Trump’s List
Yesterday, the United States government released an additional list of Chinese import products targeted for tariffs. The list contains products that are predominately US licensed brand goods manufactured in China. Economists have noted that the existing system for calculating balance of trade is not equipped to handle this business model. When imported to the US, these products are added to the trade balance at American retail price. This includes the 5-10% added value by Chinese assembly, however, the lion’s share of the profit goes to the US domestic businesses that outsourced manufacturing overseas. The list includes products by Apple and Alphabet. The chosen products suggest the primary goal is not reducing trade deficit, but rather incentivizing companies to move production back to the States. Interestingly, the main obstacle to reaching this goal could be a shortage of available labor due to the record low 3.8% unemployment. China announced that they will take countermeasures, however, no details have emerged as of yet. Meanwhile, Harley-Davidson is planning to build a plant in Europe to avoid potential retaliatory tariffs.
Declining Stock Market
Asian markets continued to fall today, however, the rate of decline has decreased. The Shanghai Composite dropped by 1% while the Australian and South Korean indices closed 0.2% lower. The Nikkei managed to stay even which is n impressive accomplishment considering the strengthening of the yen, though the Bank of Japan’s quantitative easing program may also have played a part in it. European markets are showing signs of consolidation following the aftermath of yesterday’s 2%+ drop. US index futures are already mirroring this pattern, even before the trading of US indices begins. The prices for oil and natural gas are also on the rise.
Gold
For most of the year, the price of gold has been moving gradually. Price has been steadily alternating between patterns of sideways movement within a channel, then breaking out and forming a new channel. The last range was between $1306 and $1281, however, now that it has breached, a new channel could form between $1261 and $1281. Looking at the purple trendline indicated on the chart combined with the moving average, we can discover a downwards trend dating back to April.
Price is currently near the lower limit of the previously mentioned potential range, however, a correction is necessary to confirm the validity of the channel. This correction would entail a rising movement back to the previous support line ($1281) now acting as a resistance. Since price has strayed far from both the moving average and the purple trendline, there’s a possibility that it’s oversold. New buyers and the closing of existing short positions is necessary for it to recover. If we assume that price will stick to its current pattern, then 1280 could open up an opportunity for entering the market. On the other hand, until the channel itself is confirmed, price could just as easily go the other way and continue moving downwards. In that case, the next support line could be located at $1238 which would mean a much longer distance between channels than we’ve previously seen.
USDCHF
One of the basic principles of currency trading held by economic analysts and journalists is that changes to interest rate essentially define the direction a given currency pair will be traded. According to this strategy, between the CHF with its negative interest rate and the USD with its constant rate hikes, the dollar would always come out on top. For the USDCHF this would mean a strong rising trend, however, the chart suggests otherwise. The USD started strengthening in February from 0.9150 all the way to 1.00 where it halted. From that point onwards the Swiss franc gained the upper hand despite interest rate decisions being in the dollar’s favor. This phenomenon once again affirms the franc’s status as a safe haven currency. In the midst of growing global economic uncertainty, the Swiss franc still acts as a backup plan for many investors.
The chart shows the correction period from this year’s previous rising movement. It peaked at 1.005, then rebounded to 0.9788. Applying the Fibonacci retracement tool gives us an accurate picture of support and resistance levels. Price is currently aiming for the 38.2% level at 0.9890 which has previously halted attempts at upwards movement. Previously this line could only be broken by the Fed interest rate decision that gave the dollar a tremendous boost, though not enough to reach its initial high. The movement was stopped by the 75% retracement level just blow the 1.00 line. Price turned around after forming an M pattern and proceeded to move downwards as the franc gained in value against the otherwise strengthening dollar. The situation is comparable to that of the Japanese yen. Both the franc and the yen managed to strengthen against the dollar despite their negative interest rates. In times of market turmoil it is clear that these two currencies act as safe havens for investors.
Sincerely,
Laszlo | Market Analyst
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