The dollar index tracks the USD against the six most popular world currencies, where the yen and the euro can be considered the main catalysts for a decline, having lost 3.0% and 2.6%, respectively.
Nevertheless, smaller and secondary currency pairs also deserve traders’ attention, the movement in which is a kind of manifestation of profound processes of financial markets. Judging by these movements, the longstanding carry-trade idea becoming obsolete, as the high-yielding currencies of emerging markets are no longer highly profitable and the central banks of these countries are softening their policies in the attempt to revive economic growth.
Against the backdrop of the coronavirus epidemic and the Chinese authorities’ efforts to stimulate the economy, the Yuan is weakening. The Dollar is again worth more than 7 Yuan due to the easing of monetary policy of the authorities and fears of investors about a sharp cooling of China’s economic growth. The 7.0 mark was and remained an essential barometer of sentiment in China.
The price dynamic above this level reflects the continued uncertainty in markets about future growth prospects. In early 2017 and late 2018, the Yuan was heavily protected by PBC near this level. The signing of Phase One trade agreement also returned the renminbi underneath this waterline. However, the demand for the Dollar pushed the pair higher earlier this week.
The weakness of the Yuan and the Chinese economy also affected the Australian Dollar. AUDUSD is declining again this week, updating its 2009 lows below 0.67. It was a kind of waterline at 0.70, and the pair failed its attempt to climb higher at the end of last year.
A separate story is a Turkish Lira. This currency does not depend on problems in China so that it can be viewed as a different story. The USDTRY broke through 6.0 this week, following another cut of the rate by the Turkish Central Bank. TCMB has been more focused on reviving economic growth in recent months, rather than curbing inflation.
The steady downward trend of the lira against the Dollar has been observed for more than a month, and last week the pair crossed the 6.0 level, returning to last year’s highs. Above the current mark (6.08) the pair was only in May 2019 and from August to October 2018 during the period of extreme volatility in the pair. It seems that now the markets are trying to find the “ceiling” for the pair, the growth above which will be sensitive for the policymakers, forcing them to stand up for their currency.
The same can be said about the South African Rand, which crossed the mark of 15.00 in USDZAR, which was repeatedly tested for strength in recent years but did not stay long. The weakening of the Rand against the Dollar looks more surprising as it is happening against the background of robust gold price growth, that previously determined the price direction of ZAR.
Yesterday, we talked about SP500, today, I will show You the situation on DAX. We will focus on the long-term as this is the best timeframe to trade shares. For the past two years, DAX was creating an inverse head and shoulder pattern, which bounced from the major up trendline. In the middle of October, the price broke the neckline of this formation, creating a buy signal. With this, the movement towards the highs from 2017 and 2018 seems very probable.
Now, two emerging markets currencies. First one will be a Mexican Peso with the USD. Here, we do have a positive sentiment towards the MXN, mostly thanks to the trade deal between Mexico, US and Canada, which is signed but not yet ratified. Typical market behavior – as for now, we are buying the rumors. Selling the facts can come afterwards. Technically, we are inside of the symmetric triangle pattern. The price is bouncing from its lower line, which can be a good buy signal. On the other hand, the bearish breakout here, will bring as a negative sentiment.
Last is Turkish Lira also in a pair with the USD. Few weeks ago, situation here wasn’t looking good for the TRY. Recent agreement helped a bit but it seems that we are coming back to the weakness of Lira. After the bullish breakout from the symmetric triangle pattern, the price is now breaking the upper line of the wedge. Wedge, in this case, can be considered as a trend continuation pattern and is promoting a further rise.
This article is written by Tomasz Wisniewski, Director of Research and Education at Axiory
If we start looking for profit opportunities elsewhere, the Turkish lira will come up soon. What’s happening with the TRY and is it fit for trading?
During September and the beginning of October, the lira was rather stable versus the USD. USD/TRY kept returning down to the support at 5.63, while the upside was limited by the 100-day MA. This week, however, the lira has experienced a selloff, the pair jumped above the mentioned moving average and got to the highest levels since the end of August in the 5.88 area.
Fight for the lira
For many months, Turkish state banks have been holding the advance of USD/TRY by selling dollars. According to Bloomberg, in March they sold between $10 billion and $15 billion ahead of the municipal elections.
On Monday, the lira took a blow after Turkey began a military offensive into northeastern Syria. The banks intervened when USD/TRY was around 5.84/5.85 and sold about $1-3.5 billion during the past few days. However, this wasn’t enough to negate political risks: American President Donald Trump said that the United States will “obliterate” Turkey’s economy if it did anything he considered “off-limits.” Although Trump later said that Turkey was a “big trade partner” of the US, USD/TRY stayed above 5.80.
It’s evident that the resources of any central bank aren’t endless and the Turkish central bank is no exception: it obviously won’t be able to support the lira by selling reserves during an extensive period. If tensions between the United States and Turkey keep escalating, the regulator might have to consider rate hikes to stop the fall of the TRY. This, however, is against what President Recep Tayyip Erdogan has in mind.
Economy and monetary policy
Turkish economy is going through hard times: it experienced the first recession in a decade. To restore growth, the Turkish central bank has slashed borrowing costs by 7.5 percentage points since July. The looser monetary policy is endorsed and promoted by President Erdogan.
The next meeting of the central bank will take place on Oct. 24. Although Governor Murat Uysal sounded cautious about further action, a rate cut this month is still likely given the decline in inflation. Notice that Turkey’s benchmark rate is currently at 16.5%. If we adjust this rate for inflation, it will still be higher than in most emerging markets. This, in turn, means that, despite the rate cuts, the TRY may still be attractive for those who hunt for yields and are willing to bear the immense country risk.
Notice that the International Monetary Fund has recently revised up its growth forecasts for Turkey. According to the IMF, fresh stimulus including an expansionary fiscal policy can make the GDP growth rebound by 0.25% instead of a previously projected 2.5% contraction by the end of 2019.
Despite this ray of sunshine, Turkey’s position remains very fragile. A continuation of the invasion to northern Syria can lead to the US sanctions – something the Turkish economy will have a really hard time dealing with. S&P Global Ratings has warned that the military deployment raised risks for the lira and Turkey’s balance of payments: all the progress made during the recent year may evaporate. If you monitor the TRY, keep your eyes open for the news: Erdogan will visit Washington on November 13 and the market may put some hopes in the TRY ahead of the meeting, though the future will, of course, depend on its outcome.
As you can see, the situation for the TRY looks nasty and difficult. Rate cuts and military action will continue keeping the currency under negative pressure. On the bright side, the relations between the United States and Turkey look better than they did a year ago (merely because back then they were outright terrible) and interest rates in the country are still high. As long as things don’t escalate from this point, the fall of the lira shouldn’t be extremely steep. As a result, the advance of USD/TRY may be limited by 5.90/95. The next key resistance lies at 6.00. Support, in turn, is located at 5.80 and 5.70.
