'Turnaround Tuesday' Could Prove Short-Lived


Markets continue to be volatile with intraday swings in full effect. Traders need to keep in mind the long-term trends in this environment as price action is prone to unpredictable and aggressive two-way moves.

Yesterday we saw the release of a weak German investor sentiment index (ZEW). Expectations for the German economy slumped to their lowest level since the eurozone debt crisis eight years ago amid deepening concerns over the US-China trade dispute and the potential for a chaotic UK exit from the EU. Higher than expected US core inflation readings in the afternoon then sparked intraday volatility.

However, all these moves were trumped (pardon the pun) after investors received what appeared to be positive news on the US-China trade war. China first confirmed it would restart negotiations by phone in two weeks’ time. Later, President Trump sprung another surprise by delaying the 10% tariff on some of the US$300bn Chinese goods that were to become effective from 1 September, to 15 December.

This delay of some new tariffs on consumer goods provided some relief to risk assets and currencies yesterday. And this morning’s stronger than expected fixing of the yuan might suggest that Chinese authorities appreciate the “sign of good faith” from President Trump.

Unchanged Long-Term Outlook

That said, a breakthrough does not appear to be forthcoming any time soon as signifcant barriers remain to any kind of long-term agreement. For example, there is a distinct lack of consensus on key issues like intellectual property protection, as well as on the enforcement of any agreement.

There is still the obvious risk of full implementation of the 10% additional tariff on the US$300bn list of goods in December and even further increases in the tariff rate will remain if both parties are not able to resolve their differences through negotiation. The weakening Chinese currency is also another contentious issue after the US Treasury labeled China as a currency manipulator last week.

This uncertainty is obviously casting a major shadow over the global growth outlook as evident in weaker-than-expected China industrial output overnight and the negative German Q2 GDP print this morning. 

What also seems most evident is that President Trump’s motivation for delaying some of the tariffs is largely driven by domestic considerations. And if China detects that Trump is unwilling to take too much domestic pain, this could make China less willing to make concessions as they may think they have time on their side as we move closer to the US elections next year.

USD/JPY in Focus

USD/JPY is a major we are looking at currently as the pair moved sharply higher yesterday, jumping over 1.4%, the strongest move up since March 2018. However, it found notable resistance around 107, the highs from the previous two weeks. The strong move has effectively eased all the downside pressures and with 10-year US yields moving lower again this morning (and curve inversion), the long-term trend may reassert itself again soon. Downside target are the recent cycle low at 105.05 and then 104.60.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.The trading of Foreign Exchange, and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Before deciding to trade forex, commodity or Index based CFDs you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that Capital Index (UK) Ltd is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters.