Articles by: cpt-admin

Currency wars are back?

US President Donald Trump tweeted that China and Europe are manipulating their currencies to compete with USA and not to be left behind, Bank of England Governor Mark Carney also talked down the pound sterling. Federal Reserve Chair Powell’s testimony to Congress was seen as dovish, suggesting an interest rate cut in the US later this month is a done deal. And that would happen amid full employment, solid economic growth of 3% per year and S&P 500 reaching an all time high above 3000. All leads to the suspicion of a return to a currency war?

Gold remained above $1400 mark as Bloomberg reported that central banks buying in 2019 is on track for 700 tons, which represents an increase of 73% compared with last year. The main reasons were slowdown in economic growth, geopolitical tensions and trade disputes as well as attempts to diversify reserves from fiat currencies.  

China June Inflation data showed CPI at 2.7%, in line with expectations the lowest since August 2016, which could be problematic for industrial profits going forward.

In the US, FOMC June meeting minutes saw many Fed officials calling for a rate cut as a ‘cushion for shocks’ adding that inflation expectations were inconsistent with the 2% goal.

In UK, the pound fell below 1.25 to the dollar to a low of 1.2440, the weakest level since April 2017. The slump was based on the lingering Brexit uncertainty still weighing on the economy which is expected to contract in Q2, the first time in 7 years. UK Prime Minister contender Boris Johnson maintains that the country must be prepared to leave EU without a deal. On Friday GBPUSD rebounded slightly around 1.2550.

Meanwhile the former International Monetary Fund Chief Christine Lagarde is set to be confirmed as the new ECB President in October. At the same time European Commission warned of rising downside risks and downgraded the euro zone economic outlook in its latest forecast. ECB minutes also indicated a governing council agreeing on the need to prepare for policy easing. Despite that we can see EURUSD holding between 1.1240 to 1.1280 range.

Where next for GBPUSD?

It is a widely accepted opinion that politics can affect currencies (along with energy and gold) more than any other markets. Hence the race for Number 10 Downing Street stands to be crucial for the future direction of the pound sterling. So far, the UK Prime Minister contender Boris Johnson has rather easily overcome his wide-ranging rival Tory MPs, with only Jeremy Hunt remaining in the contest. Johnson is clearly the favourite with the Conservative membership if the votes so far are anything to go by (he already crossed the magic threshold of 105) and as a result, should be confirmed as the new Prime Minister over this coming weekend.

So, where does Boris Johnson stands with regards to Brexit?

He is adamant that a new deal can be struck with EU, one that is more favourable to the UK, although to do that he is constantly refusing to take a no deal Brexit off table. That puts him at odds with UK Parliament who will not allow such a deal. On the other hand, the EU said they will not renegotiate. It’s clear that something will have to give, one way or the other. The perceived risks are Britain crashing out of the EU with no deal, or a second referendum on Brexit, general elections followed by a Labour win, or yet another delay beyond the current deadline of 31 October this year.

Depending on the different methodology used, and certainly historically, the general consensus is that the pound sterling has a fair value range of somewhere between 1.50 to 1.60 to the US dollar (aqua strip on the chart). But for a return to these levels to occur, the Brexit issue probably needs to be put to rest, one way or the other. It was the ongoing uncertainty that took its toll, resulting in GBPUSD nosediving last week, dropping below the strong support around 1.25 mark. It reached a two-year low of 1.2440, the weakest level since April 2017 (although this level is being tested at time of writing). A string of disappointing UK economic data also acted as catalysts in hurting the pound.

Somehow in another twist of events the Federal Reserves offered a brief respite. Fed Chair Jerome Powell was very dovish in his testimony in front of Congress saying that US-China trade dispute is of particular concern going forward. This despite the surprisingly much better than expected non-farm payrolls figures. As a consequence, the dollar was badly hurt, which allowed GBPUSD to rebound to 1.2578. That was rather short lived, and sterling is now back below the psychologically important 1.25 to the dollar.