The bigger picture will change in favor of the TRY only if Turkey conducts fundamental economic reforms or reaches a trade deal with the United States. With those things unlikely soon, USD/TRY will trend to the upside.
Although interest rates were left unchanged this month, markets are already pricing in an over 80.0% probability of a 10-basis point cut to interest rates in September.
At already a record low of minus 0.4%, investors will wonder whether lower interest rates will be enough to sustain the EU’s economic growth momentum. Mario Draghi has stated that “data point to somewhat weaker growth in Q3 and Q4”. “Significant monetary stimulus” may be required to ensure the EU’s economic conditions do not deteriorate further amid external risks.
The dovish language employed by Mario Draghi does little to hearten global investors over the EU’s economic prospects. Germany’s dismal manufacturing PMI and business confidence data in July also pointed to stuttering growth momentum in Europe’s growth engine, which makes an economic rebound for the EU in the second half of the year increasingly unlikely.
The EURUSD initially tumbled towards 1.110 against the Dollar, setting a new two year low before later rebounding sharply towards 1.1170. Prices have scope to test 1.1200 in the near term before bears re-enter the scene.
Turkish Central Bank joins global easing bandwagon
Less than three weeks following the news that attracted global headlines over the 6 July weekend that former Turkish Central Bank Governor, Murat Cetinkaya had been dismissed, President Erdogan has finally got what he has long called for – lower interest rates in Turkey.
In his first monetary policy meeting as Central Bank Governor, Murat Uysal has not wasted any time whatsoever in cutting interest rates. Interest rates in Turkey have been cut by 4.5% today and although the general consensus was that an interest rate cut would be the outcome of the policy meeting, a 425 basis point move lower is still higher than the 2-3% market expectations.
Although cooling inflation and soft economic fundamentals have provided a valid reason for the central bank to hop aboard the global easing bandwagon, the independence of the central bank will come into question following an interest rate cut that had occurred in just the first monetary policy meeting of the new Governor of the Central Bank of Turkey.
The USDTRY initially punched above 5.7700 before sinking back below 5.6600 as investors digested the rate decision.
With the new Central Bank Governor already stating last week that there is “room to manoeuvre” on monetary policy, this not only keeps the doors open to more interest rates cuts, but will also increase the probability of this being a matter of “when” and not “if” the Central Bank strikes again before the year concludes.
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Turkey’s national currency Lira lost most of its value on Monday’s trading session. Conversely, the USD/TRY pair got elevated, marking the daily high near 5.7884 level. The negative sentiment aroused as President Recep Tayyip Erdogan fired the country’s Central Bank Governor. Reasons behind removal are still not evident. However, speculations suggest his reluctance to cut interest rates as the major cause behind ousting the Governor. Currently, the country economy is under pressure with rising inflation and rising GDP. Following such a detrimental act, investors cleared off a major chunk of their Turkish assets over fear. The Presidential decree for the same had come out on Saturday. As a result, the USD/TRY pair made a Gap-Up on the weekend, surging more than 2.78% since the last closing.
On the technical front, the Turkish Lira pair stood well above all the major SMA, supporting the positive price actions. Despite that, the pair gains remained capped beneath the robust 5.7686 resistance mark. The RSI indicated above 60 levels as buyers took over the sellers.
After facing a severe pullback on July 5, the EUR/USD pair had appeared to cling near 1.1228 mark. The pair quite smoothly managed to trace the same path in the Asian session on Monday. Positive German May MoM Industrial Production and Trade Balance data helped the pair to stay hold onto the consolidation range. Somehow, there was some slight correction in the pair’s daily movements post-08:30 GMT. The Eurozone July Sentix Investor Confidence reported data, disappointing the market participants. The consensus had hoped the Index to come out near 0.1 over previous -3.3. However, the actual figures got recorded near -5.8. Today, the US economic docket also remained light-weighted amid lack of significant events.
A decisive rally that had initiated from 0.6957 level on July 5 rebounded on hitting a 3-day old slanted descending resistance line. Even if the AUD/USD pair displayed price actions taking the pair above the aforementioned barrier line, the pair would have met a strong SMA conflux. This conflux comprised of the near-term 50-day & 100-day SMA and the most significant long-term 200-day SMA.
In the morning session, the June ANZ Job Advertisements got published. The statistics had previously reported as -8.2%. However, this time, the reports surprised the street analysts recording a positive 4.6%. At around 18:11 GMT, the Relative Strength Indicator was pointing near 34 level, revealing strong disinterest among the buyers.
The Japanese Yen pair opened up today near 108.48 level and showcased a slight downward drift in the early hours. Anyhow, the pair made a significant rebound motion over hitting the 108.30 support mark. From there, the Ninja pair maintained a healthy uptrend price action, breaching the 108.63 resistance handle. In the afternoon session, the USD/JPY pair was taking rounds near 108.72 daily high mark. The pair had attempted twice to make a break-through from this highest point but couldn’t make it a success. Earlier the day, BoJ Governor Haruhiko Kuroda mentioned that he had expected a moderate expansion in the economy, thereby allowing the inflation to meet the 2% mark. The Governor added that the Bank would make necessary adjustments in the monetary policy to attain its inflation target.
As a result, this news caused demand for the dollar, which in turn put pressure on stocks, ignoring the recent growth based on the expectations of aggressive Fed policy easing.
Positive news on the latest round of US-China trade negotiations has so far failed to return the risky assets appetite to the markets this week. Now, the chances of Fed mitigation – to support the dollar and suppress demand for stocks – are fading.
S&P500 futures retreated 0.8% down from the peak levels reached on Friday morning. Investors have taken profits from the previous rally, overestimating the chances of the interest rates lowering. In addition, market players have become noticeably more cautious in their actions, realising that an impressive pullback often follows historical highs.
The dollar purchases strengthening led to a EURUSD decline to 1.1220 on Friday. This confirmed the downward trend which has remained since the end of last month. As a result, the pair returned under MA(50): from the side of technical analysis, it could be considered as an additional signal to Sell. In the absence of other significant drivers up to Tuesday evening, EURUSD can be guided by technical indicators only.
The British pound fell below 1.2500 on a wave of Friday’s dollar purchases. On Monday morning, GBPUSD has returned to the area slightly above this level. Behind last week’s decline was staying ahead of Bank of England Governor Mark Carney’s rhetoric easing and the overall demand for the dollar. Still, buyers’ interest in the British currency is noticeable on a decline below 1.25. Without an increase in the odds of Brexit ending erratically, the pound looks significantly oversold at current levels and is attractive for purchases during downtrends.
