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USD/CNH Gains, Yuan Weakens as Risk Aversion Runs on Trump Tariffs

Price action and Macro.

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USD/CNH Outlook Talking Points:

- Themes of risk aversion continue to show across global markets, with global stocks heading lower to go along with a strong Japanese Yen. Last week’s FOMC meeting appears to have provided some of the push, with additional selling on the back of diminishing hopes for a trade deal between the US and China.

- The US Dollar has been relatively quiet, all factors considered, but two major currencies out of Asia have remained on the move this week. The Yen has gained as risk aversion has continued, but the Chinese Yuan has gone in the opposite direction, with USD/CNH rising to a fresh four-month-high after gapping-up to start the week.

- DailyFX Forecasts are published on a variety of currencies such as Gold, the US Dollar or the Euroand are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading GBPUSD? Check out our IG Client Sentiment Indicator.

Trump Tariffs Increased at Midnight After Lack of Progress

It’s been a busy week across global markets with a number of headline items and price action themes of interest punctuating the backdrop. While themes of risk aversion have remained, the FX market has been relatively quiet, generally speaking. The notable exception to that has been two of the major currencies in Asia, as the anti-risk Yen has been very strong while the Yuan has been very weak, catching another gust of selling in the overnight session as US tariffs on China increased at midnight.

This continues what’s been a very strong week in USD/CNH. The pair gapped-higher to open trade, and that theme has continued with prices rallying back-above the 6.85 handle. The wide expectation here is that China will look to offset this additional friction imposed by tariffs with looser monetary policy, which could further equate to Yuan weakness and, perhaps, even allow for an eventual break of the 7.0000 psychological level.

USD/CNH Daily Price Chart

usdcnh daily price chart

Can Yuan Weakness and Trade Friction Further the Push of Risk Aversion?

CNH weakness provoking a larger risk-off response through global markets is not unprecedented. Something similar happened in August of 2015, when China shocked markets by devaluing their currency as the IMF was evaluating the Yuan for inclusion in the Special Drawing Rights (SDR) basket; and in short order global equity markets had started to turn lower. That risk-off theme held into 2016 trade, until the Humphrey Hawkins testimony in February, at which point Janet Yellen opened the door to the possibility of looser monetary policy to offset any potential complications that may arise. Given that interest rates were near zero at the time, this amounted to the possibility of negative rates at the FOMC. This provided a quick boost to risk markets and that lasted into the Presidential Election, at which point an entirely new theme took over.

On the weekly price chart, the S&P 500 has formed an evening start pattern, which will often be followed for bearish reversal potential.

S&P 500 Weekly Price Chart

spx500 weekly price chart spy es

Is a Less-Dovish FOMC on Top of Trade Friction Too Much for Risk Markets?

Risk aversion showed-up again in Q4 and this was taking place as the trade dispute remained in full bloom. But another factor of concern began to permeate the backdrop when Jerome Powell alluded to a continued pace of hawkishness at the Fed.

The FOMC has hiked interest rates eight times since Trump was elected in November of 2016, running in stark contrast to the one rate hike that had been seen in the prior eight years. This was coupled with balance sheet reduction, in which the Fed let maturing bonds roll-off of the portfolio, amounting to an element of dual-tightening in rates within the US economy.

It can take time for interest rate hikes to filter through the economy. Inflation had started to fall in August and September of last year, and as the door opened into Q4 in October, the Fed remained hawkish, looking to further hike rates into 2019. This was evidenced through a comment from FOMC Chair, Jerome Powell, in which he was asked about the bank’s proximity to the neutral rate, which is the theoretical level at which policy is neither simulative nor restrictive; similar to a ‘goldilocks’ rate for a Central Bank. Chair Powell opined that he thought the Fed was ‘a long way’ from the neutral rate, indicating an increased scope of expansion for rate hikes into the New Year. In short-order, stocks turned and that theme ran aggressively into the Christmas Holiday.

