Weekly Review and Outlook: Geopolitical Risks Rocked Markets, Faded Towards Weekend

Geopolitical risks in Ukraine and Middle East were the main drivers in the financial markets last week. Global equities tumbled with DJIA hitting as low as 16333.78 while SP 500 dived to 1904.78. Nonetheless, as Russia sought to de-escalate the tensions in Ukraine, stocks staged a relief rally on Friday as DIJA closed at 16553.93 while SP 500 closed at 1931.59. Both ended the week higher indeed. US treasuries benefited from safe haven flows with 30 year yield extending recent fall to close at 3.226 while 10 year yield closed at 2.415, breaking May’s low. In the currency markets, the Japanese yen and Swiss Franc were the biggest winners of the week on risk aversion. Dollar came next as the third strongest currencies. Commodity currencies were the weakest with Aussie and Canadian both additionally hit by respective employment data.

Four central banks met last week but triggered little reactions from the markets. The ECB left the monetary policy on hold, leaving the main refi rate at 0.15% and the deposit rate at minus 0.10%. At the press conference, President Draghi acknowledged the moderation of “growth momentum” and warned that tensions between Ukraine and Russia would pose downside risks to the recovery More in Draghi: Ukraine Crisis would Exacerbate the Already-Slow Growth in Eurozone. BoE maintained the Bank rate at 0.50% and the asset purchase target at GBP 375b as widely expected. Only a brief statement was released and focus will turn to meeting minutes to be published on August 20.

The BOJ left the asset buying program to increase the monetary base at an annual pace of 60 to 70 trillion yen. In the policy statement, BoJ indicated that “exports have shown some weakness”. This was compared with the language in July that “exports have recently leveled off more or less”. On industrial production, the BOJ acknowledged that output “has continued to increase moderately as a trend, although it has recently shown some weakness”. In July, the central bank noted that production had “continued to increase moderately as a trend, albeit with some fluctuations”.

The RBA left the cash rate unchanged at 2.5% for a year in August, marking the second-longest period of stable interest rates since the RBA started setting the cash rate in the mid-1980s. The accompanying statement delivered few changes to the economic and monetary policy outlook. The RBA noted firmed growth but attributed the rise in inflation to temporary factors. It continued to warn over the strong Australian dollar. Policymakers reiterated that ‘the most prudent course is likely to be a period of stability in interest rates’ given current economic indicators. More in RBA Left Rate Unchanged, Attributed Rise In Inflation To Temporary Factors.

Technically, here are some developments to note. SP 500 seemed to have formed a short term bottom at 1904.78 after drawing support from the medium term channel, ahead of 1897.28 resistance turned support. While recovery from 1904.78 might extend, we’d be cautious on strong resistance around 55 days EMA (now at 1941.96) to limit upside. Risks remain heavily on the downside before sustained trading above this EMA. And below 1904.78 will be accompanied by a break of the channel support which carries medium term bearish implications. Nonetheless, sustained break of the EMA would save the up trend and turn focus back to 1991.39 high instead.

TNX, 10 year yield’s break of 2.402 indicates resumption of the down trend from 3.036. Note that TNX is staying well inside the falling channel, with recovery attempts limited by the falling 55 days EMA. While downside momentum is a bit unconvincing with mild bullish convergence condition in daily MACD, the overall outlook stays bearish. We’d favor the case for TNX to drop further to lower channel support at 2.23 level.

In the currency markets, Euro was surprisingly resilient last week. While it did extend the fall against dollar, EUR/USD quickly recovered back into prior range. Similar picture was also seen in EUR/JPY which initially dived to 135.72 but recovered back to prior week’s range. Indeed, EUR/GBP has extended recent rebound from 0.7873 short term bottom. EUR/AUD extended the rebound from 1.4197 short term bottom. EUR/CAD also extended the rebound from 1.4417 short term bottom. These three crosses, EUR/GBP, EUR/AUD and EUR/CAD all displayed sign of bullish reversal for the near term.

Yen was the biggest winner last week, in particular against commodity currencies. NZD/JPY, CAD/JPY, AUD/JPY lost -1.15%, -1.02% and -0.98% respectively. GBP/JPY also lost -0.88%. Stabilization in the stock markets as mentioned above could halt the rally in yen. But on the other hand, falling treasury yields would maintain the bearish bias in these yen crosses.

Dollar continued to lose momentum against Euro and showed some weakness against the Japanese yen. Also, the dip in USD/CHF on Friday indicated short term topping. The dollar index also showed lost of momentum too. So overall, while the greenback would likely extend the rally against commodity currencies and sterling, the overall near term outlook could start to turn mix and the greenback might enter into a general consolidation mode. That is, strengthening against some currencies and weakening against others.

Regarding trading strategies, we closed out the EUR/USD short as suggested in last weekly report. That’s before the dive through 1.3366 support but no regret on it as the pair quickly rebound. We’ll looking for opportunities to sell EUR/USD again later. But for this week, we’ll keep our hands off it first.

We suggested to buy USD/CAD on break of 1.0960 resistance and sell GBP/JPY on break of 172.36 support. Both trade were entered. The GBP/JPY short term turned up quite well as GBP/JPY’s sell off accelerated, accompanied by GBP/USD, as helped by the reversal in EUR/GBP. The pull back in USD/CAD from 1.0985 last week was rather shallow and maintained overall near term bullish.

For those who didn’t follow last week, one might considering to buy EUR/CAD as there is prospect of it outperforming USD/CAD on EUR/USD’s rebound. But for our own selves, we’d prefer not to switch around too much. Regarding yen trades, while AUD/JPY and NZD/JPY might look tempting, it should be noted that AUD/USD is close to 0.9211 support while NZD/JPY is close to 0.8401 support. Both might stage a rebound any time. Hence, we’d rather stay short in GBP/JPY.

So to conclude, we’ll hold on to USD/CAD long and GBP/JPY short positions and monitor the developments.

GBP/JPY’s fall from 175.36 resumed last week and accelerated to as low as 171.21. The break of 172.26 support is taken as the sign of medium term topping. Initial bias remains on the downside this week for 169.53 key support level to confirm this bearish case. On the upside, break of 172.60 is needed to signal short term reversal. Otherwise, outlook will stay cautiously bearish.

In the bigger picture, the up trend from 116.83 (2011 low) continued to lose upside momentum. This could be seen in bearish divergence condition in daily MACD. And, weekly MACD continued to trend down. The acceleration in fall from 175.36 affirms the reversal case. Focus is now on 169.53 key support level. Decisive break will confirm topping and would bring deeper fall back to 55 weeks EMA (now at 165.41) and below.

In the longer term picture, we’d stay long term bullish in GBP/JPY as long as 156.77 support holds. The up trend from 116.83 is expected to extend to 61.8% retracement of 251.09 to 116.83 at 199.80 and above even though some interim consolidation could be seen.

GBP/JPY 4 Hours Chart

GBP/JPY Daily Chart

GBP/JPY Weekly Chart

GBP/JPY Monthly Chart

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