Yuan Slumps as US-Chinese Tensions Rise

India was an outlier, suffering a 2.4% loss, and Taiwan’s semiconductor sector was hit, and the Taiex fell 0.6%. European markets are off to a strong start with a 2% gain in the Dow Jones Stoxx 600 to cut last week’s loss in half. The benchmark is approaching a two-week downtrend line near 399. US shares are higher, and this could lift the S&P 500 to test the key 2945-2955 area.

The US 10-year yield is little changed near 64 bp, but European bonds are lit with peripheral yields off 4-8 basis points. The dollar is mixed. The dollar-bloc currencies and Scandis are firm, while the European complex and yen are heavier. Risk appetites are also evident among emerging market currencies, where the South African rand, Mexican peso, Turkish lira, and Hungarian forint are higher.

The JP Morgan Emerging Market Currency Index is in a sawtooth pattern of alternating gains and losses for more than a week. It fell before the weekend and is higher now. The Russian rouble has been helped by the continued recovery in oil prices, where the July WTI traded above $31. Gold racing higher after pushing to new multi-year highs at the end of last week. The yellow metal is extending is advance for a fifth session and tested the $1765 area in Europe.

Asia Pacific

Japan reported its GDP contracted by 0.9% in Q1 or 3.4% at an annualized rate. It was a little better than expected though the Q4 19 loss was revised slightly to show a 1.9% quarterly contraction (earthquake and sales tax increase). This quarter understood to be considerably worse with expectations of a quarterly decrease of around 5.0-5.5%. Separately, even if not totally unrelated, the latest Asahi poll shows support for Prime Minister Abe is off about eight percentage points to 33%, the lowest in two years. The two big knocks include the handling of the virus and efforts to secure the power to appoint senior prosecutors.

At the same time that the US was announced a tighter ban on the sales of chips to Huawei, China took steps to dramatically increase its output of 14-nanometer wafers. Taiwan Semiconductor Manufacturing Corporation (TSMC) plans to build a wafer fabrication plant in Arizona needs to also be understood in this context too. The US prohibited without a license the sales of chips to Huawei if designed or made by US-produced technology and hardware. That would apply to TSMC, whose biggest customer is Huawei.

The US export controls were circumvented by servicing Huawei out of foreign fabrication facilities. The new actions seek to close the loophole, and it seems that China had been preparing for this be stockpiling in semiconductor chips.

The dollar is confined to less than a third of a yen range above JPY107.00 and is within the pre-weekend range. So far, it is the first session in four that the dollar held above JPY107.00, though this could be challenged in the North American session today. On the top side, a $2.2 bln option at JPY107.50 expires today. After settling on its lows before the weekend, the Australian dollar bounced back to test the $0.6455 area. Resistance is around the pre-weekend high near $0.6475.

The option for roughly A$635 mln at $0.6495 that expires today looks safe. A closed blow $0.6440 would likely signal that the corrective forces remain in control. Given the heightened tension between the US and China and the greenback’s strength seen late last week, today’s PBOC fix was closely watched. The dollar’s reference rate was set at CNY7.1030, which was a bit stronger than the bank models suggested. The dollar reached its highest level since it peaked on April 2 near CNY7.1280. The highest close was on March 25 near CNY7.1150 and is under threat today.

Europe

Bank of England Governor Bailey reportedly denied that zero interest rates were under consideration last week. And the BOE’s chief economist Haldane seemed to suggest that negative interest rates were among the unconventional measures that were being considered. We suspect that the contradictory signals are more apparent than real.

With the base rate at 10 bp, unconventional policy options are being discussed. Haldane was making this more academic point. Bailey was signaling the policy thrust, which is to say that expanding its asset purchase program holds more promise. The UK 2-year yield, which fell below zero last week, is now near minus five basis points.

The economic data highlight of the week is the preliminary PMI reports. The aggregate composite is expected to rise from the record low of 13.6 in April to 27.0 in May, according to the median forecast in the Bloomberg survey, as both the manufacturing and service sectors are forecast to improve. Ahead of the report, the European Commission is slated to announce its policy recommendations for a recovery package for next month’s meetings.

