USD/JPY: decrease to 102 or increase to 112. What to expect next?

Trading 12 juil 2019 Commentaire »

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After the January flash crash of crosses with the yen, there were enough forecasts about the fall of the USD/JPY pair to the mark of 100 and even 95. In fact, the pair managed to go to the upper limit of the range 108-112, in which it was in the last few years.

The escalation of the US and China trade conflict in May and the associated hopes for easing the monetary policy of the Fed allowed the yen's exchange rate against the dollar to return to its highest levels since the beginning of the year. The positive results of the next G20 summit, at which Washington and Beijing agreed to restart trade negotiations, as well as strong data on the US labor market for June, which reduced the probability of reducing the federal funds rate by 0.5 basis points at once, made adjustments. However, the subsequent statements of the Fed leadership returned the "bears" on USD/JPY to the game.

Mizuho Bank experts expect that by the end of the year, the pair will fall to 103. As the main reason, experts call the limited capacity of the Bank of Japan to weaken monetary policy.

"If the Fed has room for maneuver, the Japanese Central Bank has already bought up a significant part of the local debt market and instead of the announced 80 trillion yen expands the monetary base by less than 30 trillion yen per year," they said.

Experts of Morgan Stanley, in turn, draw an analogy with 2016, when inflation expectations in the Land of the rising sun fell faster than the yield of local bonds, and USD/JPY sank from 121 to 99 in a few months. According to the bank's forecast, by the end of this year, the pair will fall to 102, and by the end of the next year – to 94.

It should be recognized that an integral part of the "bearish" forecasts for USD/JPY is hoping for easing the monetary rate of the Fed.

A strong report on US employment for June and fears that Fed Chairman Jerome Powell in his speech to Congress may say that the time for monetary expansion has not yet come, returned the yield on ten-year treasuries above 2% and pushed the pair USD/JPY above 108. Against this background, the probability of a 50 basis point reduction in the federal funds rate in 2019 fell to 40%, although investors had little doubt about this outcome.

However, bearing in mind of the past mistakes and not wanting to get on the same rake, Jerome Powell did not dispel the hopes of the market regarding the rate cut in July, once again confirmed the strength of the US economy and announced the preservation of increased international risks. This allowed the "bears" on USD/JPY to use the rebound from the level of 108.95 to form "shorts".

If we assume that the trade conflict between the United States and China will be delayed (which, along with the increased risks of transferring the "fighting" to the European scene, will continue to slow down the global economy and ultimately force the Fed to weaken monetary policy), then on the medium-term horizon, short positions on USD/JPY will seem quite promising.

In addition, a number of geopolitical risks remain – including Iran, Turkey, and North Korea, any of which could weaken investor sentiment. However, if there is no escape from the risk, the USD/JPY may well rise above 112 by the end of the year.

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U.S. Producer Prices Show Unexpected Uptick In June

Trading 12 juil 2019 Commentaire »

A day after reporting an unexpected uptick in U.S. consumer prices, the Labor Department released a report on Friday showing U.S. producer prices also unexpectedly edged higher in the month of June.

The Labor Department said its producer price index for final demand inched up by 0.1 percent in June, matching the uptick seen in May. Economists had expected producer prices to come in unchanged.

The modest increase in producer prices came as a steep drop in energy prices was more than offset by continued service price growth.

The report said energy prices plunged by 3.1 percent in June after tumbling by 1.0 percent in the previous month, with gas prices plummeting by 5.0 percent.

Excluding food and energy prices, however, core producer prices climbed by 0.3 percent in June after rising by 0.2 percent in May. Core prices had been expected to show another 0.2 percent increase.

The bigger than expected increase in core prices came as service prices rose by 0.4 percent in June after climbing by 0.3 percent in May.

Prices for trade services soared by 1.3 percent in June after falling by 0.5 percent in May, while prices for transportation and warehousing services rose by 0.3 percent and prices for other services were unchanged.

Compared to the same month a year ago, producer prices in June were up by 1.7 percent, reflecting a slowdown from the 1.8 percent growth in May.

Meanwhile, the report showed the annual rate of core producer price growth was unchanged from the previous month at 2.3 percent.

"The small gain in producer prices in June suggests the increase in tariffs on $200bn of imports from China has yet to generate a pick-up in inflation and confirms that underlying domestic inflationary pressures remain subdued," said Michael Pearce, Senior U.S. Economist at Capital Economics.

He added, "That should help ease any fears, following the June CPI figures released yesterday, that underlying consumer price inflation will rise back above 2%."

On Thursday, the Labor Department released a separate report showing an unexpected uptick in U.S. consumer prices in the month of June.

