Wednesday, January 9, 2019

Trade talks and Fed's dovish stance bode well for currencies and equities

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

MORNING BRIEFING

Risk assets continue to attract investors' attention as optimism over the US and China trade talks dominate the headlines. Recent reports suggest that President Trump is keen on striking a deal that will provide fresh stimulus to the equities' markets that suffered at the end of 2018. The Dollar remains largely unchanged over the past 24 hours but this may well change today in light of the FOMC minutes' release from December. Gold retreated to $1,280 as risk sentiment improves but Oil crosses above $50 for the first time this year.

The Dollar remains in focus early in the new year in light of the ongoing negotiations between US and China and Fed's dovish tilt in their forward guidance. The US currency is put under pressure as investors are hoping that the trade talks will result into some kind of resolution, which will lift high beta currencies and reduce the demand for the safe haven greenback. Should this be the case, combined with the Fed's likely pause on rate hikes during Q1, leaves room for the Dollar's peers to gain: the Euro looks bullish above 1.15 with a view to hit 1.16, the Pound is admittedly tied to the Brexit progress but the Aussie may run to 0.73, the Loonie is close to 1.32 and the Kiwi could push all the way to 0.69.

Dollar/Yen on the other hand is a particularly interesting case as the combination of a relatively bearish outlook for the greenback and a reduction in safe havens' demand leaves the currency pair stranded. We believe that the key catalyst here is the US equities' performance as traditionally the pair has a high correlation to the price action in the Dow Jones and the S&P 500. Given that the outlook for global equities is tied to the trade talks between the US and China, a positive outcome will help them extended their current recovery higher and in turn push Dollar/Yen to fresh highs, at least in the short-term. Keep in mind though that as discussed earlier in the year, our medium-term outlook for the pair is pointing lower based on Dollar's expected under-performance during Q1.

Gold had another lackluster session yesterday dropping lower to re-test the $1,280 support zone. The demand for the safe haven metal has been reduced amid renewed optimism over the Sino-US talks and traders have also taken some profits near the $1,300 peak. A penetration of the $1,275 support would clear the path for a move towards the $1,265 area but this would still not threaten Gold's bullish outlook over the medium-term, especially if the US domestic economy continues to show signs of weakness.

Oil continues to push to the upside having now climbed above the key $50 mark. As discussed last week, OPEC's expected output cuts and Saudi Arabia's decision to reduce their production ahead of schedule are positive catalysts for Oil's outlook. At the same time, news that US producers have curbed their capital expenditure on new equipment suggests that current prices may not be viable for them to keep the machines running, which poses yet another bullish push for prices. If Oil manages to hold above $50, then we should be looking for another leg higher towards the $54 mark.

Equity markets around the world had a positive day yesterday with broad gains in Europe and the US. The Asian bourses are trading significantly higher this morning, buoyed by the trade talks between US and China and Fed's lack of resolve to keep raising interest rates at this point. Futures in Europe and the US are pointing higher at this time and investors are looking for bargains to put on their portfolios. Dow Jones looks poised to target the 24,000 mark while the S&P 500 in en route to the 2,600 area again, the FTSE 100 and the DAX are close to significant levels as well found at 6,900 and 11,000 points respectively.

MARKET EVENTS TO WATCH

  • BOE Governor Carney Participates in Online Q&A – 7.30pm
  • FOMC Meeting Minutes - 11pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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