· The Australian dollar slipped towards a 10-year trough while the yen hovered off its lows on Friday, as renewed hope that China and the United States could get their negotiations back on track began to fade.
The U.S. currency was also supported by investors’ month-end rebalancing needs, which has helped lift the dollar index to its highest level in a month.
The index is last up 0.1% at 98.555.
The Australian dollar, often seen as a proxy bet on the Chinese economy, fell 0.31% to $0.67095, about a third of a cent above its 10-year low of $0.66775 hit on Aug. 7.
The yen held flat at 106.49 per dollar, off this week’s low of 106.68 hit the previous day.
“The talking point is still the U.S. yield curve inversion and whether the U.S. economy heads into a recession...In short, the atmosphere is not so good,” said Bart Wakabayashi, Tokyo branch manager of State Street.
In addition, political risks from the UK to Hong Kong and the Middle East added to risks for the global economy and kept many investors on edge.
· USD/JPY: Bulls in charge as risk appetite returns
USD/JPY is up +0.09% in Tokyo, steady on the open while risk-appetite dictates the trajectory again, with a more optimistic view over the trade wars following a series of positive headlines coming out of both the US and China and subsequent media channels. USD/JPY is currently trading at 106,42, just off the highs of 106.54 and testing the August resistance area.
USD/JPY levels
Valeria Bednarik, the Chief Analyst at FXStreet explained that the USD/JPY pair the pair is above the 20 and 100 SMA on a 4-hour basis, while below the 200 simple moving average, now at around 107.00.
"Technical indicators hold on to daily highs decelerating their advances rather in line with decreased volumes that indicating upside exhaustion. The pair could resume its decline on a break below 106.40, while the short-term rally will likely continue once above 107.00."
· The Euro may struggle to rise against the US Dollar if Eurozone unemployment and CPI data fall short of forecasts and reinforce the notion that the ECB needs to deliver stimulative measures. EUR/USD’s pain may be amplified if US consumption, income and PCE deflator data show weakness and fuel the demand for liquidity and anti-risk assets like the Greenback.
· EUR/USD stays weak near 1.1040 ahead of EMU CPI
The pair is posting losses for the fifth consecutive session at the end of the week, breaking below last week’s low at 1.1051and leaving the door wide open for further decline with immediate target at 2019 low at 1.1026.
EUR/USD levels to watch
At the moment, the pair is losing 0.11% at 1.1044 and faces immediate contention at 1.1026 (2019 low Aug.1) seconded by 1.0839 (monthly low May 11 2017) and finally 1.0569 (monthly low Apr.10 2017). On the upside, a breakout of 1.1125 (21-day SMA) would target 1.1186 (61.8% Fibo of the 2017-2018 up move) en route to 1.1196 (55-day SMA).
· The trade conflict between Japan and South Korea is a sign that the global order “is now collapsing,” according to Deborah Elms, executive director at the Asian Trade Centre.
“I think that this Japan-Korea incident is a symptom of what happens when a system starts to collapse,” Elms told CNBC’s “Squawk Box” on Wednesday. “You have trade disputes that escalate and there’s no hand brake anymore, so they roll over into security disputes — and then again, there’s no hand brake, so they can continue to percolate and there’s no obvious way to end them.”
Elms said the tensions between Seoul and Tokyo were “like two neighbors arguing over who planted the tree on the property line that is now encroaching on both sides.”
“While we’re arguing about a tree that is on the property line, there is a forest fire on the ridge line,” Elms said.
· Prominent Hong Kong activist Joshua Wong and others have been arrested amid ongoing protests in the Asian financial hub as the city’s authorities try to clamp down on historic pro-democracy demonstrations that have raged for nearly three months.
The moves to arrest Wong, Chan and Chow appear to be part of a broader pushback by authorities against the monthslong protest movement, which began over opposition to legislation easing extraditions to China and has widened into a broader push for more democracy. They come the day after police banned a mass protest planned for Saturday that had been called by the Civil Human Rights Front, a key organizer of recent demonstrations.