The euro is trading heavily but within the pre-weekend range. It has found a bid at $1.08, where a nearly 530 mln option will expire today. On the topside, the pre-weekend high was near $1.0850, and the 20-day moving average is just below there, likely keeping the $1.0875, expiring option for about 565 mln euros out of play. Sterling gapped lower (below $1.21) on the back of the talk of negative rates, but recovered to $1.2125 in the European morning.

It is struggling to maintain the downside momentum that has seen it fall for five consecutive sessions coming into today. Note that the lower Bollinger Band is found near $1.2115 today. The Turkish lira‘s short-squeeze is extending for its eighth consecutive session. News that Clearstream and Euroclear will not settle lira trades appears to have encouraged further buying back of previously sold lira positions. The US dollar found support near TRY6.81, as domestic demand (for debt servicing?) emerged.

America

The US calendar is light today. The highlight of the week includes the Philadelphia Fed survey (the Empire State manufacturing survey rose to -48.5 from -78.2) and the preliminary PMI (which is also expected to improve). April housing starts, and existing home sales will also be reported, and no fewer than eight Fed officials speak, including Powell (and Treasury Secretary Mnuchin) before the Senate Banking Committee tomorrow. Canada reports April CPI and retail sales figures this week. Mexico’s data highlight is the April retail sales report.

Conventional wisdom sees the negative yields in the US fed funds futures and concludes that investors are betting that the Fed cuts the target rate again. Some suggest that investors may be trying to push the Fed hand, deliver it a fait accompli, force it to cut, perhaps against its wishes. It is hard to argue against this. It seems to intuitively true.

Yet, the markets are not only about betting and taking on risk, but they are also for hedgers and people trying to layoff risk. The negative yields can be explained, even if no one thought the Fed would adopt negative rates. Imagine businesses that need to protect themselves against the chance.

They buy “insurance” from the seller, who then goes to the market to layoff the risk. Financial intermediaries may also choose to hedge the risk of sub-zero rates. Negative rates in the US appear to be more about swapping from floating to fixed rates and the related hedging then actually reflecting expectations of negative Fed policy rates.

Brazil is being punished. The currency and equity market are among the hardest hit, losing a third of their value. It is not simply a function of macroeconomics. Policy matters. The self-inflicted political crisis adds to the challenge posed by the crippling pandemic. President Bolsonaro has lost the confidence of investors who had been prepared to like him after several tumultuous years. The loss of the second health minister in a month during a pandemic that appears to give Brazil the fourth most cases in the world.

The US dollar is consolidating within the pre-weekend range against the Canadian dollar (~CAD1.4020-CAD1.4120). A six-week downtrend line is found today near CAD1.4160. With stronger risk appetites today, initial support near CAD1.4060 would be pressured in North America. The greenback is also consolidating against the Mexican peso with a heavier bias. Lows from the end of last week around found near MXN23.75. Below there, support is seen around MXN23.50, which also corresponds to the lower Bollinger Band. The dollar posted a key downside reversal on May 14 against the Brazilian real. Still, the follow-through dollar selling ahead of the weekend was reversed in late turnover, and the greenback finished on session highs (~BRL5.8560). The dollar’s record high was set near BRL5.9715.

This article was written by Marc Chandler, MarctoMarket.

Equities Rally and the Dollar Eases to Start the Week

All the industry groups are participating and financials and consumer discretionary leading the way.  The Dow Jones Stoxx 600 has been in a 320-340 range for the better part of three weeks and is approaching the upper end. The S&P 500 looks poised to gap higher at the opening.  The April high just below 2880 is coming into view.

Core benchmark yields are a little higher, but the peripheral European bonds are rallying with risk assets.  Yields in Italy, Spain, and Portugal are 5-10 bp lower, while Greece’s benchmark yield is off 12 bp.  The dollar is softer against all the major and most emerging market currencies.  The dollar bloc is the strongest, while the euro and Swiss franc are laggards. JP Morgan’s Emerging Market Currency Index is snapping a five-day slide. Gold is off almost 0.5% as it consolidates above $1700.  Crude oil is snapping a three-day advance, and the June WTI contract is near $14 a barrel.

Asia Pacific

The Bank of Japan made modest adjustments to its policy earlier today.  Three steps were taken. First, it removed the JPY80 trillion cap on government bond purchases. This is largely symbolic as the yield curve control policy has seen its bond purchases fall well shy of the cap (~JPY14 trillion over the past 12 months).

It did make a minor tweak to the different buckets (maturities) that it will buy.  Second, it doubled the amount of corporate bonds, and commercial paper it will purchase (to JPY20 trillion). This was as expected.  Third, it expanded access to its emergency loan facility to a wider range of banks.  Its forecasts were sobering.  Growth, it suggested, could contract by up to 5% (IMF -5.2%), and inflation could be -0.7% this fiscal year.

India’s central bank opened a new credit facility for mutual funds after Franklin Templeton shut six funds last week, citing a lack of liquidity.  The new facility is for INR500 bln (~$6.6 bln) as of today that can be lent to the mutual fund industry or buy investment-grade debt held by the funds.  Corporate borrowing costs soared after the funds were closed.

The dollar slipped toward the lower end of its two-week trading range against the yen (~JPY106.90-JPY108.10). There is an option for $1.2 bln struck at JPY107.00 that expires today.  There are also options for $1.1 bln placed in the JPY107.55-JPY107.60 range that also expire today.  The options may mark the range in the North American morning.

The Australian dollar was bid to new highs for the month today near $0.6470.  Note that $0.6450 corresponded to the (61.8%) retracement of this year’s decline.  The next immediate target is near $0.6500, though a close below $0.6445 would be seen as a failure.  The Chinese yuan was sidelined and little changed with the dollar near CNY7.08030.

Europe

S&P maintained its BBB rating of Italy and its negative outlook.  It noted the ECB’s backstop, and that in nominal terms, assuming no further deterioration in borrowing costs, Italy may pay less to service its sovereign debt the next few years than it did in 2019.

It seemed to suggest that it needed so see improvement in the debt trajectory over the medium-term (three years).  It suggested the same thing about the UK’s debt trajectory as the rating agency maintained its AA rating.  S&P cut the outlook of Greece’s BB- rating to negative.

The Swiss National Bank appears to have stepped up its intervention.  Sight deposits jumped by CHF13.4 bln (~$14 bln) in the week ending April 24.  They can be influenced by other activities but are believed to reflect ongoing attempts to limit additional strength against the euro.

The euro had been hovering just above CHF1.05 over the last couple of weeks, which is its lowest level in about five years.  Today, the euro traded near CHF1.0560, its highest in a couple of weeks.  A move above CHF1.06 is needed to signal anything important from a technical perspective.

The euro had fallen to its lowest level in a month (~$1.0725) at the end of last week before recovering to settle on the session highs, almost a cent higher.  Follow-through buying today lifted it to about $1.0860 in late Asian turnover.  It has consolidated in the European morning.   The $1.0800-$1.0820 area holds expiring options worth about 1.7 bln euros.

Last week’s high was near $1.09, and this needs to be convincingly taken out to lift the tone.  Sterling reached a five-day high today near $1.2455.  Last week’s top was just above $1.2500.  A gain above there is needed to undermine a potential head and shoulders topping pattern some see.  Initial support is seen near $1.2420.

America

The busy week in North America begins slowly.  The US and Canada have a light schedule today, with Mexico reporting March unemployment statistics.  The first look at US Q1 GDP and the FOMC meeting are the highlights.  Canada reports February monthly GDP later this week.  Mexico also reports Q1 GDP, which is expected to have fallen for the fifth consecutive quarter.