Turkish lira was hit in the morning, losing 2.3% at the opening of trading day. The Bank of Turkey’s independence has returned to the agenda as the President Recep Tayyip Erdogan suddenly removed the Head of the Central Bank from his post who after he refused to reduce the interest rate, despite repeated calls for it by the government. The influence of this event can go beyond the limits of the Turkish lira course. That could be an unpleasant precedent both in the context of pressure on the Central Bank’s heads and the relatively new wave of currency war fears.
The Greenback had touched the culmination mark of around 98.35 top levels on May 23. However, the USD Index failed to keep hold of the gains and had started the plunge rally on the second half of that day. The Index had continued the downtrend until today but appeared to initiate reversal from around 97.55 low levels. Today’s primary trend in the USD Index followed the drop of German 10-year Bond Yields, which hovered near its bottom levels. Euro being the biggest rival, the Greenback benefitted out of this and was more than 0.17% up for the day. The Index marked day’s high near 97.75 levels despite lack of economic events.
All US Banks remained closed today on account of Memorial Day. At around 05:00 GMT, the Japanese March Coincidence Index, and Leading Economic Index reported slightly lesser than the estimates. Though there remained lack of any fresh US-China trade dispute headlines, speculations revealed the US plans to blacklist another Chinese firm. This time after Huwaei, the Company is Hikvision Digital Technology, Giant Surveillance Equipment Manufacturers. Trump administration displayed deeps concerns about China’s “extensive surveillance industry”. During today’s session, such underlying trade tensions kept the Greenback restrained from growing further.
Cable initiated trading on Monday morning near 1.2722 levels. The day started with a clear upshoot touching day’s high near 1.2748 levels amid the release of EU Election results. Nigel Farage’s Brexit Party won the majority UK seats followed by Lib. Democratic Party. The Conservatives and Labors remained down in the list as noted in the Election outcome. Farage commented that “Never before in British politics has a new party, launched six weeks ago, topped the polls in a national election”. However, the GBP/USD pair slipped 0.60% landing near 1.2670 levels following fears of a hard Brexit. After the announcement of the results, Farage had mentioned in his speech to the press that he needs a seat at Brexit talks. He alerted that the EU-UK Divorce should happen to the earliest and within the deadline October 31, 2019. If allowed to attend Brexit talks, Farage promised to ensure a Brexit happening irrespective of an underlying deal. Meantime, with May set to leave Downing Street on June 7, candidates line up to become May’s successor.
The US Dollar, Turkish Lira pair, continued declining on Monday’s session as Lira stays under the verge of an economic crash again. The USD/TRY pair traveled along a straight line around 6.0842 levels in the early morning session. Recently, the Central Bank of the Republic of Turkey (TCMB) announced the depreciating value of Turkish Lira currency.
Over the years, Turkish people have tended to use foreign currencies over the local currency, limiting usage of Lira. Hence, the Central Bank addressed banks to elevate their Reserve Requirement Ratio with the Bank. Officials believe that this would lead citizens to increase the Lira liquidity in their national territory. However, the Bank’s revenues continue plunging, depreciating the local currency. Nevertheless, a lack of new headlines over US-Sino trade talks helped the USD/TRY pair to reduce intra-day losses. The pair had touched the day’s low near 6.0300 levels and recovered later reaching near 6.0614 levels.
After closing the last day’s trading session on a negative note, the pair displayed some signs of recovery. The USD/JPY pair elevated from the 109.45 levels touching near the day’s high near 109.58 levels following weak Japanese March data. Leading Economic Index came out 0.42% lower than the consensus estimates of around 96.3 points. Also, the Coincidence Index reported 99.4 points over 99.6 forecasts. The Japanese Yen lost further ground after the BoJ’s Governor Kuroda alerted of high economic instability.
The Aussie pair rang the Tuesday morning bell near 0.6993 levels. The pair displayed a decent performance in the early hours after some positive AUD-specific events. The March MoM AUD Retail Sales came around 0.1 percent higher than the estimates near 0.2 percent. Also, the March AUD Trade Balance reported a figure around 4949 million over expectation of 4300 million. The investors witnessed a whopping 0.76 percent in the Asian trading session post such positive results.
However, the AUD/USD pair slid back to 0.6999 levels in the next session after the RBA rate announcement. The market had expected the Central Bank to report a rate cut this time. Somehow, the RBA kept the interest rates unchanged at 1.5 percent shattering the investor hopes. At around 17:00 GMT, the pair was trading near 0.7006 levels.
The Fiber managed to keep up near 1.1200 levels since last few sessions. However, the pair lost hold of high levels today. The EUR/USD had tested near the day’s high near 1.1219 levels. Laterwards, the pair fell amid poor German Factory Order figures. The March MoM German Factory Orders recorded near 0.6 percent over the estimates of 1.5 percent. Adding to this negative sentiment, France March Trade Balance reported a negative €5.3B over expectation of negative €4.5B.
Meanwhile, France March Current Account came as negative €1.3B, as to the consensus estimate of negative €0.97B. The primary rationale behind the Fiber plunge was the political turmoil prevailing in Turkey. During the day, the EUR/USD pair lost almost 0.46 percent of the gains accumulated since last few sessions.
The Turkish Lira had extended its losses into today’s session amid Istanbul political chaos. During the day, the USD/TRY pair made a substantial 1.76 percent marking the year’s high near 6.2000 levels. The Lira investors went unnerved, calling for a massive sell-off after the Turkish government announced for re-election on June 23. The Opposition party had won in the local elections conducted on March 31.
Speculations suggested that the Turkish President Erdoğan is trying to misuse his powers to bring back control over Istanbul. The citizens protested against the government and its decision. The fall in the Turkish Lira had significantly benefitted the earlier-falling US Dollar Index. The USD/TRY pair had remained fragile to the last Central Bank Interest Rate meeting. The Bank had decided to keep the rates unchanged at 24.00 percent. This move was initiated to compete against the rising US interest rates and heavy debt pressures on the country.
US Dollar Index
The Greenback measured against the six major rival currencies weighed higher today after slumping yesterday. The Index was pretty down amid Trump threats to impose more tariffs on Chinese goods. However, the Index has successfully managed to rebound from its previous day losses. The Index jumped back near 97.70 levels from where it had fallen the last day. During the day, the Green Money made a swing high of around 0.32 percent. The primary rival (EUR/USD) which constitutes almost 50 percent of the Index dropped over Greenback rise. Quite notably, most of the competitors computed against the greenback remained lower today. The AUD/USD and USD/TRY remained among such tumbling currency pairs.