On the downside, all the eyes will be on support around 1.2450 – 1.2500 area. If that does not hold it could open the door for another slump to the next support level just above 1.2350 last seen in March 2017, followed by 1.2200. A retest of the record low of 1.1987 seen in January 2017 cannot be ruled out either.  

On the upside a close above 1.25 will bring in the support turned resistance at 1.2570 followed by major resistance at 1.2750. It is also quite possible the market hangs about in a consolidation pattern for a while due to a lot of unanswered questions about Brexit. Furthermore, as it is summertime, politicians take a break, traditionally resulting in a quieter period, certainly in terms of political news.

Further consideration should also be made to the 9 day (pink line) and 21 days (blue line) moving averages. It can be seen that when the 9 MA crossed below the 21 MA, it signalled a drop in the GBPUSD, like it did in August 2008, November 2014 and June 2018. Conversely it signalled a rise in October 2013 when the 9 MA crossed above the 21 MA. It looks like the crossover is a good signal in trending markets and not in a consolidation period (2009 to 2014). Currently the 9 MA is below the 21 MA but before we rush into the bearish outlook, it could be possible that we see another sideways range largely between 1.1980 – 1.4250.

One final note; the chart shows the sterling being in a downward trend well before the Brexit vote, and the pullback just before June 2016 was probably driven by expectations of a winning Remain vote. Is this recent move lower a further confirmation of this long-term trend!

Welcomed pullback in Gold?

On the technical side
The news that made headlines for the past few weeks was Gold breaking above the $1350-1360 resistance area. The market had tried and tried to overcome that huge barrier for 6 years, forming a sideways range, which finally broke, pushing gold to within touching distance of the $1440 level.
It is worth remembering that $1430 was tested a few times back in 2013. It seems the market focused on those inflexion points. Hence it has proved a good ceiling this time around (for now?) as gold opened lower this week and is currently sitting around $1392. From a technical point of view that gap created by the lower opening ($1392) to Fridays close ($1408) is there to be filled, although it remains to be seen if/ when it will happen. Additionally, $1390 represents support as it is a 38.2% Fibonacci retracement from an all time high of over $1900, back in Sep 2011, to the lows of $1046 seen in December 2015.
So whilst breaking out of the long term channel is definitely welcomed, the recent gains have been quite steep. For the Bulls in the market, a pullback could be the catalyst to give gold some breathing space on the RSIs and for future prospects, potentially allow room for the next leg up. We can see a target/resistance at $1480 – $1490 range, which represents 50% Fibonacci retracement, and then $1520-$1550 zone which was solid support between 2011-2013.
Any further retracements should find very healthy support back in the well-established $1350-1360 level, where the market found the resistance on the way up.

On the fundamental side
The bullish narrative
We feel that gold being back on the bullish map is very much dependent on a weaker US dollar because of the inverse correlation between the two.
Over the weekend US President Donald Trump and China’s Xi Jinping met at the G20 in Tokyo and it seems were back on speaking terms. On one hand Trump agreed not to introduce new tariffs on Chinese goods and allowed certain US companies to do business with telecoms group Huawei. On the other hand, China agreed to buy more agricultural goods which should help the struggling American farmers.
As it happens the political interests for both sides somehow aligned this time. Trump has an election coming next year and the ongoing warrior like attitude may not help, leading to expectation of him to tone it down a notch. President Xi has the Communist Party celebrations in October and because that’s the 70th anniversary since Mao founded the People’s Republic of China, will want to focus on prosperity, rather than tensions.
As a combination of the above, the rather positive meeting could spark renewed risk-on attitude with investors returning to stock market. Couple this with the anticipated interest rate cut by the Federal Reserve (which is overwhelmingly priced in) later this month, could push the US dollar lower. This potential scenario is probably what President Trump desires (higher stock market is good for election and lower dollar helps with paying down the deficit hid long term mantra).
It is for this very reason why this week’s non-farm payrolls report possibly has more significance than usual.

