Treading Carefully
There was no deal between Iran and other state representatives at the Vienna summit this weekend. All parties expressed their willingness to cooperate, however, they could not settle on any specific terms. Iran expects the complete lifting of all sanctions, giving them full access to global financial and oil markets, as well as foreign investments to help develop their economy. The parties involved did not fully believe in the other side’s commitment, resulting in a need for further extensive negotiations before an agreement can be reached on the Joint Comprehensive Plan of Action. We should expect to see several more meetings before November 4.
Easing Tensions
Investors calmed down after the US and China finished their game of tit for tat on Friday. Neither country backed down, instead making good on their threats as actual policy. While they prepare their next measures, the markets are looking for opportunities to quickly buy devalued Chinese stocks. The Shanghai Composite rose by 2.36% today and its optimism spread to other markets as well. The Nikkei and the Hang Seng indices rose by 1.2% and 1.65% respectively. Gold and silver both increased by 0.5% since Friday. The price of WTI increased by 10 cents as did Brent by 36 cents.
EURGBP
British Secretary of State David Davis resigned over the weekend. He explained his decision by saying PM Theresa May needs “an enthusiastic believer, not a reluctant conscript.” Analysts say the secession of the lead negotiator increases the likelihood of a so called hard Brexit. The hard Brexit scenario is one where there is no special agreement of cooperation between London and Brussels so Great Britain simply becomes one of many non-Union countries. The inability to form a stable cabinet means Prime Minister May now also has to deal with discord within her own party in addition to the opposition.
Despite the chaos in UK politics, the pound remains relatively stable against the euro. Recent events suggest the pound should weaken, however, it was the euro that lost value . Following the resignation of Mr. Davis, the currency pair dropped by 40 pips and shows signs of wanting to return to the 0.8722-0.8825 range. The euro’s strengthening over the past 10 days indicated the pair would stay above the upper limit of the range, however, news of the sudden change in personnel caused price to break the rising yellow trendline. If price moves below the purple 0.8800 support line, it would confirm the continued strengthening of the pound. Once that area is reached, we can consider the time price spent outside the channel a brief interlude rather than a direction defining trend.
AUDUSD
Many of last week’s US unemployment figures were mixed, however, the Nonfarm Payrolls (NFP) exceeded expectations, showing that there is still a high demand for labor in the US market. The NFP reported 213,000 new jobs in June, 18,000 more than was expected. The largest increases were seen in business services, healthcare and manufacturing. Meanwhile 22,000 retail jobs were lost. The only factor casting doubt on the otherwise positive results is the rise of unemployment figures from 3.8% in May to 4% in June. The NFP’s report was overall favorable enough for buyers to dominate the stock markets, but not the dollar market. The USD is showing signs of trend reversals against several currencies, most notably the Aussie dollar which gained 0.6% during the North American trading session.
Tensions from the trade war and the anticipation of an upcoming Fed rate hike caused the dollar to strengthen, resulting in the AUDUSD pair dropping from 0.7676 to 0.7313 in June. The sharp decline was followed by a basing period, characterized by low volatility sideways movement. Up until now the 0.74 support line was considered an impenetrable wall for the AUD. Today’s general market optimism spurred investors to buy more Australian dollars, causing the USD to already lose half of the value it gained over the course of June. If we use the Fibonacci tool we can see that price is approaching the 50% retracement level, which will likely serve as a strong line of resistance for any upwards trend. The ongoing increase is sharp enough for the last six candles to close above the upper Bolinger bands. This is usually a sign of the asset being overbought and conventional wisdom dictates that price will soon return to the middle band.
Sincerely,
Laszlo | Market Analyst
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