting, President Trump’s latest escalation of the trade war with China trumped all. On Friday, China said it would increase tariffs on more than 5,000 US goods, reinstituting a 25% duty on American-made cars. After the markets closed, Trump responded by saying he would raise tariffs on Chinese goods worth USD 300 billion to 15% from 10% and tariffs on a further USD 250 billion worth of Chinese products would be increased from 25% to 30% in October. According to Reuters, Fed Chairman Jerome Powell “did not announce any major stimulus to ease a worsening global economic outlook” at the conclusion of the Jackson Hole, Wyoming symposium. The G7 meeting in the seaside resort at Biarritz France yielded no communique amidst growing divisions among members. In early Asia, the Dollar nosedived against the haven Yen to 104.65 from its New York close of 105.40 (106.40 Friday). USD/CHF plunged further to 0.9715 from Friday’s close of 0.9750. On Friday, the Dollar Index (USD/DXY) ended 0.96% lower to 97.263. The Euro extended its rally to 1.1153 from 1.1144 (NY close) and 1.1083 Friday. Against the offshore Chinese Yuan, the Dollar soared to 7.1795, a 5-year high from its New York close of 7.1380. The Australian Dollar sank to 0.6690 in early Sydney before settling at 0.6700 from 0.6758 Friday. Sterling advanced to 1.2270 (1.2255 Friday).

DAILY FX USD INDEX CHART - 26 AUGUST 2019
DAILY FX USD INDEX CHART – 26 AUGUST 2019

In Asia, the Dow Futures dropped 300 points to 25,384. after plunging 2% in New York on Friday.
The benchmark US 10-year bond yield dropped 8 basis points to 1.53% at the close in NY before falling further to 1.478% in Asia.
US August Home Sales fell to 635,000 less than median expectations of 645,000.

  • EUR/USD – The Euro rallied against the broadly-based weaker US Dollar to 1.1145 in New York, up 0.40%. In early Asia, further USD selling lifted the shared currency to 1.1155. Bundesbank President and ECB policy maker Jens Weidmann was quoted as saying that while Germany’s economy had weakened, there was no need for economic stimulus.
  • USD/JPY – The Dollar, already down 1.11% at 105.40 at the NY close, plunged further to a fresh 2019 low at 104.45 before bouncing to its current 104.75. Expect a roller coaster ride in this currency. Look for Japanese officials to verbally intervene as the haven currency strengthens.
  • AUD/USD – The Aussie Battler succumbed to the escalating trade war between the world’s two largest economies, nosediving to 0.66899 before rallying to settle at 0.6700.
  • USD/DXY – The Dollar Index slid 0.92% to 97.263 on the escalation of the trade war and lower US bond yields. The US 10-year rate closed at 1.533%, approaching 1.5% and near late 2016 lows.

On the Lookout: Get those tin helmets, on and get ready to rumble. We are in for a roller coaster ride in Asia this morning. And its hard to find any circuit breaker for the markets right now. As in the past, and due to previous experience, we can expect Japanese officials to try and smoothen out the volatility with their verbal intervention. Specially if the Yen continues to strengthen.
On the sidelines of the G7 meet, the US and and its ally Japan had bilateral talks with Japanese Prime Minister Shinzo Abe and US President Donald Trump agreeing in principle to a bilateral trade deal.
Trump also had a meeting with UK PM Boris Johnson, promising a very big trade deal with the UK.
Data released today are Germany’s IFO Business Climate Index and the US August Headline and Core Durable Goods Orders.

Trading Perspective: The Dollar Index dropped to 97.263 after trading to a high last week of 98.45. A downtrend for the Dollar has resumed and we could see further broad-based falls.

CNBC US TEN YEAR BOND YIELD CHART - 26 AUG 2019
CNBC US TEN YEAR BOND YIELD CHART – 26 AUG 2019

Falling US bond yields will weigh on the Greenback. This morning the US 10-year bond yield fell below 1.5% to 1.478%. Without yield support, the Dollar has no legs to stand on. That said, we can expect further FX volatility in the days ahead as we close the traditionally slow month of August. September is historically a much more volatile month for FX and we can expect more of the same in the current environment.

  1. USD/JPY – Expect the haven darling Yen to take the spotlight in FX. The Dollar broke through the previous 105.00 support in early Asia today following the trade war escalation news. Stops were triggered and we saw the USD/JPY nosedive to a low at 104.45 before settling at its current 104.87. Immediate resistance lies at 105.00 followed by 105.30 and 105.80. A falling Nikkei share market and strengthening Yen is something Japanese officials (BOJ and MOF) abhor. Expect them to verbally intervene which should see a Dollar base. Look for a likely trading range today of 104.70-105.70. Prefer to buy dips. Be ready for a roller coaster in this puppy.
  2. EUR/USD – The Euro climbed against the broadly weaker US Dollar to an early high at 1.11638 in Sydney. Immediate resistance for the Euro lies at 1.1160 followed by 1.1180 and then 1.1200. Immediate support can be found at 1.1140 followed by 1.1100. Comments by the Bundesbank’s Weidmann that there was no need for economic stimulus even though Germany’s economy had weakened are Euro supportive. Germany’s 10-year Bund yield was 3 basis points lower on Friday at -0.68%. Look to buy EUR/USD dips with a likely range today of 1.1120-1.1190.
DAILYFX AUD USD Daily Chart - 26 AUG 2019 - 2
DAILYFX AUD USD Daily Chart – 26 AUG 2019 – 2
  1. AUD/USD – The Aussie Battler plunged in early Asia to 0.6690 before recovering to its current 0.6705. The overall weaker US Dollar will provide the Aussie some support at this morning’s low of 0.6690. The next support level can be found at 0.6670, near the 2019 low at 0.66768 (Aug 8). Immediate resistance can be found at 0.6720 followed by 0.6750. The overall weaker US Dollar and lower US bond yields will be Aussie supportive. Look to trade a volatile 0.6685-0.6775 range today. Prefer to buy dips.

“Let’s get ready to rumble.” Tin helmets on, enjoy the ride. Happy trading all.

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