The bearish narrative
If, on the other hand, we have a strong reading from the non-farm payroll figures, that will soften the Fed’s hand in making the case for a rate cut, which in turn could scare off investors. Running back into the safe haven of the US dollar will become a distinct possibility which, at least in short term, might hurt gold prices.
This, combined with a rising stock market after the G20 meeting, might in itself be enough of a reason for Fed Chair Jerome Powell to hold fire for now and not start easing this month, especially when Trump has accused him of being wrong so many times. Forcing him to give in to pressure from the president and slashing rates on a rebounding stock market would raise questions on the Fed’s independence.

US-China trade talks at G20

Gold’s breakout above levels that held repeatedly since 2013, making a high of $1439, has been described as a perfect storm of technicals and fundamentals. Geopolitics, in the form of US tensions with Iran, Sino-US trade dispute, a Federal Reserve getting ready to ease again constantly bullied by a President who desperately wants a weaker dollar (and higher stock market), all lined up to support the precious metal.
China’s Commerce Ministry said tariffs by certain countries are a threat to the global economy, although they agreed to keep open the communication channels with the US. Meanwhile US Commerce Secretary Wilbur Ross reiterated Trump’s tariffs threats are not a bluff, although his camp is looking for a ‘reasonable deal’ with China over trade.
Presidents Trump and Xi will meet on Saturday in Japan at the G20 summit and the media seems cautiously optimistic, although both sides aren’t giving much away.
Boris Johnson, the front runner to become the UK Prime Minister, said Parliament is now ready to back a no-deal Brexit and repeated his promise to exit by October 31 this year. Fear grows among Brussels politicians that a no-deal Brexit is increasingly becoming unavoidable. After encountering good support at 1.25 to the dollar, the sterling soared to 1.2750 which was good resistance in the past.
ECB President Mario Draghi hinted last week that more stimulus will be needed if the outlook remains concerning, amid lingering uncertainty regarding trade tensions. A string of economists were quick to predict the central banker will emphasize that more and more in the near future and eventually take action, possibly from September onwards. The EURUSD is sitting just below 1.14.
After going south for a good 18 months, Bitcoin more than doubled since early May reaching above $13,800 and the steep surge made everyone remember the booming second half of 2017. It retraced to $10,500 and looks to be stable just below $12,000 on Friday. However Bloomberg reports ‘the pop culture zeitgeist isn’t quite as giddy’ as apparently Google searches for the word bitcoin were five times higher in December 2017. On the other hand, that episode made Bitcoin & co significant enough that a lot more people are now clued up about them. Facebook announced plans to issue their own crypto currency, Libra, in a sign that institutional adoption is gathering pace.

Gold price breaks higher

Gold made a break above the $1350 – $1360 area which has offered solid resistance for the last few years, reaching $1400 level. The move came after the Federal Reserve hinted it will soften its monetary policy thus hurting the greenback.
China has cut its holdings of US Treasury by $7.5 billion in April to $1.11 trillion, the lowest mark in almost two years according to Bloomberg. At the same time People’s Bank of China added 240 billion yuan into the banking system, via a one-year (medium term) lending facility, in an attempt to increase banking liquidity. To further counter the US tariffs and limit the damage on its economy, China has lowered duties on non-US imports.
The US Federal Reserve held interest rates unchanged in a range between 2.25% – 2.5%, as anticipated, but added the economic activity has been rising at a moderate pace (changed from ‘solid pace’ last month). Chair Powell acknowledged that inflation dropped, trade risks have grown but ‘he wanted to see more’ before cutting. Markets have now almost fully priced in a rate cut of 25 basis points in July with further cuts expected to follow. Quite a turnaround over the year..
After dropping to a recent low of 1.25 to the dollar, the pound sterling managed a small rebound following steady inflation data with CPI figures coming in at +2.0%, in line with consensus. However, selling pressure remains with the continues political uncertainty. On Thursday, the Bank of England left its benchmark rate unchanged at 0.75% with overall language also remaining the same.
Meanwhile ECB President Mario Draghi said more rate cuts are part of the central bank’s key tools, joining the US Fed in taking a renewed dovish stance. Ironically, such actions attracted indignation from President Trump who tweeted that ‘ECB chief remarks make it unfairly easier for them to compete against the US’.
Reserve Bank of Australia has released its June 2019 monetary policy board meeting minutes saying further easing would be appropriate. The labour market, in particular, would be expected to bear the most weight, although lower rates are expected to push down the value of Aussie dollar.