S&P 500 Daily Price Chart

spx500 spy es daily price chart

Like a light-switch being flipped back on, bulls returned to the party after Christmas, evoking an aggressive topside rally that ran through April trade. The S&P 500 retraced the entirety of Q4’s losses, and then some, as the index set a fresh all-time-high just last week.

Since then, matters have begun to shift. It was around the FOMC rate decision when that began to show, as the Fed wasn’t quite as dovish as many had expected. Odds for a rate cut by the end of 2019 were as high as 68% before that meeting. After, odds had dipped down to around 50%, largely driven by the fact that Jerome Powell did not talk up the prospect of looser monetary policy. This created a quick move of weakness in US indices, and after a Friday rally brought-in a lower-high, bears have been back on the attack this week, assisted with trade tensions further muddying the economic backdrop.

S&P 500 Four-Hour Price Chart

spx500 spy es price chart

Yen Strength to Go Along with Risk Aversion Themes

In the FX-world, the US Dollar remains relatively quiet, all factors considered. The Japanese Yen, however, has been strong throughout this week, with some remaining unfilled-gap in pairs like USD/JPY, EUR/JPY and GBP/JPY. This illustrates just how aggressive that risk-off theme has been in the Yen this week, and this can keep the door open for potential continuation scenarios.

In USD/JPY, prices are holding on to a key area of support in a zone that runs from 109.67-110.00. A push below this zone opens the door for a test of a deeper zone that’s around 100 pips lower, running from 108.47-108.69.

USD/JPY Daily Price Chart

usdjpy usd/jpy daily price chart

In GBP/JPY, the pair broke below a big support level this week at 143.79. This is the 38.2% retracement of the 2016-2018 major move in the pair, and this level had previously helped to hold the lows on four separate occasions over the past three months. Sellers have thus far been thwarted around the 142.50 psychological level, and this could lead to a backdrop in which prior support could be re-engaged as lower-high resistance potential.

GBP/JPY Four-Hour Price Chart

gbpjpy eight hour price chart

Another pair of interest for continued risk aversion, AUD/JPY did fill its gap earlier this week, prodded in-part by a less-dovish RBA rate meeting than what many were expecting. But, that didn’t stop the sell-off in the Aussie, particularly against the Yen as those risk-aversion flows in JPY pushed the pair down to fresh three-month-lows in follow-thru price action this week.

AUD/JPY Eight-Hour Price Chart

audjpy aud/jpy eight hour price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on Gold or USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers an abundance of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX




Can China Outlast the US Through Painful Trade War Escalation?

Fundamental analysis, economic and market themes.

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US-CHINA TRADE WAR, YEN, AUD, NZD, USD – TALKING POINTS:

  • Yen up, AUD and NZD down as US-China trade war fears return
  • S&P 500 index futures hint global markets back in risk-off mode
  • Can China outlast the US through tit-for-tat conflict escalation?

Currency markets were back in risk-off mode in Asia Pacific trade, with the defensively-minded Japanese Yen outperforming while the sentiment-geared Australian and New Zealand Dollars fell. US-China trade war considerations took center stage again.

Regional markets were unable to capitalize on a positive lead from Wall Street, a move driven by hopeful developments on US auto tariff prospects and the USMCA trade pact. That’s after President Trump issued an executive order seemingly intended to punish Chinese telecoms like Huawei and ZTE Corp.

Markets appeared to read this as likely to complicate already frayed relationsbetween the world’s top-two economies, lowering the probability that the situation might get better before it gets worse. That has set an ominous for the remainder of the trading day.

US STOCK INDEX FUTURES WARN MARKET SENTIMENT IS SOURING ANEW

A relatively lackluster offering on the economic calendar seems likely to keep macro-level sentiment trends in the driver’s seat. Bellwether S&P 500 stock index futures are pointing convincingly lower, warning that APAC-session trading patterns have scope for follow-through.

