Dollar Regains Bullish Momentum after Brief Set Back, Swiss Franc Pressured

Market overviews

Dollar suffered brief set back overnight as Euro attempted for a rally. But the greenback quickly found its footing and it’s trading as the strongest one in Asian session today. In particular USD/CHF took out 0.9651 resistance, which is taken as a signal of near term reversal. It remains to be proven if the greenback is ready for reversal, or it’s just broad based weakness in the Franc. For now, Swiss Franc is the weakest one, followed by Australian Dollar.

In other markets, DOW ended down -0.68% yesterday, digesting recent strong record run. S&P 500 also lost -0.35% but NASDAQ was steady and gained 0.08%. US treasury yields closed slightly higher with 10 year yield up 0.010 at 3.078 and 30-year yield added 0.005 to 3.210. Both are yet to find sustainable momentum through key resistance level at 3.115 and 3.225 respectively. In Asia, Japanese Nikkei is up 0.16% at the time of writing. Singapore Strait Times is up 0.39%. China Shanghai SSE is down -0.76%.

Technically, first thing to note is that despite spiking higher to 1.1814, EUR/USD is back below 1.1779 key fibonacci resistance. Focus remains on whether it will reverse from current level as we anticipate. As mentioned above, USD/CHF’s break of 0.9651 is already a sign of bullish reversal. EUR/CHF also broke 1.1342 minor resistance. More downside is now in expected for Swiss Franc in general. The levels to watch include 0.7228 support in AUD/USD, 1.3042 support in GBP/USD, 1.2975 resistance in USD/CAD. Break of these levels will solidify the case of Dollar comeback.

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BoJ July minutes: Sentiments could worsen if US-China trade friction intensifies

The minutes of July 30-31 BoJ meeting showed that the board members expected Japan’s economy to grow above potential in fiscal 2018. For 2019 and 2020, growth would likely continue “partly supported by external demand”. However, the pace would decelerate “due to a slowdown in domestic demand. On prices, most members agreed that CPI would likely increase increase gradually towards 2% as “firms’ stance gradually would shift toward further raising wages and prices”. But these members agreed that “it would take more time than expected to achieve 2 percent inflation”. Thus, the inflation projection in the July Outlook Report was lowered from April’s.

The minutes also noted that the global financial markets had temporarily become unstable through early July, “mainly against the background of uncertainties over trade policy, especially between the United States and China”. And, many members warned that “risk sentiment could worsen again if trade friction between the United States and China intensified.” Also, one member added that ” if the Chinese yuan depreciated further, due mainly to concerns over the possible negative impact on the Chinese economy, there was a risk of this having a negative impact on investors’ sentiment regarding emerging markets in Asia.”

Also from Japan, corporate service price index rose 1.3% yoy in August, above expectation of 1.1% yoy.

US and South Korea signed trade agreement, Japan trade talk postponed

South Korean President Moon Jae-in and Trump formally signed a new bilateral trade agreement yesterday, as sideline of a UN summit in New York. Under the agreement, South Korea will exempt up to 50,000 US cars from safety requirements, doubling the current amount. It also agreed on improvements in customs procedures and amendments in drug pricing policies. The 25% US tariffs against South Korean Trucks are extended from 2021 to 2041. On the other hand, the US exempt a certain amount of South Korean steel from the tariffs announced back in Mach, equivalent to 70% of the country’s import.

On the other hand, the meeting between Japanese Economy Minister Toshimitsu Motegi  and US Trade Representative Robert Lighthizer was postponed from Monday to Tuesday due to scheduling issue. Japanese Chief Cabinet Secretary Yoshihide Suga said the talks “will focus on further expanding trade and investment between Japan and the U.S. to bring benefits to both nations”.

Japanese Prime Minister Shinzo Abe had a dinner with Trump on Sunday and he said they had a “very constructive discussion on trade and investment”. Before the dinner Trump continued with his bullying tactic and tweeted “We have done much to help Japan, would like to see more of a reciprocal relationship. It will all work out!”

Euro surged briefly as ECB Draghi said domestic price pressures are strengthening and broadening

Overnight, Euro surged briefly as ECB President Mario Draghi sounded rather upbeat in his European Parliament ECON committee hearing. On growth he noted “an ongoing broad-based expansion of the euro area economy”, with “high levels of capacity utilisation”. Also, “labour markets are tightening with signs of labour shortages in some countries and sectors” And “higher income supports private consumption”.

More importantly, Draghi noted “domestic price pressures are strengthening and broadening”. And, “underlying inflation is expected to increase further over the coming months as the tightening labour market is pushing up wage growth.”

Overall guidance on monetary policy is unchanged though. That is, subject today, ECB will end the asset purchase program after December. And interest rates will stay at current level “through the summer of 2019”. Draghi said the guidance firstly incorporated a “calendar-based element” which tells the market when the first hike could come. Secondly, there is a “state-dependent component” indicating that rate could still stay unchanged if necessary, and for as long as needed.

Looking ahead

The economic calendar is rather light today. Main features are US house price indices and consumer confidence.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.9602; (P) 0.9627; (R1) 0.9674; More…

USD/CHF’s strong rise today and break of 0.9651 support turned resistance indicates short term bottoming at 0.9541, on bullish convergence condition in 4 hour MACD. Intraday bias is back on the upside for 0.9757 resistance first. Firm break there will target 0.9866 key resistance level, 61.8% retracement of 1.0067 to 0.9541 at 0.9866. On the downside, below 0.9604 will turn bias back to the downside for 0.9541 low instead.

In the bigger picture, rise from 0.9186 low has completed at 1.0067, after failing to sustain above 1.0037 resistance. Fall from 1.0067 could extend to 61.8% retracement of 0.9816 to 1.0067 at 0.9523 and possibly below. But for now, we don’t expect a break of 0.9186 low. On the upside, firm break of 0.9866 support turned resistance will suggest that fall from 1.0067 has completed and rise from 0.9186 is resuming.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
23:50 JPY BOJ Minutes
23:50 JPY Corporate Service Price Y/Y Aug 1.30% 1.10% 1.10%
13:00 USD House Price Index M/M Jul 0.20% 0.20%
13:00 USD S&P/Case-Shiller Composite-20 Y/Y Jul 6.20% 6.30%
14:00 USD Consumer Confidence Index Sep 130.5 133.4