The Labor Department said its consumer price index inched up by 0.1 percent in June, matching the slight increase seen in May. Economists had expected consumer prices to come in unchanged.

Excluding food and energy prices, core consumer prices rose by 0.3 percent in June after inching up by 0.1 percent for four consecutive months. Core prices had been expected to edge up by 0.2 percent.

Despite the unexpected monthly increase, the Labor Department said the annual rate of consumer price growth slowed to 1.6 percent in June from 1.8 percent in May.

Meanwhile, the report said the annual rate of core consumer price growth crept up to 2.1 percent in June from 2.0 percent in the previous month.


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The dollar acts ahead of the curve

Trading 12 juil 2019 Commentaire »

Jerome Powell quickly stopped the intention of the "bears" on EUR/USD to bring the pair's quotes beyond the range of 1.12-1.14. In his speeches to the US Congress, the Fed Chairman made it clear that the Central Bank has grounds for reducing the federal funds rate. First, inflation leaves much to be desired. Secondly, Donald Trump's trade policy creates a headwind for the American economy. The Fed is ready to act ahead of the curve. In 1995 and 1998, its preventive monetary easing saved the States from recession. In 2001 and 2004, when the rate was lowered in response to the deterioration of macroeconomic statistics, the recession could not be avoided.

If the Fed does not disdain monetary expansion when core inflation is at 2.1% and unemployment is at half-century lows, then why should the ECB restrain itself? Both central banks note the negative impact of falling inflation expectations on consumer prices, but in the eurozone, it is more pronounced than in the United States.

Dynamics of oil and inflation expectations

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The June Protocol of the ECB Governing Council showed that officials will discuss the issues of lowering rates and resuscitation of QE. The market is set that the European regulator will give a signal to ease monetary policy in July, and will move from words to deeds in September.

If Frankfurt has more grounds for monetary expansion than Washington, why is EUR/USD growing? We have already discussed this issue. When two central banks soften their policies, the arsenal of tools they have is important. The Fed can reduce the rate by as much as 250 bp, or even more, while the rate on deposits of the ECB is already in the negative area (-0.4%). Simply put, the beginning of a cycle of monetary expansion in the United States gives speculators the opportunity to fix profits on long-term long positions on the US dollar and move to short.

At the same time, if the US economy shows resistance to external factors, then reduce the federal funds rate by 50 or 75 bp won't be necessary. In this regard, the release of data on retail sales in the US in June is able to lend a helping hand to the "bears" on EUR/USD. The publication of these indicators and China's GDP for the second quarter will be the key events of the week by July 19. Investors will closely monitor the state of China's economy and the course of trade negotiations between Washington and Beijing.

Pressure on the euro is created by the growing risks of a trade war between the EU and the United States, the desire of the new Greek government to revise the budget surplus established by the European Union of 3.5%, as well as the possible occupation of Boris Johnson as Prime Minister of Britain. An ardent supporter of Brexit claims that Albion will leave the EU with or without an agreement.

Technically, the EUR/USD pair continues to consolidate in the range of 1.12-1.14 within the "Diamond bottom" pattern. The breakthrough of resistance at 1.132 will increase the risks of implementing targets for the models AB = CD (161.8%) and "Wolfe Waves".

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Canadian Dollar Advances On Rising Oil Prices

Trading 12 juil 2019 Commentaire »

The Canadian dollar climbed against its most major counterparts in the European session on Friday amid rising oil prices, as oil production in the Gulf of Mexico has been reduced in the wake of Tropical Storm Barry that threaten the region.

Crude for August delivery rose $0.06 to $60.26 per barrel.

Report from the US Department of Interior's Bureau of Safety and Environmental Enforcement showed Thursday that around 53.39 percent of the current oil production in the Gulf of Mexico was reduced, which is equivalent to 1.01 million barrels of oil per day.

Barry is expected to gather strength as a Category 1 hurricane on Saturday and make landfall in Louisiana.

Oil prices were also supported by lowering of oil production growth forecast by OPEC for its non-cartel peers next year.

In its monthly report, the cartel projected demand for crude in 2020 to fall to 29.27 million barrels of oil per day, down 1.34 million barrels of oil per day from the 2019 projection.

The currency has been trading in a positive territory against its major counterparts in the Asian session, excepting the aussie.

The loonie appreciated to near a 9-month high of 1.3018 against the greenback and held steady thereafter. The pair was worth 1.3071 at Thursday's close.

The loonie that ended yesterday's trading at 1.4708 against the euro advanced to a 4-day high of 1.4659. Next key resistance for the loonie is seen around the 1.44 mark.

Data from Eurostat showed that Eurozone industrial production rebounded at a faster than expected pace in May largely driven by consumer goods output.