Besides the Yen, the US Dollar may be well-supported if another wave of divestment across the risky asset universe puts a premium on the benchmark unit’s unrivaled liquidity. That has kept it impressively well-supported even as Fed rate hike bets have evaporated since late last year.

What are we trading? See the DailyFX team’s top trade ideas for 2019 and find out!

CHART OF THE DAY – WHO WILL BLINK FIRST AS US-CHINA TRADE WAR ESCALATES?

Can China Outlast the US Through Painful Trade War Escalation?

An oft-repeated sentiment among financial market participants is that the US economy is in a better position to withstand a prolonged trade war with China than the alternative. PMI survey data – a timely proxy for GDP growth – hints this may be somewhat misguided.

Since February, the data shows that US factory- and service-sector activity growth has slowed even as analogous measures tracking China have rebounded. This shows up in the government’s PMI statistics as well as the private-sector Caixin data series.

This comes at a time when Washington has escalated pressure on Beijing by increasing tariffs on $200 billion in Chinese imports from 10 to 25 percent. The Trump administration has also threatened to apply the higher levy to a further $300 billion in goods if a deal is not struck within a month.

At surface level, such actions seem to imply that the US sees itself in a position to force an agreement, presumably because it is better able to weather through a mutually damaging escalation. PMI figures warn this may be a miscalculation however, prolonging the spat and stoking longer-lasting risk aversion

FX TRADING RESOURCES

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter




US Dollar Rises, EURUSD Targets 2017 Lows as Fed Rate Cut Bets Cool

Classic technical analysis, macro and economic themes.

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Asia Pacific Market Open Talking Points

  • US Dollar appreciates as S&P 500, bond yields rise on rosy US earnings
  • Pro-risk AUD/USD, NZD/USD struggle capitalizing on gains in equities
  • EUR/USD clears support, may test June 2017 lows on positioning signals

Trade all the major global economic data live as it populates in the economic calendar and follow the live coverage for key events listed in the DailyFX Webinars. We’d love to have you along.

FX News Thursday

The US Dollar outperformed against its major counterparts on Thursday amidst a general pickup in sentiment despite the looming threat of a pickup in US-China trade wars. The uptick in market optimism, which resulted in the S&P 500 and Dow Jones closing 0.89% and 0.84% higher respectively, occurred against the backdrop of rosy earnings reports from Walmart and Cisco during the first half of the day.

US front-end government bond yields rallied, and expectations of a rate cut from the Federal Reserve weakened slightly. Rosy markets also aided sentiment-linked crude oil prices as the Canadian Dollar extended gains. Interestingly, the pro-risk Australian and New Zealand Dollars were unable to capitalize on the improvement in sentiment, likely owing to a jubilant Greenback that yields a higher rate of return.

EUR/USD Technical Analysis

Taking a look at the EUR/USD daily chart, prices have just closed under a former range of support under 1.1176. Not only was this the worst day for the Euro in over 3 weeks, it also followed a break under the near-term rising channel from the end of April. This has once again exposed June 2017 lows, which held on April 25, offering a temporary rebound for the pair.

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart Created in TradingView

It seems that we may get another shot at closing under the June 2017 lows. On the next chart below, market positioning is offering a bearish-contrarian EUR/USD trading bias. If you would like to learn more about using this in your market analysis, in addition to fundamental and technical ones, tune in for my webinars each week on Wednesdays at 00:00 GMT.

EUR/USD Client Positioning

US Dollar Rises, EURUSD Targets 2017 Lows as Fed Rate Cut Bets Cool

Data Provided by IG

Friday’s Asia Pacific Trading Session

Friday’s Asia Pacific trading session is relatively quiet, when looking at the economic calendar docket, compared to what we have seen this week so far. With that in mind, this places the focus for markets on risk trends and sentiment.

Local indexes may echo gains from the prior Wall Street trading session, but that was not quite the case when markets were presented with a similar scenario yesterday. Updates on the trade front are a wildcard, especially with rising geopolitical tensions between Chinese telecommunication companies and the US.

FX Trading Resources

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter




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