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Risk Sentiment Rising in FX Markets with U.S.-China Trade Tensions

05/14/2019 9:52 am EST

Focus: FOREX

Bill Baruch

President and Founder, Blue Line Futures

Euro currency withstood rising risk tensions and yen enjoyed safe-haven support, says Bill Baruch, President of BlueLineFutures.com.

Euro (ECM)

Fundamentals: Risk-sentiment worsened into Monday morning on escalating U.S-China trade tensions and sent the odds for a Federal Reserve rate cut in 2019 above 70% (based on Fed Fund futures). Typically, the euro has been beaten-up along with risk-sentiment but today this wasn’t the case. In fact, although the Chinese yuan shed 0.78% against the U.S. dollar, the dollar did not garner broad safe-haven tailwinds versus other currencies. It did pare early losses to finish unchanged with the euro stalling at 1.13. Fed Governor Clarida pointed to inflation just below the Fed’s 2% target which was nothing new. However, Boston Fed President Rosengren discussed the uncertainties a budding trade war could cause and said the Fed has tools to use if growth worsens. Tomorrow’s economic calendar heats up in Europe. Regional CPI data from Germany and Italy is due early. The biggest read will be German ZEW Sentiment at 4:00 am CT. It will be accompanied by Eurozone Industrial Production and ZEW Sentiment. U.S Import/Export Price Index is due at 7:30 am CT and Kansas City Fed President George, a voting member in 2019, speaks at 11:45 am CT.

Technicals: Since bottoming out April 26, the euro has tested and attempted to close above major three-star resistance at 1.12455-1.12695 in every session since. Ten sessions in total and the highest closes were 1.1266 on April 20 and 1.1265 on Friday. It has traded above major three-star resistance five times and each one has failed to hold. The euro faces a strong hurdle overhead and sellers are defending rally attempts. While we are not bearish on a value basis, we cannot be bullish given recent failures. Thursday’s low of 1.12075 brings an intermediate floor, a move below here could bring a heavy wave of selling.

Bias: Neutral

Resistance: 1.12455-1.12695***, 1.1311-1.1332**, 1.13855***

Support: 1.12075**, 1.11565-1.11845***, 1.1000***

Japanese yen (JYM)

Fundamentals: The Japanese yen notched its sixth gain in seven sessions as the demand for safe-havens picked up amidst an escalating trade war. With the yen though, you want to be cautious for deteriorating conditions regionally and ultimately this has capped gains relative to Treasury markets. However, the dollar has seemingly failed to broadly breakout and the U.S. Dollar Index has been capped under 98.00; this has helped provide a tailwind during the more recent escalation. As long as pressures remain on U.S equity benchmarks and the dollar stays in check to lower, the yen should continue to benefit fundamentally in the near term. Japan Current Account data is due at 6:50 pm CT and a 30-year JGB auction is out at 10:35 pm CT.

Technicals: In our FX Rundown videos last week, we pointed to the path of least resistance in the yen being north as long as it stays above .9031-.90585. Price action opened up firmly last night and extended gains early this morning. The tape is bullish above .9105-.9129 but remember, this is not when you want to be rushing into the yen, this is when you want to be capitalizing on risk taken much lower.

Bias: Neutral/Bullish

Resistance:.91815-.9217***, .9284***

Pivot: 9105-.9129

Support: .9031-.90585***, .8919-8931***, .88355**, .87675***

Aussie dollar (ADM)

Fundamentals: The Aussie closed today at the lowest level since January 2016. Yes, there was a capitulatory spike to .6825-.6861 on Jan. 3, but that was during odd hours and not on a settlement basis. In our videos last week, we discussed the possibility of this impending breakdown, now coming to fruition amidst an escalating trade war. If broad risk-sentiment remains negative, equity markets remain under pressure and there is no progress between the world’s two largest economies, we expect continued pressure on the Aussie. Westpac Consumer Sentiment is due at 7:30 pm CT and NAB Business Confidence follows at 8:30 pm CT. Tomorrow, we get a deluge of data from China including Industrial Production and this could help stop the bleeding.

Technicals: Today was a clear breakdown below strong support in a fundamentally driven market. A continued close below .6970 paves a path of least resistance to revisit .6809-.6861. While there is room to capture a move lower, traders do want to approach such knowing the landscape can shift via one tweet or comment.

Bias: Neutral/Bearish

Resistance: .7024*, .7077-.7080***

Pivot: .6970-6997

Support: .6809-.6861***

Canadian dollar (CDM)

Fundamentals: The Canadian dollar gained solid footing on Friday after a blowout jobs report; +106,500 jobs versus +10,000 expected and a drop of 0.1 in the unemployment rate to 5.7%. However, all gains have dissipated as equity markets dive lower to start the week on U.S and China trade tensions worsening. With no end in sight, the Canadian dollar could find itself on a path following the Aussie. To make matters worse, early gains in crude oil reversed sharply tail and now the commodity finds itself at an inflection point near the 200-day moving average with a large on the session.

Technicals: The Canadian battled constructively against major three-star support since late April. This is the floor at the moment keeping it from legging another 1%. However, after today’s loss and a failure at the 50-day moving average, the bears are priming to take the third test below support. A streak of lower highs dating back to June certainly gives them an advantage.

Bias: Neutral/Bearish

Resistance: .7491-.7509**, .7544-7564**, .7600-.7630***

Pivot: .7443

Support: .7404-.7427***, .7330-.7347***

Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com

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