Abstract: USD closed near its lows on Monday but a touch higher than Friday. This morning is seeing a better bid after disappointing Chinese trade figures soured risk sentiment. The 2-year yield continued its move lower after breaking down on Friday through long-held 50-day SMA support. The 10-year yield is falling sharply today as it nears the psychological 4% mark.
Headlines
* Chinas trade plunges more than forecast in blow to recovery
* Fed officials sketch case on both sides of rate debate
* USD/JPY recapture 143 amid fresh dollar buying
* Asian markets softer as investors look to key inflation readings
FX: USD closed near its lows on Monday but a touch higher than Friday. This morning is seeing a better bid after disappointing Chinese trade figures soured risk sentiment. The 2-year yield continued its move lower after breaking down on Friday through long-held 50-day SMA support. The 10-year yield is falling sharply today as it nears the psychological 4% mark.
EUR closed little changed at 1.1002. The data calendar is sparse out of Europe this week. August is also a quiet month for ECB speakers.
GBP settled modestly higher at 1.2783. Comments from the BoEs Chief Economist Pill noted that inflation remains much too high. Persistently elevated UK inflation is expected to keep the BoE hiking. Two more 25bp rate rises are priced in by March 2024.
USD/JPY continued its move higher and breached 143. This came even though US Treasury yields have begun to fall. But, there was mixed household spending and softer wages out of Japan.
AUD tanked towards 0.65 amid China-related concerns and its disappointing trade data. USD/CAD made fresh two-month highs this morning. The 200-day SMA sits above at 1.3451.
Stocks: US equities made decent gains on Monday after last weeks global sell-off. The benchmark S&P 500 added 0.9% to 4518. This was led by media and tech stocks. Disney reports on Wednesday, and over 80% of the S&P 500 constituents have now reported Q2 earnings. The tech-laden Nasdaq gained 0.87% to 15,407. The Dow outperformed, settling 1.16% higher at 35,473. Tesla shares fell over 4% at one point before closing with a 0.95% loss. This was after news that the current CFO was leaving.
Asian stocks traded mixed after the strong Wall Street handover gave way to the disappointing China data. Chinese stocks were heavily pressured. Tech and property stocks led the declines. The Nikkei 225 was initially lifted by the weaker yen. But selling in Chinese stocks spooked markets.
US equity futures are in the red amid the risk-off mood in Asia. Also, adding to the negative sentiment was Moodys ratings cut on US banks. European equity futures are lower this morning (-0.1%). The Euro Stoxx 50 closed up 0.1% yesterday.
Gold is uneventful and tracking below $1940. Holdings in bullion backed exchange traded funds have fallen to their lowest in more than three years. But, central bank buying remains strong. Chinas central bank added to its gold reserves for the ninth consecutive month in July.
Day Ahead – Summer season
As mentioned, Week Ahead about summer liquidity and volumes being lighter and causing choppy price action. Pinning rationales and reasons for short-term markets is a form of the summertime “silly season”.
We know central bankers around the globe are currently highly data dependent. Sensitivity to economic data releases is high. That means even snippets of information on the health of economies can generate outsized market reactions. Theres no doubt it can make for trading opportunities. But, these moves can be short-lived, depending on your trading time frames.
Chart of the Day – EUR/USD correction over?
The worlds most popular currency pair has been going through its third notable correction of the year. The ones in February and May were worth 5% and 4%. The current pullback was around 3%. These corrections largely come on the back of heavy one-way positioning, given that most expect EUR/USD to be higher by year-end. The current consensus is for 1.12.
We note that the market has taken 15bps out of the expected ECB tightening cycle over recent weeks. But last week‘s core inflation figure was still high. That means the September ECB meeting should still be considered ’live for a 25bp rate hike. Support in EUR/USD is at the 100-day SMA at 1.0923. Initial resistance is 1.1041, just above the February top at 1.1032. This comes ahead of the 50-day SMA at 1.1074.
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