US oil inventory data will draw attention.  Despite cuts in output, and the shuttering of more oil rigs (-60 last week, leaving 378, a four-year low), US storage space is quickly becoming exhausted, and there is concern that the problem will persist through the expiration of the June WTI contract.

Over the weekend, Treasury Secretary Mnuuchin reiterated that the US was looking at how to help the oil sector.  It is not clear if it would be another facility that Fed supported or whether it would be the Treasury or Energy Department taking a leading role.  Last week, President Trump again threatened tariffs on oil imports.

Trump has also spoken about boosting the Strategic Petroleum Reserves and giving some private producers access to some of its storage capacity.  Several of the largest oil companies, including Exxon, Mobil, British Petroleum, and Royal Dutch report earnings this week. Many still insist the lower oil prices are a function of a dispute between Saudi Arabia and Russia. Yet, since 2008, the US has doubled its output, which reached 13 mln barrels per day by the end of last year.

The US is not the low-cost producer, though access to cheap capital helped.  The industry was set for consolidation even before the latest drop.  Failures and acquisitions are rationalizing the fragmented shale industry and the larger players finding opportunities.  Diamond Offshore Drilling became the latest casualty over, filing bankruptcy after missing a debt servicing payment a week and a half ago. Last year, its losses doubled to almost $360 mln as revenues fell by about $100 mln to $980 mln.

We suspect that most of the US assistance would not go to the small fledgling producers, many of whom are not investment grade.  If this is true, it may accelerate the re-shaping of the industry, while at the same time, putting down a marker that claims the US will not bear the burden of the global adjustment: Saudi Arabia and Russia need to accommodate it.

The Brazilian real slumped to record lows before the weekend following the resignation of the Justice Minister Moro, who was held in high regard as the driving force behind the anti-corruption Car Wash investigation that ultimately jailed former President Lula. It followed the dismissal of the head of the Federal Police.  President Bolsonaro has been widely criticized for the handling of the health crisis and last week dismissed the Health Minister that favored social isolation.  The Bovespa lost roughly 5.5% at the end of last week.

The US dollar traded between CAD1.40 and CAD1.42 last Thursday.  This range is still key for the near-term outlook. After finishing last week near CAD1.4100, the US dollar slipped to about CAD1.4040 before finding support.  We continue to see the Canadian dollar more sensitive to the risk appetite (S&P 500 proxy) than oil prices per se.

A convincing break of the CAD1.40 area would target the month’s low near CAD1.3860. The greenback closed firmly against the Mexican peso at the end of last week after poking above MXN25.00 for the first time since April 6, when the record high was set (~MXN25.7850). It is trading within the pre-weekend range and found support near MXN24.75, just above the five-day moving average.

This article was written by Marc Chandler, MarctoMarket.

The EUR Looking Vulnerable to Further Downside

They did give their blessing for a short-term plan of $540b, although we have no idea how it will be funded and this is not the panacea to stop an impending 15% contraction in GDP – 15% being the number ECB president Lagarde made mention of overnight.

EURUSD has seen whippy price action, trading a range of 1.0846 to 1.0756 through European and US trade, and is currently sitting towards the low-end of the range here in Asia. The technical set-up on the daily has become just that bit more damaged and the prospects of a re-test of the 23 March low (1.0634) has increased a touch, but the bears will want to see the 6 April low give way.

I looked at EURAUD shorts in yesterdays ‘Daily Fix’ trader thoughts and I’ve added to that position through 1.7014, as its working well – as in life, if something is working you do more of it. The 100-day MA at 1.6771 beckons. EURJPY (see chart below) also gets attention as we’ve seen a break down through the September lows of 115.87 and a convincing break here opens up a test of the 115-figure, where there’s not as huge amount of support through here.

There has been no move in EUR vols, with EURUSD 1-month implied volatility holding below 8%, but one factor that some traders are talking about is the Euribor-OIS spread. We see this pushing up sharply, suggesting growing stress in the EU banking sector. Granted, we’re some way from the levels seen in the GFC or even the European debt crisis (2011), but there are a few stresses in the system that are getting attention and if they start to really move higher the EUR will find sellers easy enough.