Our Fed is very disruptive to us

It seems the US has reached an agreement with Mexico and President Donald Trump has now tweeted that tariffs would be suspended indefinitely. So much for ‘tariffs are a beautiful thing’ then… As a result, the greenback was given a lift, despite the weakest US employment report released less than 24 hours before. Later this month we could see the re-opening of negotiations between China and US at the G20 meeting, although it’s widely understood that a resolution of trade tensions between these two will require a lot more effort.
We saw a larger than anticipated trade surplus for China in May due to higher than expected exports (despite trade dispute escalation), coupled with lower than expected imports. At the same time, Chinese state-owned Bank of Communications International said ‘weakened valuation of the yuan is decided by the recent tough trade environment China is facing’ but added that they believe the yuan will drop below 7 within 3 months.
The race for the UK Prime Minister has seen the first round of voting which the clear favourite, Boris Johnson, has won by quite some margin after promising an income tax cut. He has already expressed his views that Brexit will happen on October 31 with or without a deal. However, despite previous concerns about a possible hard Brexit hurting the pound, cable (GBPUSD) was trading conditions were stable, around 1.2650, Friday morning.
Meanwhile, the ECB officials are starting to fear the market is losing confidence in the region inflation’s control which could force another round of stimulus to re-establish control. So much so that governing council member Olli Rehn said the central bank could strengthen forward guidance, cut interest rates and relaunch quantitative easing.
Australia’s (May) employment data release showed mixed signals, with an addition of 42.3k jobs (hugely above the expectation for 16k gain), while unemployment rate came in at 5.2% versus 5.1% prediction. Aussie dollar moved lower with many now seeing an increased chance for further easing in the coming months.

Rising chance of Fed rate cut?

 The US dollar started the week on the back foot following growing speculation that a rate cut is back on the table at Federal Reserve. There is no end in sight for the trade dispute with China and its increasing impact on global markets is definitely making investors nervous. The week ended with disappointing non- farm payroll figures of 75K versus the expectation of 175k, which leads to the US dollar expected to lose value further. 

Replying to repetitive accusations against his country’s policies, China’s foreign ministry said that every setback in trade talks is ‘due to US breaking consensus’. Amid stalling negotiations, it is unclear if China will devalue its currency in retaliation to US tariffs or employ a more targeted approach i.e. restrict exports of rare earths to the US (China accounts for more than 70% of global output). 

Back in the UK on the Brexit front, Tory leadership contender Boris Johnson said if he gets in ‘we’ll come out of Europe with a deal or no deal by 31 October’. The no deal option is causing a lot of uncertainties within UK, which could possibly cause sterling to drop across the board. 

European Commission reportedly has sent a letter to Italy blaming it for a violation of debt reduction rules and is preparing to apply a $4 billion fine. Responding to this, Italian deputy prime minister Luigi Di Maio commented the EU made ‘absurd’ requests on investments. Away from domestic squabbles, economic fears spread as the European Central Bank signalled its readiness to embark on a fresh round of bond purchases. So we have a dovish signals from both the ECB and the Fed, but the euro is the currency currently coming out stronger breaking above 1.13 against the greenback. 

In a move that was widely anticipated, the Reserve Bank of Australia’ cut cash rates by 25 basis points from 1.5% to 1.25% at its latest monetary policy meeting on 4 June. That represents a record low for Australia and is the first slash by the central bank since August 2016. The decision was taken to support jobs growth, achieve inflation target as well as to deal with a weakening housing market. 

