Forex: Overview - Week of September 2-6

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09/05/2019 | 05:16 pm
Although stock market indices are fluttering, safe-haven stocks are still appealing to traders, the Yen having briefly moved to new levels in nearly three years.
The trade war remains at the center of foreign exchange news as September returns. Tensions rose on the fringes of the G7, with Beijing announcing a tariff increase on $75 billion worth of US products, instantly provoking new threats from Donald Trump on Twitter. But the time has now come to calm down as the Chinese Ministry of Commerce has just announced that negotiators from the two major world powers will meet in early October in Washington for further discussions.

Meanwhile, the Asian giant is quietly letting its currency slip, with the Yuan recording an 11-year low. This was an opportunity for the White House resident to reiterate his criticism of the Federal Reserve, which was too orthodox for his taste.

At the Jackson Hole central bankers' meeting at the end of last month, Jerome Powell promised to take action to support the American economy, but above all he admitted that the FED did not have ready-made instructions to respond to the tensions on international trade. As a collateral victim of the Sino-American arm wrestling, Uncle Sam's manufacturing activity contracted in August for the first time in three years.

In Europe, the imminence of a new ECB action in September is now a mere secret. In responses to the European Parliament, Christine Lagarde, who will succeed Mario Draghi in November, has also shown herself willing to maintain the course of an ultra-comfortable policy in the "foreseeable future". "Rates have not bottomed out and the institution has many tools to boost growth," she added.

In Italy, the political class organized itself to avoid the scenario of new elections, which threatened to bring Salvini's far right to power. President Sergio Mattarella has instructed resigning Prime Minister Giuseppe Conte to form a new government as part of a potential agreement between Matteo Renzi's Democratic Party (center-left) and the unclassifiable 5 Star Movement (M5S).

On the Brexit side, the wind is turning across the Channel where Boris Johnson has just suffered a series of setbacks. Clumsily provoking Westminster and British democracy shortly before the start of the school year by deciding to suspend Parliament from September 9 to October 14, the Prime Minister attracted the wrath of Her Majesty's deputies. The whimsical resident of 10 Downing Street lost his majority in the House of Commons following a defection before failing to call early parliamentary elections and finally resolving not to block a legislative text calling for a further postponement of Brexit. In addition, his own brother Jo Johnson, Secretary of State, has just announced his resignation, claiming to place the "national interest" before "family loyalty".

In Australia, an economy highly dependent on China's neighbor’s health, the central bank kept its key interest rate at 1%, but accompanied its decision with an accommodating statement. According to the RBA, "it is reasonable to expect that a prolonged period of low interest rates will be needed in Australia to make progress in reducing unemployment and making more secure progress towards the inflation target".

The same is true in Canada, where the central bank's inaction (status quo at 1.75%) does not totally hide its concerns. The BoC expects the pace of growth to slow in the second half of the year as the negative effects of the US-China trade dispute "weigh more heavily on the dynamics of the global economy" than it had anticipated in July.

In the coming days and ahead of the ECB meeting on September 12, investors will be watching some macroeconomic indicators, such as monthly employment figures in the United States and Canada on Friday or the level of British GDP on Monday.

Graphically, the Euro continues its downward trend, recording new lows since May 2017, below USD 1.10 USD. In the meantime, we prefer sales on rebound to contact USD 1.1081 and USD 1.1143.

For its part, the Pound relied on 2016 support under USD 1.20 to catch its breath beyond USD 1.2330. Although the scenario of a no deal never seemed totally credible to us, we remain outside the pair waiting for new elements.

If the Australian Dollar also benefits from a general decline in the greenback, the prospects of the RBA easing its monetary policy this year may prevent it from remaining firm over the medium term. USD 0.6706 and 0.6577 are the next thresholds to watch.

The upward movement of the Canadian dollar also offers a good opportunity to act against it. At the contact of 1.3198, the greenback could turn around in the direction of CAD 1.3339.

Finally, while safe haven values have stalled in recent sessions, the underlying trend remains very favorable.

The Swiss National Bank faces the same kind of scenario as in January 2015, when expectations for ECB action placed upward pressure on the Swiss franc, forcing the monetary authority to abandon its floor (CHF 1.20 for EUR 1 at the time). Although the context is now different since the SNB allows its currency to fluctuate more or less freely, the issuing institution could be forced to let the EUR/CHF pair slide to 1.0664 or even CHF 1.0481 in the short term before resuming trading.

Finally, the USD/JPY pair is recovering temporarily after reaching a low point since late 2016 below JPY 105 and it will be interesting to observe its reaction to its 50-day moving average to understand whether the momentum is sufficient to allow the price to accelerate to JPY 107.80 and 108.90.

Comparative performance of the main currencies on the foreign exchange market against a basket of currencies
Mathieu Burbau
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