S&P 500 futures on Monday updated historic highs but shortly after fell under some pressure. One of the reasons is the disappointment in Alphabet report, whose stocks are losing more than 7% in premarket. But even worse, Chinese data showed a decline in production activity. The technical analysis demonstrates the weakening growth momentum in the markets and increases the chances of a quick corrective pullback. The markets may require an impressive positive factor to continue the rally, which may be a further sharp easing of the Fed position (Wednesday), and a strong labour market report (on Friday).
EURUSD has added about 40 pips on Monday to 1.1180. At the beginning of trading in Europe, the pair came close to the level of 1.1200. The former strong level of support now risks becoming important resistance, heightening the pressure on the euro. Among the news, quotes may be affected by estimates of GDP in the eurozone, as well as inflation in Germany.
The British pound rose to 1.2950 dollars, adding about 50 points to Monday’s intraday lows. Behind the growth is the caution of players in front of a tense second half of the week. The combination of the demand for safe assets and reduced trading activity can make MA(200) a relatively strong resistance in the coming days.
Turkish lira continues to decline against the dollar. The financial markets of the country are experiencing serious outflows, and the national Central Bank (TCMB) burns foreign exchange reserves to curb the weakening of the national currency. The situation is aggravated by the economic downturn in the country, which limits the ability of the TCMB to raise the rate in order to stabilize the TRY. Potentially, the focus of anxiety can spread to the whole emerging markets sector and to the European markets, including EUR.
Most currencies are up against the dollar at the time of writing, but not all currencies have the same prospects of adding to its gains. The Russian ruble is looking most promising, while the USDZAR is looking to be carving out a significant inverse head and shoulders pattern. USDTRY is outright bullish, and it seems like the Turkish lira will add to its losses in the days ahead, while USDMXN is trading sideways.
The Russian ruble is looking most interesting after taking a break to its uptrend in the last few weeks. The USDRUB attempted in March to breakout from a multi-month descending triangle but fell short, after reaching a low of 63.68 and traded back into the pattern. However, in the last few days the price is once again trying to trade lower, and ATFX’s Chief Market Strategist, Alejandro Zambrano, suspects that USDRUB might reach its 2019 low of 63.62 as long as the price trades below this week’s high of 65.67.
The Turkish Lira is also highlighted in the video, as it looks to trade lower on technicals, but also as President Erdogan kept up pressure for a recount of local elections in Istanbul. The USDTRY left a relatively stable price range that latest from November 2018 to March 2019, and looks now to be heading to its rectangle pattern of 5.96. The price will need to trade below the April 2 low of 5.67 to turn neutral.
The Mexican Peso is trading sideways between 18.74 and 19.60, but the long-term prospects of a strong trend look good on a break to 18.74.
The South African rand is the short-term bullish, but if we take a longer-term view, it looks like the price is trying to carve out a significant inverse head and shoulders pattern.
Today, the USD/JPY pair skyrocketed breaking all the in-between resistance levels. After the heavy plunge of Friday, the pair had tried to rally upwards on Monday but failed to break the major resistance levels. The pair sustained range bound movement between 109.73 and 110.23 levels.
The USD/JPY pair began the day at 110.09 level. After that, it made a slight upward drift following the rebound of 10-year US T-bond yield. The pair again slipped lower to a new support level of 110.01. From that reversal point, the pair soared continuously moving up more than 0.58 percent.
During the morning session, the Bank of Japan (BoJ) reported its Summary of Opinions which mentioned that the bank would stay flexible on varying economic changes.
The USD Index that computes the greenback against the six major currencies weighed more against its peers today. After consolidating in the early hours, the index changed gears at 04:00 GMT and took a steep upward jump reaching 96.092 level. After a small correction, the index uplifted further on lower 10-year Treasury Bond Yields. The escalation continued despite poor February Housing Starts and Building Permits reports released today. Both numbers were below the consensus estimate.
“There is a reluctance to buy dollars, while the bar for selling dollars has been relatively high because people have been burned before,” said Steven Englander, global head of G10 FX research at Standard Chartered Bank in New York.
The EUR/USD tumbled reaching far below 1.1300 level. The greenback climbed new highs recovering previous losses. The USD Index had touched 96.7500 level during the day. The pair was unsuccessful in breaking the 200-week Simple Moving Average (SMA). The fall worsened later the day reaching weekly low under the vicinity of 1.1280.
The Brexit changed controls over to the Parliamentarians. Euro Investors are highly worried over concerns on a deal Brexit as Eurozone Elections are nearing.
The Loonie pair seems to end the day at low levels. The pair had risen in the mid-day session after the rebounding of the US 10-year treasury bonds yields. Poor US housing data and other indexes released today, pushed the loonie pair down later the day.
With the OPEC cut in production and rising oil demands, the price of crude oil reached new highs. This elevation in the crude price helped the Canadian Dollar to uplift which lowered the pair further. The USD/CAD pair touched the day’s low of 1.3371 twice during the day.
The pair remained under consolidation mode for quite some time before beginning with the downtrend. The USD/TRY pair showed violent movements ranging between 5.50/5.60 levels during the day. At 14:20 GMT, the pair started slumping heavily from 5.5616 level reaching 5.3829 level. Investors look for the Sunday Municipal elections.
The Simple Moving Average (SMA) for the major days lie above the last traded level of the pair. This symbolizes a bearish stance for the pair. The pair traded staying within the range of the Bollinger Band without breaking the boundaries. Mid-day contraction was followed by a later expansion. The bearish pressure increased multifold with the economic sluggishness amid US poor data revealing reports released during the day. A selling has taken place which brought the pair down to lower levels as the day approaches to end.
We have come to the second month of 2019 and it’s time to take a deep breath after the crazy run of the year, evaluate what has already happened and made some precisions on the upcoming months.
Last year appeared to be struggling for the emerging market currencies. And there were several reasons for that. Firstly, it was the aggressive pace of rate hikes by the Fed. Secondly, the escalation of the US-China trade war and slowdown in the global economic growth. Thirdly, the global risk-off sentiment. Moreover, we all remember crises in Turkey and Argentina that made traders more cautious about the emerging markets.
2019 seems shinier for the EMs. Reasons are hidden in the relief of the Fed monetary policy and the possibility of the deal between the US and China. As a result, it seems like bears started easing their grip. Does it mean that the time to invest in developing economies has come?
Where to invest and why?
The Brazilian currency may become one of the most attractive ones in 2019.
Last year, the Brazilian market was under the pressure of the global market sentiment and the presidential elections. However, all these factors seem to start vanishing in 2019. There are no doubts the Federal Reserve will ease its monetary policy. Trade disputes between the US and China have started improving. There are no proves that they won’t escalate in the future again but the melting confrontation is already a good sign. Also, experts see a policy of Mr. Bolsonaro (elected in 2018) as a booster for the Brazilian economy. The pension reform is anticipated to become one of the main drivers. Experts believe that the policy of the pro-business president could contribute to the faster GDP growth and investment flows in Brazil.