· China’s best option in the trade war is to wait it out, experts say, as it’s huge domestic economy is increasingly being driven by the power of its consumers — not trade.
Playing the long game is “probably the best and only option” that China has, said Chung Man Wing, investment director at Value Partners.
As trade tensions with the U.S. draw out, the world’s second largest economy will likely seek to beef up its domestic economy, which contributes more to growth than its exports, according to analysts.
External trade make up only a “very small portion” of China’s economy — and form only about 20% of its gross domestic product, he said. “And majority of that is actually not to the U.S., so China can afford to play the long game, and play it well.”
· Earlier this summer, Carrie Lam, the chief executive of Hong Kong, submitted a report to Beijing that assessed protesters’ five key demands and found that withdrawing a contentious extradition bill could help defuse the mounting political crisis in the territory.
The Chinese central government rejected Lam’s proposal to withdraw the extradition bill and ordered her not to yield to any of the protesters’ other demands at that time, three individuals with direct knowledge of the matter told Reuters.
· Danske Bank analysts note that the Brexit situation remains fluid after UK PM Boris Johnson's suspension of the UK parliament will get an early test on Friday when two courts could rule on challenges from Brexit opponents.
Key Quotes
“In light of the recent events, we have changed our call and our base case now is that a small majority in the House of Commons will eventually bring the Johnson government down, form a temporary government, ask the EU 27 for an extension and call for election when the extension is granted (40%). However, we stress that uncertainty is high and the risk of a no-deal Brexit has increased in the past days in our view (30%).”
· Chinese and U.S. trade negotiating teams are maintaining effective communication, China’s Foreign Ministry said on Friday at a daily news briefing in Beijing.
· The Chinese government’s top diplomat, State Councillor Wang Yi, will visit North Korea next week, the foreign ministry said on Friday, at a time of international concern about a series of missile launches and tests by Pyongyang.
· Japan’s government left its assessment that the economy is recovering at a moderate pace unchanged in August, with weakness continuing to center on exports, according to a monthly economic report released by the Cabinet Office on Friday.
Risks to the outlook caused by an overseas slowdown and the U.S.-China trade war could add to pressure on the government to boost spending to offset a potential drop in domestic demand after a sales tax hike in October.
On the bright side, the government raised its assessment of public works as sectors less affected by slowing global trade were seen pulling the economy forwards.
· The Bank of Korea’s (BOK) monetary policy board voted to hold the 7-day base rate KROCRT=ECI at 1.50%, an official announced without elaborating. Governor Lee Ju-yeol is due to hold a news conference from 0220 GMT.
The decision followed a rate cut at its last meeting in July and was in line with the forecasts of 13 of the 18 analysts surveyed by Reuters, while the remaining five saw a cut. Still, 10 of the 13 analysts expect the BOK to trim the rate to a joint record low of 1.25% at the Oct. 16 meeting.
· Shop sales in Germany fell by far more than expected in July, with customers handing over 2.2% less than in the previous month - the latest in a cluster of signs that Europe’s largest economy is losing steam.
Traditionally an export-driven economy, Germany has increasingly been reliant on domestic demand to sustain growth as the international economic environment has soured, meaning signs of retail weakness will prompt concern.
· Christine Lagarde, the ECB’s next president, said on Thursday the central bank still has room to cut interest rates if needed, although this may pose financial stability risk.
· Oil gave back some of its recent gains on Friday, but was still headed for the biggest weekly increase since early July, boosted by a decline in U.S stocks, a looming hurricane in Florida and an easing of Sino-U.S. trade rhetoric.
Brent crude LCOc1 was down by 23 cents, or 0.4%, at $60.85 a barrel, by 0711 GMT, but was heading for a gain of more than 2% for the week.
U.S. West Texas Intermediate (WTI) crude futures CLc1 fell 40 cents, or 0.7%, to $56.31 a barrel. The contract is still set for a gain of nearly 4% this week.
Worries about a slowdown in economic growth and the impact on oil demand due to the trade war between the world’s two biggest oil consumers kept a lid on price gains this week, even as falling inventories indicate a balancing market.
Reference: CNBC, Reuters, Daily FX
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