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News and Analysis

Overnight report

Trade war fears re-emerge, Shanghai Composite reaches a four year low, as emerging economies’ currencies fall versus USD

China’s equity markets sold off sharply on Monday morning, after news emerged over the weekend, in financial media publications such as the Wall Street Journal, that the Trump administration is ready to impose further tariffs, of between 10-25%, on another $200B of Chinese imports, as early as this week.

The reports also suggested that China has refused to enter into dialogue, or attend any meeting to discuss ways of avoiding the imposition of more tariffs. Hong Kong’s equity index, the Hang Seng, traded down 1.39% and the CSI index closed down 1.15% on Monday morning, a fall of 20.49% year to date. The Shanghai composite closed at a four year low, as Bloomberg calculated that up to five trillion of USD value has been wiped from Chinese equity markets, during the recent bear market sell off.

The MSCI emerging market index had fallen 1.2% on Monday morning by 8:30am U.K. time, whilst the emerging market currency index fell by 0.5%. The Turkish lira, which appeared to stabilise its losses after the Turkish central bank raised the interest rate to 24% last week, fell by 1.30% versus the USD during Monday morning’s trading sessions; priced at 6.258 USD/TRY is trading up 80% yearly.

As the winter months approach, with market analysts beginning to focus on the Fed/FOMC’s commitment to raise the USA interest twice more before 2018 closes, hedge funds and large institutional traders have adjusted their bullish positions in the U.S. dollar. According to the C.O.T. report (commitment of traders), traders are holding net long positions in USD of $19.2 billion, based on the Commodity Futures Trading Commission (CFTC) data, released on Friday. The CFTC report also revealed the major position trading changes in the euro, with net longs increasing. Short positions in both sterling and the Swiss franc also declined.

The dollar index, DXY, traded at 94.9 shortly after the London open on Monday, close to flat on the day and down 1.27% monthly. The Aussie dollar, the U.K. pound and the euro all traded up versus USD during the early trading sessions. USD/JPY traded close to flat, Japan’s equity markets were closed for a national holiday.

FX traders are likely to return their focus on the U.K. pound during the coming trading week, as up to three European summits are scheduled to take place, between the U.K. and E.U. negotiators. GBP/USD has slipped from last week’s six week high of $1.314, to trade at $1.309. The IMF waded into the issue of Brexit as they published their own impact assessment on Monday morning. The head of the IMF Christine Lagarde didn’t pull her punches in her scathing assessment of the U.K.’s prospects in the event of a no deal exit.

During an interview and joint press conference with the U.K. chancellor Philp Hammond and his treasury department in London, to discuss the IMF’s article IV report, her colleague Philip Gerson, the IMF’s UK mission chief, also weighed into the debate. He warned that “the UK will be permanently smaller after Brexit and that means permanently lower revenues.”

The trade war fears caused ripple effects throughout many global markets, European markets opened down on Monday morning; Germany’s DAX traded down 0.42%, France’s CAC was down 0.17% and the U.K. FTSE 100 traded down 0.08%. Rising political tensions over Germany’s coalition government, added to the negative investor sentiment in the DAX.

The president of the ECB Mario Draghi will speak in Paris on Tuesday morning, the day after the latest inflation data was published for the Eurozone; CPI has remained steady at 2% year on year. Investors will focus on the speech for any changes by way of forward guidance, to the ECB’s current monetary policy. Mr. Draghi will also deliver a speech in Berlin on Wednesday.

Snapshot of major and top cross FX pairs at 10:00am September 17th, using pivot point technical analysis.

U.S. DOLLAR.

USD/JPY whipsawed in a tight, daily range, opening the Asian session above the daily pivot point, the major currency pair gave up its initial gains, to fall through the daily PP, whilst threatening to breach the first level of support, S1. Trading close to flat on the day at 111.9, up 0.78% weekly and up 1.32% monthly, when observed on the daily time frame, the price action, which has supported the recent bullish momentum, is clearly identified. Price is trading above the 50 DMA, sited at 111.34.

USD/CHF traded in a narrow, daily range, with a bias to the downside. Trading down 0.17% at 0.966 in the early part of the London-European session, the major currency pair is down 0.77% weekly and down 2.42% monthly. The 21 and 200 DMAs are close to convergence, as price continues its downward, bearish momentum trend, which began in mid August. A lower moving average, crossing a much higher time frame to the downside, is often referred to as a death cross.

EURO.

EUR/USD traded in a narrow range, with a daily bullish bias, during the early stage of the European trading session. Trading up 0.20% at 1.164 and close to the daily pivot point, after opening the Asian session below the level. Price is trading up 0.36% weekly and up 1.72% monthly. When observed on the daily time frame, the tight, whipsawing range, the major pair has traded in during recent weeks, is clearly illustrated. The 21 and 50 DMAs have recently crossed, whilst price is trading close to the 100 DMA.

EUR/CHF whipsawed in a tight range, with a bias to the downside, during the Asian and European trading session. Trading below the daily PP, price was up 0.13% on the day at 1.124, trading down 0.42% weekly and down 1.10% monthly. The whipsawing behaviour of the cross pair, is revealed by the price action which has developed on the daily time frame. Trading in a tight range during the month of September, price has remained under the 21 DMA, sited at 1.131.

STERLING.

GBP/USD traded in a tight, daily range, with a bias to the upside and above the daily PP. The upswing trend, which has developed since early September, is clearly illustrated on the daily time frame, which reveals the major pair recovering significantly since early September. Trading between the 50 and 100 DMAs, up 0.23% on the day at 1.309, the major pair is trading up 0.42% weekly and up 2.59% monthly.

Chart of the day; EUR/USD trades in a tight range as moving averages close and converge.

The major currency pair EUR/USD, has traded in a tight range during the first half of September. The 21 and 50 DMAs have recently crossed, whilst current price is trading close to the 100 DMA. The gap between all three DMAs has closed markedly over recent months, which is often indicative of overall market sentiment being neutral.

chart-17-09-18

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