Staying on the JPY, there has been a focus on the idea that the BoJ will announce a plan to remove its ¥80t bond-buying limit. The central bank is due to meet on Monday and we may hear plans then, but we haven’t seen much of a broad sell-off in the JPY as a result.

We can focus on the JPN225 (Nikkei 225) as this could be a beneficiary if the BoJ do step up its liquidity drive. On the daily, which is good for oversight here, I see both the 5-day EMA and 20-day MA headed sideways, with the RSI mid-range – it’s a range traders paradise right now, but my view is to let the market come to me. For that, I would buy a closing breakthrough 19,886. That would give me some belief the market is benefiting from changes to BoJ asset purchases and ready to trend.

USDBRL has seen some flow too, with the pair hitting a new record high of 5.5554, largely thanks to Justice Minister Moro resigning. NZDUSD has printed an outside day (on the daily) and could make a tilt at the 50-day MA at 0.6095 – watch for follow on here, and if this prints a higher high today it could take us to the average and 14 April high.

More positive times have been seen in the NOK, with better flows seen in crude. As I type front-month Brent sits up 7.2% and WTI 23%. I am not sure much has fundamentally changed, but price has shifted. Interestingly we haven’t seen any real relief in inflation expectations, with 5-year breakevens unchanged, with the HYG ETF closing -0.05%.

The S&P500 also closed -0.05%, again on light volumes, with futures finding sellers after the close. One to keep an eye on as there was no interest in participants supporting the index above 2800. Asia has seen broadly mixed trade, with the ASX200 higher but sellers are seen in China and Japan. S&P500 and DAX futures are lower and indicating a weaker open for European trade. Although, as said, it’s the EUR that is more heavily on the radar.

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Chris Weston, Head of Global Research at Pepperstone.

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What are Commodity Currency Pairs?

The currencies of countries around the world are fiat instruments, meaning that they have no backing by anything other than the full faith and credit of the nations that issue the legal tender.In the past, many currencies used gold and silver to provide support for the foreign exchange instruments, but the metals prevented countries from making significant changes in the money supply to address sudden changes in economic conditions.

Meanwhile, some countries with substantial natural resources that account for revenue and tax receipts have an implicit backing for their legal tender. The ability to extract commodities from the crust of the earth within a nation’s borders or grow crops that feed the world allows for exports and revenue flows. While those countries have fiat currencies in the international financial system, the implied backstop of commodity production makes them commodity currencies.

Commodities provide support for some foreign exchange instruments

The fundamental equation in the world of commodities often dictates the path of least resistance for prices. While demand is ubiquitous as all people around the globe are consumers of raw materials, production tends to be a local affair.

Commodity output depends on geology when it comes to energy, metals, and minerals. Soil, access to water, and climate make some areas of the world best-suited for growing agricultural products. Chile is the world’s leading producer of copper. The vast majority of cocoa beans, the primary ingredient in chocolate, come from the Ivory Coast and Ghana, two countries in West Africa.

In Chile and the African nations, the production of the raw materials accounts for a significant amount of revenues and employs many people, making them a critical factor when it comes to economic growth. Meanwhile, the Australian and Canadian currencies are highly sensitive to commodity prices as both nations are significant producers and exporters of the raw materials to consumers around the globe.

Australia and Canada have commodity currencies

Australia and Canada produce a wide range of agricultural and energy products, as well as metals and minerals. Australia’s geographical proximity to China, the world’s most populous nation with the second-leading economy, makes it a supermarket for the Asian country. Canada borders on the US, the wealthiest consuming nation on the earth. Therefore, Australia and Canada are both commodity supermarkets for a substantial addressable market of consumers.

In 2011, commodity prices reached highs, and the price action in the Australian and Canadian currencies versus the US dollar shows their sensitivity to raw material prices.