Mexica has a similar situation to Brazil. Last year the country elected a new president. This year will show whether the new political force will encourage the economic growth or pull it down. Uncertainties around the policy of the new president will add pressure on the currency, but as soon as the new government confirms its reliability, investment flows will come to the country.
2018 appeared to be the hard year for Turkey and its economy. Disputes with the US, problems with the monetary policy made the Turkish lira depreciate by around 30%.
Up to now, economic data are not encouraging. However, there is a chance. On its last meeting, the central bank decreased its 2019 inflation forecast by 0.6% to 14.6%. Moreover, the central bank promised to not cut the interest rate until there is an improvement in the inflation level.
It’s early to talk about the strong recovery of the Turkish currency, but it’s worth following the economic releases.
What investments to avoid?
Although most of the factors signal the recovery of the EMs, it doesn’t mean that all currencies will appreciate. Risks for some currencies still exist.
Possible stones for the South African Rand.
The first thing that may affect the currency is the continuation of the slowdown in the Chinese growth. China is the close partner of South Africa. As a result, the suffering Chinese economy may put downward pressure on the South African one.
The second factor is the possible credit downgrade. And this factor is highly connected with another one – May elections. Elections always create high volatility in the domestic market. Moreover, the results of the elections will affect the economy in general. The pace the elected government committed to will affect the future of the country.
Analysts say that it’s unlikely Moody’s will cut the ratings before the elections but the further slowdown of the South African economy and the risks of the further fiscal slippage may push the agency to do that to the end of the year.
Making a conclusion, we can say that there are good opportunities for emerging markets to recover. However, not all EM currencies have the same chances to appreciate. The further direction of them will depend on economic releases, political news, and the market sentiment.
Volatility returned to the currency markets in 2018. The prior year did not provide investors with fear and uncertainty the way 2018 did. The dollar was the main catalyst for changes in market sentiment. Exchange rates were relatively stable until the spring of 2018 and then it became clear that US yields would rise, sending the greenback higher. There were also some severe movements in emerging currencies. The Chinese Yuan weakened substantially along with the Turkish Lira. Moving forward, there are several factors investors should focus on. The ECB will play a key role in 2018, along with political events in both the UK and US.
The Strength in the Greenback
The dollar returned as the king of the currencies in the spring of 2018. A new Federal Reserve chair began his tenure and quickly installed the belief that the Fed would continue to raise rates multiple times in 2018 and 2019. This led to a rise in US yields pushing the yield differential between major counterparts in favor of the greenback.
Fed Chair Powell’s continued to be hawkish throughout the year, and by October of 2018 the average Fed forecast confirmed the central banks’ intention to increase interest rates three more times in 2019, with another rate hike scheduled for December. Fed chair Powell in the fall of 2018 said that monetary policy was still accommodative, and there was further to go before the Fed funds rate hit neutrality. The hawkish tone of the Fed was repeated during the week before Christmas. The fed increased the Fed fund rates by 25-basis points and signaled some softening by forecasting an increase in interest rates by 50-basis points in 2019 instead of the 75-basis point forecast increase they had made during the fall. This was at odds with the market which forecast rates to fall in 2019.
The Dollar versus the Euro which is the most liquid global currency pair has a peak to trough move of nearly 10%. The increase in the value of the greenback might be curtailed by a less hawkish fed. The markets are signaling that rates have reached restrictive levels which might reduce dollar volatility moving forward.
One of the issues is the concept of neutrality. Coming out of the Great Financial Crisis, the Fed wanted to increase interest rates to the point where they had enough bullets to reduce rates should a recession occur. If the Fed left rates as very accommodative levels, then there would be no stimulus to help the economy if it began to falter.
The Fed also needed to unwind its asset purchases. The period of quantitative easing had ended, and the Fed began to wind down its portfolio. This strategy was put in place before President Trump was elected, and there has been continuity between recent Fed Chairs, during the last 10-years. The President has been ultra-critical of the Fed decision to increase rates during 2018. If this occurred in nearly any other country investors would have hammered the currency. Yields would soar as investors extract a steep price for criticism of the central bank.
Brexit Hampers Sterling
The pound was a big loser in 2018, as the issue related to Brexit started to heat up. The decline in the pound coincided with strength in the greenback which began in the spring of 2018. The GBP/USD had peaked to trough range of 13%.
During the fall of 2018 reports that the EU and the UK were having difficulty reaching an agreement started to generate headwinds for the GBP. Despite mixed data, some of which showed strength, the Bank of England was hamstrung by the Brexit issues. Ahead of the Christmas break, Prime Minister Terresa May reached an agreement with the EC but was told this would be the last agreement and there was no flexibility. Unfortunately, PM May was unable to get the Brexit bill passed by the parliament. In fact, her own party the Tories held a no-confidence vote which May was able to survive. This will be revisited in early 2019, as the Brexit saga continues.
The Chinese Yuan Tumbles
The Chinese Yuan was one of the biggest movers during 2018. The peak to trough range was nearly 11.5%. The currency began to weaken during the spring of 2018 as trade issue between the US and China began to heat up. There were multiple fits and starts and as of the year-end, the rhetoric between President Trump and President Xi continues. Initially, investors thought the weakening of the Chinese currency was a function of the People’s Bank of China’s efforts to offset softening exports with a weaker currency. This would make Chinese exports more attractive. During the latter half of 2018, Chinese economic data began to soften which was foreshadowed by the weakening currency. As of year, end Chinese PMI data moved into contraction territory which points to further contraction in the Chinese economy.
While 2018 was the year of the dollar, there are many issues that can change the narrative in 2019. The Fed will likely change its tune and reduce the number of rate hikes to 1, instead of 2. US yields already reflect this scenario and should help reduce the value of the dollar. The global economy could continue to weaken which will weigh on the yuan and could further hurt the Chinese currency.
The markets have also failed to discount the volatility associated with political unrest in the United States. President Trump could be impeached which is likely, but nobody believes, the Senate will convict him. If this becomes the case, the markets could become very volatile and could generate significantly headwinds for the dollar. US yields, in this case, would decline instead of rising, making the dollar less attractive. At the same time, investors would be looking for a safe-haven currency which would likely be the yen and the Swiss Franc. Even if political unrest does not occur, a potential recession in the US would weigh on the greenback.
The developing trade war between the US and China has created turmoil in emerging markets, most noticeably in the form of a sell-off of the Chinese stock market and currency.
Trading the trade war is not very straightforward. Firstly, we really don’t know how it will end. It will probably be resolved eventually, but the timing will make a big difference.
The longer it lasts the more damage will be done, and that will have longer-term implications. A longer trade war may also trigger a domino effect through other parts of the global economy. If the trade war was to be resolved fairly soon, prices would normalize quite quickly.
