Geopolitical Risks Rock Markets; Euro Surprisingly Resilient
ActionForex | Aug 11, 2014 03:57AM ET
Geopolitical risks in Ukraine and Middle East were the main drivers in the financial markets last week. Global equities tumbled with DJIA hitting as low as 16333.78 while the S&P 500 dived to 1904.78. Nonetheless, as Russia sought to de-escalate the tensions in Ukraine, stocks staged a relief rally on Friday as DIJA closed at 16553.93 while S&P 500 closed at 1931.59. Both ended the week higher indeed. US treasuries benefited from safe haven flows with 30 year yield extending recent fall to close at 3.226 while 10 year yield closed at 2.415, breaking May's low. In the currency markets, the yen and Swiss franc were the biggest winners of the week on risk aversion. The dollar came next as the third strongest currencies. Commodity currencies were the weakest with Aussie and Canadian dollar both additionally hit by respective employment data.
Four central banks met last week but triggered little reactions from the markets. The ECB left the monetary policy on hold, leaving the main refi rate at 0.15% and the deposit rate at minus 0.10%. At the press conference, President Draghi acknowledged the moderation of "growth momentum" and warned that tensions between Ukraine and Russia would pose downside risks to the recovery. BoE maintained the Bank rate at 0.50% and the asset purchase target at GBP 375b as widely expected. Only a brief statement was released and focus will turn to meeting minutes to be published on August 20.
The BOJ left the asset buying program to increase the monetary base at an annual pace of 60 to 70 trillion yen. In the policy statement, BoJ indicated that "exports have shown some weakness". This was compared with the language in July that "exports have recently leveled off more or less". On industrial production, the BOJ acknowledged that output "has continued to increase moderately as a trend, although it has recently shown some weakness". In July, the central bank noted that production had "continued to increase moderately as a trend, albeit with some fluctuations".
The RBA left the cash rate unchanged at 2.5% for a year in August, marking the second-longest period of stable interest rates since the RBA started setting the cash rate in the mid-1980s. The accompanying statement delivered few changes to the economic and monetary policy outlook. The RBA noted firmed growth but attributed the rise in inflation to temporary factors. It continued to warn over the strong Australian dollar. Policymakers reiterated that 'the most prudent course is likely to be a period of stability in interest rates' given current economic indicators.
Technically, here are some developments to note. S&P 500 seemed to have formed a short term bottom at 1904.78 after drawing support from the medium term channel, ahead of 1897.28 resistance turned support. While recovery from 1904.78 might extend, we'd be cautious on strong resistance around 55 days EMA (now at 1941.96) to limit upside. Risks remain heavily on the downside before sustained trading above this EMA. And below 1904.78 will be accompanied by a break of the channel support which carries medium term bearish implications. Nonetheless, sustained break of the EMA would save the up trend and turn focus back to 1991.39 high instead.
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TNX, U.S. 10-Year yield's break of 2.402 indicates resumption of the down trend from 3.036. Note that TNX is staying well inside the falling channel, with recovery attempts limited by the falling 55 days EMA. While downside momentum is a bit unconvincing with mild bullish convergence condition in daily MACD, the overall outlook stays bearish. We'd favor the case for TNX to drop further to lower channel support at 2.23 level.
In the currency markets, Eeuro was surprisingly resilient last week. While it did extend the fall against dollar, The EUR/USD quickly recovered back into prior range. Similar picture was also seen in the EUR/JPY which initially dived to 135.72, but recovered back to prior week's range. Indeed, the EUR/GBP has extended recent rebound from 0.7873 short term bottom. The EUR/AUD extended the rebound from 1.4197 short term bottom. The EUR/CAD also extended the rebound from 1.4417 short term bottom. These three crosses, the EUR/GBP, EUR/AUD and EUR/CAD all displayed sign of bullish reversal for the near term.
The yen was the biggest winner last week, in particular against commodity currencies. The NZD/JPY, CAD/JPY, AUD/JPY lost -1.15%, -1.02% and -0.98% respectively. The GBP/JPY also lost -0.88%. Stabilization in the stock markets as mentioned above could halt the rally in the yen. But on the other hand, falling treasury yields would maintain the bearish bias in these yen crosses.
The dollar continued to lose momentum against Euro and showed some weakness against the Japanese yen. Also, the dip in the USD/CHF on Friday indicated short term topping. The dollar index also showed lost of momentum too. So overall, while the greenback would likely extend the rally against commodity currencies and sterling, the overall near term outlook could start to turn mix and the greenback might enter into a general consolidation mode. That is, strengthening against some currencies and weakening against others.
Regarding trading strategies, we closed out the EUR/USD short as suggested in last weekly report. That's before the dive through 1.3366 support but no regret on it as the pair quickly rebound. We'll looking for opportunities to sell EUR/USD again later. But for this week, we'll keep our hands off it first.
We suggested to buy the USD/CAD on break of 1.0960 resistance and sell the GBP/JPY on break of 172.36 support. Both trade were entered. The GBP/JPY short term turned up quite well as the GBP/JPY's sell off accelerated, accompanied by the GBP/USD, as helped by the reversal in the EUR/GBP. The pull back in the USD/CAD from 1.0985 last week was rather shallow and maintained overall near term bullish.
For those who didn't follow last week, one might considering to buy the EUR/CAD as there is prospect of it outperforming the USD/CAD on EUR/USD's rebound. But for our own selves, we'd prefer not to switch around too much. Regarding yen trades, while the AUD/JPY and NZD/JPY might look tempting, it should be noted that the AUD/USD is close to 0.9211 support while the NZD/JPY is close to 0.8401 support. Both might stage a rebound any time. Hence, we'd rather stay short in the GBP/JPY.
So, to conclude, we'll hold on to the USD/CAD long and GBP/JPY short positions and monitor the developments.
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