Source: CQG

The quarterly chart of the Australian versus the US dollar currency pair highlights that highs in commodity prices in 2011 took the foreign exchange relationship to its all-time high of $1.1005. The price spike to the downside during the first quarter of 2020 that took the A$ to $0.5510 came on the back of a deflationary spiral caused by the global Coronavirus pandemic that sent many raw material prices to multiyear lows.

Canada is a significant oil-producing nation. In 2008, the price of nearby oil futures rose to an all-time peak of over $147 per barrel.

Source: CQG

The quarterly chart of the Canadian versus the US dollar currency pair shows that the record high came in late 2007 at $1.1043 as the price of oil was on its way to the record peak. The highs in raw material prices in 2011 took the C$ to a lower high of $1.0618. The deflationary spiral in March 2020 pushed the C$ to a low of $0.6820 against the US dollar.

Both the Australian and Canadian dollars are commodity currencies that move higher and lower with raw material prices over time.

Brazil’s real also tracks the prices of some commodities

Brazil is an emerging market, but the most populous nation in South America with the leading GDP in the region is a significant producer of commodities. The price relationship between the Brazilian real and the US dollar is another example of how the multiyear highs in commodity prices in 2011 sent the value of a commodity-sensitive currency to a high.

Source: CQG

The quarterly chart of the Brazilian real versus the US dollar currency pair shows that the real reached a record high of $0.65095 against the US dollar in 2011 when commodity prices reached a peak.

While the Australian and Canadian dollar and Brazilian real are fiat currencies, they each reflect the price action in the raw material markets, making them commodity currencies. The foreign exchange instruments may not have express backing of the nation’s raw material production; there is an implied backing as higher commodity prices lift the local economies and government tax revenues. Commodity currencies can serve as proxies for the asset class as they move higher and lower with raw material prices.

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Let’s find out what has been moving the market today.

After the unexpected victory for conservative Prime Minister Scott Morrison the Australian dollar was supported. However, the trade war risks keep circulating and any fresh negative news may hurt the aussie. Take a look at AUD/USD.

After the People’s bank of China’s comments on keeping the yuan stable, the Chinese currency gained. Its strength now depends on the path of trade talks. ​- Also, pay attention to the USD/BRL pair. The trade war uncertainties, national protests against the freeze of educational budget and cuts of the growth forecasts weakened the Brazilian currency heavily. The release of the level of business confidence today at 17:00 MT may support the BRL, however, the risks of the further weakness remain.

How to Trade Using the Carry Trade Strategy

Carry trade is the borrowing or selling of a financial instrument with a low-interest rate, then using it to buy another instrument with a higher interest rate. The trades will either be going short on the lower interest rate currency or going long on the higher interest rate currency, with the carry trades needed to be held for a prolonged period of time using leverage for enhanced returns and take advantage of interest rates spread between the two currencies.

The use of leverage with a broker to increase earnings multiples through interest rate arbitrage is considered to be a ‘risk on’ strategy, where investors will either consider the current economic environment to be positive for their position or, more importantly, for the economic outlook to be positive, supporting an interest rate diverging environment that enhances carry trade returns. The strategy is based on the evaluation of the economic situation of each country or financial zone.

Risk Aversion – How to Trade the Carry Trade?

The carry trade has been a particularly popular medium to long-term strategy within the FX world, with shifts in interest rates tending to be few and the opportunity to take long-term positions to appeal to investors and hedge funds. 

Basically, carry trade is all about the interest rates differentials, and, more importantly, interest rates prediction.

Yet, for the retail investors, cautions must be taken into the account. While in an ideal world, where political stability persists and macroeconomic conditions have been supportive of carry trades, it is not always as simple as moving from a low yielding to a high yielding environment.

Economic shocks will be reflected within the FX world, sometimes far more quickly than in other asset classes.

Additionally, while central banks have a tendency to provide guidance for the financial markets, supposedly giving ample time to respond and position in anticipation of a shift in policy, some central banks are less interested in forwarding guidance than other. A surprise shift in policy by a central bank capable of eroding any returns made through a carry trade on a given day and even lead to heavy losses.

