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Trade War Back as Main Theme as Turkish Crisis Eased, US and China to Meet

The forex markets turned into consolidative mode last week as Dollar and Yen lost momentum. Turkish currency crisis hit a climax on Monday but worries eased after the government’s measures were well taken by investors. The fear of extra sanctions by the US on Turkey caused some jitters. But the muted reactions towards the S&P and Moody’s downgrade of Turkey showed that the crisis is temporarily over. And the situation has turned from immediate shock to long term pain. The lack of strength in European stocks rebound was a reflection of this.

Another theme emerged as the US and China agreed to resume trade negotiations. Chinese Vice Commerce Minister Wang Shouwen will meet with US Secretary for International Affairs David Malpass this week, in Washington. But we have very low expectations on the meeting. Firstly, these two are rather low level official who cannot make a decision. Secondly, Malpass is from the team of Treasury Steven Mnuchin, who’s been constantly isolated by trade hawks.

Nonetheless, separately, US Trade Representative doubled the length of tariff hearing on USD 200B of China goods, due to strong demand. That’s a sign that Trump might soften his trade attack on China due to domestic pressure. Still, as Chinese stocks’ fall to new low showed that investors are possibly as pessimistic as we are.

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The above developments contributed to stabilization of market sentiments in some ways. While risk aversion stayed generally, globally, worries were eased. New Zealand Dollar ended the week as the strongest one. But that’s mainly because the Kiwi was digesting recent dovish RBNZ triggered sharp fall. Canadian Dollar followed as the second strongest. Strong Canadian CPI, which hit 3% level, should seal the deal of an October BoC hike. There are speculations that BoC could hike as soon as in September. But we still lean towards an October move.

On the other hand, Sterling ended the week as the weakest one. Economic data from the UK, CPI, employment and retail sales, were generally solid. But they’re not strong enough to alter BoE’s rate path. And Brexit uncertainties continue as it seems like a no-deal one is the base case now. Swiss Franc ended as the second weakest one, followed by Dollar.

Technically, EUR/USD and AUD/USD should have bottomed out in near term. Adding to weakness in USD/CAD and USD/JPY, the greenback could have entered into a consolidation phase with some downside risks. Meanwhile, we’d like to emphasize that the recoveries in EUR/JPY and GBP/JPY are weak so far. Thus, there is no confirmation of near term bottoming yet. 1.3049 near term support in USD/CAD now looks vulnerable after Friday’s selloff. Break will put medium term channel support into focus.

DOW diverged from global stocks and surged

DOW showed strong resilience last week despite risk aversion elsewhere globally. That’s partly thanks to strong results of Waltmart. But it also suggested that the US economy might be less vulnerable to problems in emerging markets. Despite a sharp dip to 24956.77, DOW drew strong support form 55 day EMA and rebounded. Subsequent breach of 2569.72 near term resistance suggests that choppy rise form 23344.52 has resumed. And near term outlook stays bullish for 25800.35/26616.71 resistance. Still, we’re viewing price actions from 26616.71 as a consolidation pattern that’s not completed yet. There should be strong resistance from 25800.35/26616.71 to limit upside and bring near term reversal, to start the third leg of the consolidation pattern.

DAX pressing 12104 key support, looks vulnerable

DAX dropped to as low as 12120.65 last week and failed to stage a meaningful recovery from there. Eurozone’s vulnerability to emerging market problem, in particular Turkey, is an important reason for the weakness. With medium term rising trend line broken firmly, near term outlook is turned rather bearish. Immediate focus in on 12104.41 support this week. Decisive break there would pave the way to 11726.62 support and possibly below. Price actions from 13596.89 are seen as a consolidation pattern for now. Hence, DAX could indeed drop to 50% retracement of 9214.09 to 13596.89 at 11405.49 before forming a medium term bottom.

Nikkei showed some resilience, but risk tilted to the downside

Performance of Nikkei was nowhere near being strong. But it did displayed some resilience. However, as the index is limited below 55 day EMA with the current recovery, risk is a bit tilted to the downside. And break of last week’s low at 21851.32 will put 21462.94 support into focus. Break there will mark completion of the rebound from 20347.49. And the corrective pattern from 24129.34 could have then started the third leg to 20347.49 and below. Nonetheless, firm break of 55 day EMA (now at 22392.22) will save near term bullishness and turn focus back to 23050.39 resistance.

China SSE resumed down trend, 2016 low in sight

China’s stock market was the worst performing one comparing to the above. The selloff in tech giant Tencent was certainly a factor.