One thing to remember is that it appears Trump is happy to keep the pressure on as long as the US stock indices continue making new highs. If volatility in the US stock market picks up, as it is now, he may be forced to soften his stance.
Several markets related to the trade war are currently very oversold, and should the impasse be resolved, sharp reversals are possible in some of these markets.
Traders should be careful of using the same approach across all emerging markets. Some markets have been caught up in the trade war, while others have deep-seated underlying problems of their own.
Tensions over trade began to grow between the US and China between January and May this year. In May the US began to effectively impose tariffs on certain imports from China by terminating tariff exemptions. More products were added in June and more gain in September.
The Chinese Renminbi has fallen 10% since March as the trade war has escalated. The Shanghai composite has meanwhile lost as much as 25% since the beginning of 2018.
The slide in the renminbi has to a certain extent offset the added tariffs – the weaker currency means US importers are paying slightly less before tariffs are added.
It’s worth noting that the slide in the value of the Renminbi has slowed significantly since July despite the additional tariffs with a double top potentially forming. It is possible that the Chinese Central Bank is supporting the currency to prevent capital flight, as they experienced in 2015/2016.
Not many forex brokers offer to trade in the Renminbi, but a few do. If you are looking to trade the Chinese currency you will be trading the Offshore Renminbi or CNH. The CNY is the Onshore Renminbi which us restricted and managed by the Central Bank.
Turkey has several problems. Firstly, a series of populist policy decisions by the president eroded investor confidence, triggering a selloff of the already structurally weak Lira. This turned into a vicious cycle as much of the country’s government and corporate debt is USD denominated, and effectively rises as the Lira weakens. On top of this precarious situation, the US then imposed new import tariffs on Turkish goods.
The Turkish Lira had lost almost 46% of its value by the middle of August and is now consolidating in what could turn out to be either a continuation or reversal pattern. The benchmark equity index, the BIST100, fell as much as 30%, though it has recovered some of those losses.
The Turkish economy is one of the most vulnerable in the world, and further emerging market volatility could very easily lead to further losses for both the currency and stock market. Investors will probably want to see policy changes before a sustained recovery begins.
Argentina had to turn to the IMF to help prop up its balance sheet in May, and this loan was recently increased to $57 billion. The Peso reached an all-time high of 41.47 against the USD, having traded at 18 in January. Last week, the Central Bank raised interest rates to 65%, indicating how serious the crisis is.
The benchmark stock index recently tested the all-time high recorded in January – though this has more to do with the inflationary effect of a weak currency than with earnings.
Argentina is one of the weakest markets and will be vulnerable to further fallout from the trade war. Traders watching the stock index should focus on the technical picture rather than trying to weigh up valuations and a fluctuating currency.
South Africa’s economy has been under pressure for several years as a result of a scandal-ridden government. In the second quarter, the country officially dipped into a recession.
South Africa’s currency, the Rand, is structurally weak and was also rated by Bloomberg as one of the most vulnerable in the world. The Top40 stock index has made little ground since 2014 as political uncertainty led to an investor exodus.
A certain degree of political stability has been restored and South Africa is beginning to look more like a potential turn around play. South Africa is also a major commodity exporter and highly correlated with China’s economy. If the trade relationship between China and the US is resolved, SA may be a market to watch on the upside.
Commodities, especially base metals like copper and iron ore are another potential play based on how things develop. If the standoff is prolonged its likely to have an ongoing impact on China’s domestic economy, which includes massive infrastructure projects. Besides metals prices, traders can also look to Australia’s large commodity exporters.
Global Tech Stocks
The original FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have a few problems of their own. Not only are they priced for strong growth going forward, but the likes of Facebook and Google are facing growing scrutiny over issues related to users’ personal data.
The trade war has now brought a new dynamic to the sector. Chinese tech giants Alibaba and TenCent are both under pressure due to the trade war. China is also very important in Apple’s life, both as a supplier and as a customer. Ongoing pressure on China’s economy will eventually begin to impact Apple.
As you can see there are quite a few instruments that traders can use to play the trade war, either in the case of an escalation, or continuation or in the case that it is resolved. When choosing a forex broker it’s a good idea to look at the range of instruments offered so that you have the option of expressing trades through several instruments.
As was mentioned at the beginning, it’s impossible to predict how all of this will play out. Traders should, therefore, trade opportunistically and keep an open mind.
The US Federal Reserve will be announcing their decision on interest rates and releasing the minutes of the FOMC meeting today at 18h00 GMT tomorrow. A 25-basis point hike is expected by economists and investors, with another hike in December also widely expected.
Given that the rate decision is taken as a given, all eyes will be on the wording that accompanies the decision and, on the Fed’s updated Summary of Economic Projections which will also be released. In particular, the market will be looking at whether the term accommodative will be removed or softened within the statement.
Jerome Powell is widely expected to say that risks to the economic environment are balanced, but investors will also be interested to see whether he highlights trade policy (i.e. tariffs) as a major risk to the US economy.
In the absence of any unexpected concerns regarding risks, GDP growth or inflation, the market will be looking at the Fed’s projections for the economy and rates out to 2021. This will be the first time the Fed will extend its projected rate charts to 2021, where many believe rates will stop rising and level off.
Overall, the rate announcement is likely to be a non-event and investors will look to other economic data releases, the escalating trade war, and emerging markets for direction.
The US Dollar
US Dollar has weakened since the previous meeting and sentiment remains weak around the greenback, despite 10-year treasury yields hitting their highest levels since 2011. With the market already discounting a 25-basis point hike, the Dollar is only likely to strengthen if the outlook is more hawkish than expected.
There is a very small chance (2%) of a 50bps hike but considering that another hike in December is also expected by most market watchers, even this may not be enough to boost the Dollar.
The US Dollar index (below) has breached support going back to May, and it will take a very hawkish statement for it to regain this support level at 94.75. While all of this appears to point to further weakness, this too may be contained by technical levels against other major currencies.
The EUR/USD has bullish momentum but will encounter resistance between 1.181 and 1.19 – in fact it is already struggling below 1.18. If this area of resistance is convincingly breached, we may see further USD weakness.
Most of the emerging market currencies that have been under pressure in 2018 have consolidated over the past month. In general, risk assets are back in favor, and emerging currencies have benefited from this. However, they do remain vulnerable, and any volatility that follows the Fed decision would probably lead to further weakness.
In all, the rate decision is most likely to turn out to be a non-event. The market is more likely to focus on the longer-term fallout from the trade war with China, something that will impact emerging markets and China, more than the USD itself.
While the currency pairs we hear about most often are the major and minor pairs, there are actually far more exotic currency pairs to trade. In this introduction, we will define the types of currency pairs and cover some of the basics you’ll need to know before you begin trading the ‘exotics’.