Risk aversion can also come about from natural disasters or war and not just from a shift in the policy outlook.

In summary, key risks to carry trade positions include:

  • Geo-Political Risk – A political event that will influence sentiment towards monetary policy and economic outlook for a given country, such as Brexit, sanctions, trade war and more.
  • FX risk – returns from interest rate differentials offset by exchange rate movements in the carry trade, leading to losses in spite of interest rate differentials favoring the carry trade.
  • Gearing risk – Losses resulting from unexpected movements that are exasperated by leveraged positions that could result in margin calls or even positions being stopped out by an exchange.
  • Interest Rate Risk – More of an issue when including compounding interest. Movements in interest rate differentials can have a positive or negative impact on returns, with a narrowing in differentials leaving returns lower than expected until the next interest compounding period.

And yet, although risk aversion can be a risk for carry trades positions, carry trades can come as a smart decision for a long-term investment or a trigger to buy/sell any instrument.

The most traditional carry trades have been the USD/JPY, the NZD/USD, NZD/JPY, AUD/USD and the AUD/JPY, with the EUR/USD coming into its own since the global financial crisis. There are others, including the Brazilian real and the Turkish Lira, with some more volatile exotics also on offer, but risk appetite will need to be particularly high and with some economies less transparent than others, carry trades into such exotic currencies come with significant risk. Although these pairs are at the highest level of popularity when it comes to carry trades, any currency or currency pair can be considered a carry trade transaction.

Interest rates spread between two countries can be the main catalyst for a strength of one currency over another currency.

Looking at today’s interest rate environment, the EUR and the Japanese Yen are amongst the preferred funding currencies, with interest rates sitting at or below 0%.

When looking at the recent moves in yields for 10-year U.S Treasuries, the material shift in sentiment towards the U.S economy and monetary policy outlook has seen the Dollar rally of late, with year-to-date losses having been all but wiped out in just a matter of weeks.

For those looking to take on carry trades, finding the right trading platform that offers the appropriate trading tools is key. HQBroker is one such platform that offers the trading of FX and CFDs, giving the trader the option to scalp, swing or take on longer-term positions that includes carry trades, with the use of leverage to enhance returns.

Every trader must research and understand the significance of carry trades prior to entering a transaction and at the exit of the transaction. Carry trades and interest rates differentials provide the volatility in the FX market and more importantly, provide the opportunity for a trader to execute a carry trade, with high odds of a positive return.

Not only the Turkish Lira – The Indian Rupee Hits All Time Low

This week the Indian Rupee crossed 70 for the first time in its history. India’s currency crossed the psychological level on Monday and traded as high as 70.80 on Wednesday. The Rupee is just one of several emerging market currencies to come under pressure in the wake of the Turkish Lira’s collapse. However, the Rupee may be vulnerable to further weakness regardless of the weakness of the Lira.

The Turkish Lira is now down about 35% since the beginning of the year. The Argentinian Peso has lost close to 37% of its value in 2018 after the country was forced to turn to the IMF in May. Other emerging market currencies losing ground are the Indonesian Rupee, the Philippine Peso, the Brazilian Real and the South African Rand.

However, not all emerging market currencies are losing ground. The Mexican Peso has gained ground in 2018, and most South East Asian and East Asian currencies are holding their value.

Almost all the countries that have seen their currencies come under pressure are those with wide, or widening, current account deficits. In India’s case, analysts have been worried about the deficit for some time, and these fears were confirmed when the commerce ministry announced on Tuesday that it had hit a five year high of $18 billion in July.

The current account deficit is growing due to rising oil prices and a surging USD, and FDI and foreign institutional investment flows are not high enough to offset the widening deficit. The rising oil price alone could see India’s oil import bill growing by $26 billion in 2018 and 2019, and is unfortunately likely to offset any export gains due to the weaker currency.

The central bank has also raised rates twice, in June and August, the first rate hikes in four years. It may hike rates further if the currency continues to weaken, though it will be cautious about doing so if economic growth slows.

