Wednesday, May 8, 2019

Currencies turn lower as traders look for refuge in the Japanese Yen and Gold

Tags
  • China
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

Currencies are tracking equities lower as risk aversion intensifies following President Trump's threat to raise the trade tariffs on China and even though the Asian side is taking a calm approach to his aggressive tone. The likes of the Euro, the Pound and the antipodeans lost ground during yesterday's session while Yen and Gold gained on safe haven demand. The Single currency will remain front and center today, in light of the German industrial production figures and Mario Draghi's speech. Equities are seen opening flat after a day of strong losses while Oil tries to recapture the $62 mark.

Even though Monday's trading action was an attempt from the major currency pairs to close the gap created when Asian markets opened at the start of the week, yesterday was without doubt a bearish day. The European majors drove lower as investors were looking to move away from the high beta currencies, while fresh figures and domestic politics weren't supportive either. In regards to the Euro, the softer than expected increase in German Factory Orders further contributed to prices dropping below 1.12 again. Despite yesterday's data, today's industrial production report printed stronger than expected but the way forward for the Single currency likely points lower: a break below yesterday's lows exposes the 1.1150 and 1.1130 marks.

Sterling was also bearish and retreated below the 1.31 figure once again. The British currency found support around the 1.3050 area, where an ascending trendline and the 200-period moving average are situated, but the broader bias still suggests further declines. Theresa May will be speaking in Parliament today and recent rumors suggest that her talks with the Labor party are going nowhere, casting doubts on whether a positive way forward can be found soon. With technicals and sentiment pointing lower, a penetration of yesterday's lows will bring the 1.30 mark in focus.

Meanwhile, Dollar/Yen is testing the 110 support as the selloff seen in the equity markets yesterday boosted the Japanese currency, with investors seeking refuge in the risk averse Yen. What's key to note here is that the currency pair's technical outlook is flashing bearish signals: yesterday's decline penetrated an ascending trendline which had tracked the instrument's gains since the start of the year; furthermore, the 109.80 area is a major technical support level and a break below that as well may open the door for a broader decline all the way to 108, with an interim support around 50 pips higher. All this will largely depend on how equities fare going forward but if investors see a breakdown in trade talks then this scenario will become very relevant.

Gold is forming quite an interesting pattern as well, which is actually an inverse mirror image of what we discussed for the Yen. Prices are challenging to break out of a descending channel, with its top side found around the $1,288 level - where the 200-period moving average is also situated. Alongside the technical indications, the elevated geopolitical risks also create an upside scenario for the yellow metal and if the resistance found at $1,288 is overtaken, then the next stop will be at $1.300. Oil is treading water between $61 and $62 and the exit from this formation will show us the way forward, with the $58 and $65 levels the potential targets after a successful breakout.

Equities in Europe and the US had a miserable day yesterday closing between 1.6% and 2% lower across the board. Obviously, Donald Trump's decision to raise the stakes in the Sino-US trade talks decimated the “goldilocks” environment for equity traders, where subdued geopolitical risks, steady Fed policy and low inflation were only hinting on more gains for the global indices. This morning, futures on either side of the pond are suggesting a muted opening bell and traders are holding their breath; if the two sides come to an agreement quickly, then a relief rally will be triggered but with time running out, the risk for equities is to the downside.

MARKET EVENTS TO WATCH

  • US MBA Mortgage Applications - 3pm
  • ECB President Draghi Speaks in Frankfurt - 3.30pm
  • U.S. Crude Oil Inventories - 6.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research