Industrial output grew 0.9 percent month-on-month in May after declining 0.4 percent in April. This was the first increase in four months.

The loonie edged higher to 0.9105 against the aussie, from a low of 0.9126 hit at 1:45 am ET. The loonie is likely to face resistance around the 0.895 mark.

On the flip side, the loonie eased to 83.05 against the yen, from a 1-1/2-month high of 83.24 touched at 3:45 am ET. If the loonie drops further, 81.00 is seen as its next support level.

Final data from the Ministry of Economy, Trade and Industry showed that Japan's industrial production grew at a less-than-initially-estimated rate in May.

Industrial production rose 2.0 percent month-on-month in May instead of 2.3 percent estimated previously.

Looking ahead, U.S. producer prices for June are due in the New York session.


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India Inflation Accelerates More Than Expected

Trading 12 juil 2019 Commentaire »

India's consumer price inflation accelerated at a faster-than-expected pace in June, figures from the statistics ministry showed on Friday.

The consumer price index climbed 3.18 percent year-on-year following a 3.05 percent increase in May. Economists had forecast 3.13 percent inflation.

The food price inflation accelerated to 2.17 percent from 1.83 percent.

In June, the Reserve Bank of India cut the key interest rate by a quarter basis point, the third in a row, to its lowest level since 2010 and tweaked its monetary policy stance to accommodative from neutral.

Considering the impact of rate cuts and expectations of a normal monsoon, the bank revised down the path of CPI inflation to 3.0-3.1 percent for the first half of the fiscal 2020 and to 3.4-3.7 percent for the second half.


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U.S. Producer Prices Unexpectedly Inch Up 0.1% In June

Trading 12 juil 2019 Commentaire »

A day after reporting an unexpected uptick in U.S. consumer prices, the Labor Department released a report on Friday showing U.S. producer prices also unexpectedly edged higher in the month of June.

The Labor Department said its producer price index for final demand inched up by 0.1 percent in June, matching the uptick seen in May. Economists had expected producer prices to come in unchanged.

Excluding food and energy prices, core producer prices climbed by 0.3 percent in June after rising by 0.2 percent in May. Core prices had been expected to show another 0.2 percent increase.


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India's Industrial Output Rises More Than Forecast

Trading 12 juil 2019 Commentaire »

India's industrial production grew more than expected in May, data from statistics ministry showed Friday. Industrial production advanced 3.1 percent annually, bigger than the expected 2.9 percent. However, the rate was weaker than the revised 4.3 percent expansion seen in April.

In the same period last year, production had expanded 3.8 percent.

Mining output climbed 3.2 percent and manufacturing gained 2.5 percent. At the same time, electricity output grew sharply by 7.4 percent.

The cumulative growth in overall industrial production for April to May period was 3.7 percent.


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*U.S. Producer Prices Inch Up 0.1% In June, Core Prices Rise 0.3%

Trading 12 juil 2019 Commentaire »

U.S. Producer Prices Inch Up 0.1% In June, Core Prices Rise 0.3%


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Bullish scenario for EURUSD

Trading 12 juil 2019 Commentaire »

EURUSD has so far retraced 50% of the recent rise from 1.1193 to 1.1285. Short-term trend is bearish as price is making lower lows and lower highs. A reversal of trend should come once the ABC decline completes around 61.8% Fibonacci retracement and price breaks above 1.1275.

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Red lines - bearish channel

Blue rectangle - possible reversal area

Green line - expected path

EURUSD is pulling back towards the upper channel boundary and towards the 50-61.8% Fibonacci retracement levels. A reversal to the upside from these levels is highly probable. EURUSD bulls should respect the 61.8% level and break above 1,1275 resistance in order to resume their up trend. Support is at 1.1228. I expect that it is more probable to see an upward reversal.

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Weekly analysis on Gold

Trading 12 juil 2019 Commentaire »

Gold price has trouble on a weekly basis to capture the $1,450-$1,440 level. This is a confirmed major resistance and puts short-term trend in danger. Prices are vulnerable to a pull back towards $1,300 as long as price gets rejected each time we challenge $1,440-50.

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Yellow rectangle - long upper tails, signs of selling pressure

Blue line -long-term resistance trend line broken

Green line -long-term support trend line

Gold price has broken above the long-term resistance trend line and is in a medium-term bullish trend. As long as price is above the green trend line support, bulls have nothing to fear. Of course a break below the blue trend line support (previously resistance) would not be welcomed. In the last three weeks we see long upper tails in the Daily candlesticks. This is a sign that resistance is strong in this area and bulls are not strong enough. Short-term support is at $1,385-90 and if this level breaks, traders should expect a reversal towards $1,350-$1,300.

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