India ratings and research have also just lowered its growth forecast for the year to 7.2%, from 7.4% sighting rising inflation due to oil import costs.

USD/INR Weekly Chart (Source: Tradingview.com)
USD/INR Weekly Chart (Source: Tradingview.com)

Going forward, the most important factors to watch will be the oil price and the strength of the USD. While developments in the domestic economy will play a part, they are likely to be outweighed by these external factors. Some analysts are forecasting the Rupee to reach between 72 and 73.55 by year-end, based on current fundamentals – but these can change rapidly.

If current fears over emerging market currencies ease, the Rupee will probably retrace to an extent. Short term support may come into play at 69.70, and if that doesn’t hold, the breakout level at 69 could be retested. It seems very unlikely that the currency would strengthen below that level without a substantial change in the economic environment. A likely trading range for the remainder of 2018 may be 69.70 to 72.

While the selloff of the Turkish Lira has played its part in the weakness we are seeing in the Rupee, fundamentals are equally to blame. The Rupee is not one of the currencies that is most influenced by emerging market sentiment and domestic factors rather than speculation play more of a role in the price.

Traders should, therefore, pay as much attention to oil prices and domestic developments as they do to sentiment or technical levels.

10-Year U.S Treasury Yields are Nearly 3%, US Futures Point Higher on Strong Earnings Reports

Wall Street has been inconsistent the past few trading sessions but set to open higher. Asian equities were strong this morning. Gold has lost more value.

Inconsistent Results from Wall Street, Shanghai Shenzhen Market Powers Up

Asian equities have proven positive today, this as Wall Street has misfired three days in a row with inconsistent results. The Shanghai Shenzhen composite gained more than 2% today, and the Hang Seng and Nikkei Indexes also provided solid climbs. Japanese inflation via Core Consumer Price Index numbers met their expectations. And the U.S saw good economic numbers via Existing Homes Sales and its Manufacturing sector yesterday, but the three major equity Indexes have struggled to add value since the middle of last week. While corporate earnings may be weighing on sentiment, the fly in the ointment for U.S equities is the strong bond market which is producing good results.

Euro Appears Vulnerable as U.S Dollar Gains, U.S Bond Market Influence

The U.S Dollar has been ultra-strong the past few trading sessions and it is putting the Yen, Euro, and Pound near important technical junctures. 10-Year U.S Treasury Bonds are now yielding nearly 3 percent, which has been a definite catalyst for the Dollar trend. The European Central Bank will make their monthly monetary pronouncement on Thursday, but no changes of consequence are expected. The Euro is hovering near the 1.22 level versus the U.S Dollar and still appears vulnerable.

Gold on a Slippery Slope Short Term, April Support Levels May Not Hold

Gold has found itself on a slippery slope the past few days. The precious metal remains under selling pressure and is near the 1325.00 U.S Dollar ounce level. Support proved to be strong around these junctures early in April, but speculative forces may be targeting lower values near term.

Home Price Index from the States, U.S Consumer Data Awaits Today

An important Consumer Confidence reading will be issued for the U.S at 14:00 GMT and get the interest of traders.

  • 13:00 PM GMT, U.S, S&P/CS Composite-20 Home Price Index
  • 14:00 PM GMT, U.S, CB Consumer Confidence

Yaron Mazor is a senior analyst at SuperTraderTV.

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Brazilian Real Higher After Interest Rate Cut

The Brazilian real rallied against the US dollar yesterday after the Federal Reserve released a dovish policy statement and Brazil’s central bank cut its key interest rate.

The Central Bank of Brazil cut the Selic rate by one percentage point to 9.25%, in line with expectations. It was the first time since November 2013 when the interest rate was set below 10%. Moreover, the central bank signaled that it may continue monetary easing at the same pace at the next policy meeting.

USD/BRL sank 1.07% to 3.1384 as of 11:30 GMT today.

This post was originally published by EarnForex