Major and Minor Currency Pairs
Firstly, we should define major and minor currency pairs. The following are regarded as major currencies:
US Dollar (USD)
Japanese Yen (JPY)
British Pound (GBP)
Swiss Franc (CHF)
Canadian Dollar (CAD)
Australian Dollar (AUD)
New Zealand Dollar (NZD)
Major currency pairs refer to any pair containing one of these currencies and the US Dollar, so while there are eight major currencies, there are only seven major currency
An important issue in the currency market is liquidity – i.e. the amount of any currency being bought or sold at any time. The most liquid currency pairs tend to have natural supply and demand from exporters and importers in addition to the supply and demand generated by speculators and investors. Since all the countries listed above have substantial trading relationships with the US, constant liquidity is provided by exporters and importers.
Minor currency pairs include any two of the major currencies apart from the USD. Some of these pairs, including GBP/EUR and AUD/JPY represent pairs of countries with active
trade relationships, providing significant liquidity. Others, like CHF/JPY and EUR/JPY, have less active natural supply and demand.
Before we move on to exotic currencies it’s important to understand that there are two major forces driving the exchange rate between two currencies; natural supply and demand, and the relationship between those two currencies and other currencies – most notably the USD. If you exchange GBP for EUR, importers, and exporters in both the UK and Europe will be buying and selling both currencies, providing an active market. On the other hand, if you exchange GBP for NZD, there will be fewer importers, and exporters active in the market – the quotes will more likely be a combination of the GBPUSD rate and the USDNZD rate. With currencies that are even less liquid, exchanging one currency for another will inevitably involve exchanging the first currency for USD and then exchanging USD for the second currency.
Most forex brokers offer clients forex trading either in the direct currency market or via CFDs (contracts for difference). Either way, the spreads they offer depend on the liquidity of the underlying currency market. Even though you may see a pair quoted as just two currencies, for the trades to take place in the underlying market, at some point an extra leg may have to be executed by a market maker.
What are exotic currencies?
Exotic currencies are any currencies not mentioned already. Some like the Hong Kong Dollar (HKD) and Norwegian Krone (NOK) are actually very liquid, some like the Mexican Peso (MXN) and Thai Baht (THB) are fairly liquid, and others like the Malawian Kwacha (MWK) and Laos Kip (LAK) have very little liquidity.
Exotic pairs are those that include one major currency and one exotic currency. While there are over 150 countries that could be classified as developing nations, trading in exotic currencies is focussed on 18 currencies. Admiral Markets UK Ltd, a prominent forex and CFD broker, for instance, lists 19 exotic FX currency pairs including 10 exotic currencies. There are plenty of other exotic currencies, but in most cases, brokers will only offer those that their clients demand.
The following are the most widely traded exotic currencies:
Chinese Yuan Renminbi
Hong Kong Dollar
South Korean Won
South African Rand
With any broker, the spreads being offered for a currency pair will reflect the underlying liquidity for that pair. Admiral Markets, for instance, offers spreads as low as 0.1 pip for the EURUSD pair (the most liquid pair in the world) to 5 pips for CADCHF and 10 pips for the USDCNH. For even less liquid currencies, the spreads can be much wider, in some cases reaching 800 pips.
Which Currencies Should You Trade Exotic Currencies Against?
An exotic currency will usually have better liquidity if it is traded against the currency of a major trading partner. The Turkish Lira is therefore usually traded against the Euro, the HKD against the USD or Chinese Renminbi and Mexican Peso against the US Dollar. You would struggle to find a broker offering a Malawian Kwacha/Swiss Franc pair, but even if you did, the spreads would be very wide. In most cases, exotic currencies from countries in or close to Europe are traded against the Euro, and others are traded against the USD.
Pros and Cons of trading Exotic Currencies
The currencies of developing nations are often volatile and prone to trend strongly. Some countries with large current account deficits have structurally weak currencies that have weekend consistently for decades, while others have steadily strengthened over time.
This means there are certainly opportunities for forex traders to profit. The downside is that trading costs can be high and are some currencies are prone to large, unexpected moves when government policies are changed without warning.
For the most part, traders need to have a longer-term view when trading exotic currencies than they would with major currencies. The less liquid a currency is, the longer the time horizon should be. Some, like the Norwegian Krone and Singapore Dollar, are very liquid and can be treated like major currencies. However, others, like the South African Rand and Turkish Lira are not suitable for intraday trading and are only suitable for medium-term trading under unique circumstances. In most cases, exotic currencies require time horizons of weeks to months, unless a very unique opportunity presents itself.
Secondly, traders must familiarise themselves with the typical patterns for a particular currency before trading it. Each currency has its own unique personality and there are usually good and bad times of the day and week to trade them.
While trading exotic currencies are less straightforward than trading major and minor pairs, they do offer very profitable opportunities. Every few years there is usually an emerging market currency crisis which results in some currencies moving as much as 20 to 30%.
These situations offer forex traders opportunities they will seldom see in major pairs. It is therefore worth learning more about these currencies and adding another tool to your trading arsenal.
Risk disclosure: Forex and CFD trading carries a high level of risk that is not suitable for all investors. Presented information is not an offer, recommendation or solicitation to buy or sell. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks involved. Read more at admiralmarkets.com.
Cautiousness returned to the markets at the beginning of the new week on the introduction of bilateral tariffs between the U.S. and China, as well as expectations of the Fed rates rise. It should also be noted that the tightening of the Fed’s policy forces the central banks of smaller countries to tighten their policies as well. The Central Banks of developing countries (Argentina, Turkey, Russia, Philippines) actively raised rates or unfolded their rhetoric towards the tightening in August and September in response to a very serious outflow of capital and the fall of national currencies.
Despite the similarity of form, the consequences for countries and currencies will vary drastically.
Policy tightening in the United States is a response to increased inflationary pressures because of a strong economic growth and one of the tightest labor market conditions for decades. Measured increases in rates do not hinder the economic growth and even motivate the demand to some extent, as consumers rush to credit at low rates, realizing that soon the lending will rise after the tightening from the Fed.
In emerging markets, it is often a different story. The central banks of Argentina and Turkey have increased the rates very sharply to stop the free fall of national currencies and frightening volatility of the markets. Now, this sharp policy tightening may become a serious strangling for growth in the coming months. Earlier last month, the South African rand sharply decreased after reports of an unexpected recession in the country.
It will not be surprising if in the coming months we will be more likely to receive reports about slowing growths of developing countries or recessions there (the Central Bank of Russia has already warned about such possibility).
The central banks of developing countries will probably have to fight back the attacks like the one we saw in August and September more than once in the coming months. In doing so, they will have to balance between the policy tightening and growth to maintain the attractiveness of the currency for external investors and avoid the economy knockdown.