Rising chance of Fed rate cut?

The US dollar started the week on the back foot following growing speculation that a rate cut is back
on the table at Federal Reserve. There is no end in sight for the trade dispute with China and its
increasing impact on global markets is definitely making investors nervous. The week ended with
disappointing non- farm payroll figures of 75K versus the expectation of 175k, which leads to the US
dollar expected to lose value further.
Replying to repetitive accusations against his country’s policies, China’s foreign ministry said that
every setback in trade talks is ‘due to US breaking consensus’. Amid stalling negotiations, it is unclear
if China will devalue its currency in retaliation to US tariffs or employ a more targeted approach i.e.
restrict exports of rare earths to the US (China accounts for more than 70% of global output).
Back in the UK on the Brexit front, Tory leadership contender Boris Johnson said if he gets in ‘we’ll
come out of Europe with a deal or no deal by 31 October’. The no deal option is causing a lot of
uncertainties within UK, which could possibly cause sterling to drop across the board.
European Commission reportedly has sent a letter to Italy blaming it for a violation of debt reduction
rules and is preparing to apply a $4 billion fine. Responding to this, Italian deputy prime minister
Luigi Di Maio commented the EU made ‘absurd’ requests on investments. Away from domestic
squabbles, economic fears spread as the European Central Bank signalled its readiness to embark on
a fresh round of bond purchases. So we have a dovish signals from both the ECB and the Fed, but the
euro is the currency currently coming out stronger breaking above 1.13 against the greenback.
In a move that was widely anticipated, the Reserve Bank of Australia’ cut cash rates by 25 basis
points from 1.5% to 1.25% at its latest monetary policy meeting on 4 June. That represents a record
low for Australia and is the first slash by the central bank since August 2016. The decision was taken
to support jobs growth, achieve inflation target as well as to deal with a weakening housing market.

US June payrolls up by 224k vs 160k expected

 Gold tumbled to $1383 on the back of a stronger USD, following a positive meeting between Chinese and US Presidents over the weekend. Nonetheless the sell-off was rather short lived and a rebound soon followed with the precious metal pushing back above $1430 within two days. Hitting perfect technical retracement levels. 

The highlight of the Trump-Xi meeting at G20 summit is that both sides have agreed to restart trade talks and there will be no new levies on Chinese goods. Meanwhile the focus shifted with and the US proposing to add more tariffs to $4 bln worth of EU goods. 

China’s June Caixin Manufacturing PMI came in at 49.4 vs 50.1 anticipated. It is the second lowest reading since June 2016 showing a contraction in manufacturing as the overall economy slips further into the red. However Premier Li Keqiang was adamant earlier in the week that China will not resort to yuan devaluation. 

ECB policymakers seemed confident they don’t need to add monetary stimulus in July preferring instead to wait for more data on the economy (no mention of QE). EURUSD was on the downside for the whole week testing lows of 1.12 at the time of writing. Meanwhile EU leaders agreed to appoint Christine Lagarde (the current IMF chief) as the next ECB President 

OPEC agreed to extend the production cuts by an additional 9 months, concerned with the excess oil supply from the US. The trade truce is seen as bullish for global growth but the rally in oil prices was short lived as the markets came off the highs. 

On Friday, the US nonfarm payrolls report showed 224k jobs were added in June, a lot higher than markets had anticipated. In reaction, the Dow fell 100 points and gold prices slipped below $1400 (hovering around $1415 before the announcement) amid a strengthening US dollar. Analysts were quick to speculate the numbers would now make it much harder for the Fed to justify a rate cut at the next meeting ( if it wasn’t for a meddling President who has three words in regards to monetary policy ‘cut cut cut’….). 

The pound sterling started the week on the back foot due to ongoing poor UK data. It fell below the previously good support level of 1.25 USD after the US jobs report.