The Bank of England and the European Central Bank did not deliver any surprising news on Thursday, both banks kept interest rates unchanged. As expected, the BoE left its rate on 0.75%, the ECB kept its record low rates at 0.00%.
The Turkish Lira strengthens 2.87% versus the US dollar after the Central Bank of Turkey increased its interest rates from 17.75% to 24%.
Economic reports and the Fed were highlighted on Wednesday with volatility spread across the board from commodities to stocks to financials. The U.S. session featured reports on producer inflation and crude oil inventories as well as a speech from a Fed official and the central bank take on U.S. manufacturing. Early Thursday, investors are reacting to stronger-than-expected Australian employment data.
U.S. Economic Reports
According to the Labor Department, U.S. producer prices unexpectedly fell in August with the weakness led by declines in the prices of food and a range of trade services. The decline could have been worse if not for an increase in the cost of energy products.
The Producer Price Index (PPI) for final demand slipped 0.1 percent last month after being unchanged in July. August’s decline was the first in 1-1/2 years. Economists were looking for an increase of 0.2 percent in August.
In the 12 months through August, the PPI rose 2.8 percent, down from July’s 3.3 percent increase. Economists had forecast a 3.2 percent year-on-year reading.
Core PPI edged up 0.1 percent in August. In the 12 months through August, the core PPI increased 2.9 percent after rising 2.8 percent in July.
U.S. Energy Information Administration Inventories Report
Crude oil prices rose after an EIA report showed U.S. crude inventories fell 5.3 million barrels in the week to September 7 to 396.2 million barrels, the lowest since February 2015 and about 3 percent below the five-year average for this time of year.
Additionally, U.S. crude oil production fell by 100,000 bpd, to 10.9 million bpd, as the industry faces pipeline capacity constraints.
Gasoline stocks rose 1.3 million barrels, while distillate stockpiles, climbed by 6.2 million barrels, the EIA data showed.
Fed Beige Book
According to the Federal Reserve’s latest Beige Book released late Wednesday, three of the Fed’s 12 districts – St. Louis, Philadelphia and Kansas City – reported weaker growth in August. Additionally, the central bank said that while the overall U.S. economy expanded at a “moderate pace,” trade concerns and a lack of workers delayed projects. There were also “some signs of deliberation” in prices of final goods and services.
Fed Governor Lael Brainard
Fed Governor Lael Brainard said in a speech on Wednesday that the Federal Reserve likely will continue gradual interest rate increases but will accelerate the pace if signs that financial imbalances continue to build.
“While the information available to us today suggests that a gradual path is appropriate, we would not hesitate to act decisively if circumstances were to change,” Brainard said, according to prepared remarks. “If, for example, underlying inflation were to move abruptly and unexpectedly higher, it might be appropriate to depart from the gradual path.”
Australian Employment Report
Australia’s employment rose a strong 44.0K in August, more than reversing the modest 4.3K drop in July. Over the past three months, employment has risen an average of 33K per month. The strength was due to a sharp rise in full-time jobs (33.7K), while part-time jobs also rose (10.2K). The Unemployment Rate was stable at 5.3 percent, while the participation rate rose 65.7 percent.
Global stocks trade mostly higher on Thursday morning on new trade talks between Beijing and Washington. The global positive momentum affects also the developing countries share market which after a sharp decline rebound due to three main reasons.
Positive expectations from trade negotiations
Asian markets are adding after reaching 14-month lows the day before. Positive markets are supported by the reports about China’s invitation to trade negotiations. Previous negotiations did not bring any results and led to a tightening of the rhetoric and tariff expansion. However, the positive markets are fuelled by the sentiment that President Trump’s administration will be slightly more inclined to reach an agreement, having faced a public coalition of 85 industrial groups in the US that oppose the trade tariffs.
Short-term oversold indices
However, an equally important factor is the “fatigue” of the market after a prolonged sale. MSCI for Asia ex-Japan adds 0.5% this morning after touching the oversold area on RSI. Often, the exit from this area increases the craving for profit by speculators, oriented to technical factors that could support the market in the next few days. Futures on Heng Seng 50 add 1.1% per day. After a long sale, the fixation of profit from the weakening can develop a rebound up to the rest of this week, although it is not yet possible to talk about a fundamental reversal to the growth for EM markets.
In addition, weak U.S. PPI data have a moderately positive impact on the markets. The release below expectations has lowered the fears that the Fed will have to go ahead with raising the rates to suppress inflationary risks having pressed on the dollar and supported the demand for risks.
All of the factors above (positive expectations from trade negotiations, short-term oversold indices and weak statistics on inflation in the USA) are not capable to form a sharp rebound separately, but their combination helps the markets to form the ground.
Stocks of the Emerging Markets remain under pressure on Wednesday morning, with positive sentiments prevailing in American markets following strong macroeconomic statistics. MSCI for Asia-Pacific region has been updating its lows since July 2017, losing 0.5% on Wednesday. Hong Kong’s Hang Seng loses 0.2% but is also in the area of 14-month lows. Both of these indices have entered the oversold zone on RSI, which reflects a strong impulse for the decline, but also requires attention to a possible rebound.
However, bears seem to have an upper hand for now on EM against a verbal skirmish between China and the United States regarding the trade. Trump noted that he had a tough stance against China, and Beijing told it would request WTO for sanctions of $7 bln. per year against the U.S. due to non-compliance with the trade negotiation procedure.
On the contrast, the U.S. markets were gaining on Tuesday, relying on strong statistics. S&P500 added 0.3%, having recovered after the data from earlier intraday decline. The Small business optimism index has reached a new high in its 45-year history following the most intensive plans to increase jobs, expand investments and increase stocks. Separately, according to JOLTS report, the number of open positions in July reached a record of 6.94 million, which is greater than the number of unemployed ones that are 6.2 million, also it is noted that the number of those who voluntarily change their work grows. These are the signs of labor market strength, foretelling acceleration of the salary growth that we saw at the end of the last week in Payrolls report in August.
The enthusiasm around the confident growth of the U.S. economy creates expectations of higher rates from the Fed. The markets put 80% chance of the rate rising in September and December versus 71% a week earlier and 60% a month ago. However, this seems to be insufficient for the growth of the dollar. The EM currencies put on pause their decline on the assumptions that strong statistics in the United States will support global growth rates.
The dollar index has been around the 95.0 level since the beginning of the month. EURUSD has retreated this morning to 1.1580 after a failed 1.16 test yesterday, GBPUSD has returned under 1.30.
Strong U.S. data and the news that Hurricane Florence could become the strongest in history, hurting oil production in the U.S., caused a spike in oil quotes. Brent rose to $79, the level, above which oil has not been sustained since May.