The Currency Front
Last week President Trump accused China of interfering with currency prices, which prompted the People’s Bank of China to reevaluate its methods for assessing the price of the yuan. As per Friday’s announcement, the central bank will be switching to the counter-cyclical factor method. Analysts consider this a step towards stabilizing the price of the yuan, since in the future whenever price moves over 2% in either direction, the central bank will step in by means of open market intervention. This system promises greater stability on the Chinese currency market, leaving the US with no reason to object.
Meanwhile Russia continues its campaign to shift its foreign trade away from being based on the USD and towards a different currency. Their first initiative to do so was with Turkey, in an attempt to help Erdogan’s administration, however, they’re aiming to broaden this practice to include their other trade partners. There have been several such attempts made in the past, so far without any breakthrough.
A Gradual Increase
On Friday, Jerome Powell, the Chairman of the Fed spoke on the importance of a gradual increase in economic growth, which suggests a period of more dovish interest rate policy. The US stock markets reached new heights on Friday, which combined with the new Chinese monetary policy resulted in a close to 2% increase on the Chinese and Hong Kong exchanges. The Nikkei and Kospi are also on the rise, although to a lesser extent. Following Powell’s announcement, the dollar underwent a brief, but definite weakening period, which did not continue on Monday when the dollar was back on the up and up. Today’s trading session on the commodities market seems more about price corrections in response to last Friday, when the dollar’s decline led to an increase in the price of oil and precious metals.
EURUSD
As mentioned in the headlines, Russia is making an attempt to reduce the US dollar’s influence in global trade. This includes aiming to change its functions both as a reserve and a clearing currency. The process involves the sale of US dollars and the purchase of a new currency. Obviously this would weaken the US dollar itself, however, it could also strengthen the USA’s trade position in the aftermath of the restructuring of global trade relations initiated by President Trump.
The strengthening US dollar has been an indirect target of Trump’s discontent. One question worth asking is whether the Fed Chair taking on a softer tone shortly after implies that the President has more influence over the Fed than previously thought.
With so many questions surrounding the USD, it’s worth thinking about what could take its place as a reserve/clearing currency. The euro, as the world’s second most traded currency, seems a likely candidate. It’s widely known that Germany has been the primary beneficiary of the euro’s introduction and current status. There are several underlying reasons for the euro’s current weakness, including the economic and social problems of several member states such as Italy, Spain and Greece. Meanwhile Germany boasts near full employment, constitutes 40% of the EU’s trade surplus and even has a government surplus the equivalent of 2% of their GDP. Germany is undoubtedly enjoying the full benefits of a weak euro, so they are unlikely to take any action that could jeopardize that status quo. Luckily for them, its almost impossible for a currency based on a number of unpredictable components to become a reserve currency. This makes the euro unfit to challenge the hegemony US dollar, unlike the yuan.
Nikkei
The Japanese index is back at its earlier resistance line. Over the past few weeks, the trade of Japanese stocks seems to have taken on a sideways ranging pattern. The area between the 21864 and 22814 along with the 22375 center line perfectly encapsulates the range of movement its price had so far. At the same time, the 200-period moving average formed a slight upwards curve while still remaining in proximity of the center line.
This shape generally mirrors the pattern we saw on the last two occasions when price courted the range’s upper limit. In both cases there was a long wick at the top of the candle indicating a trend reversal. Today, price made an attempt to break through the upper boundary with a similarly weak candle. The question here is whether Nikkei will follow suit and replay scenario laid out by two prior attempts earlier this month. If so, then price will likely experience a drastic fall that could last all the way to 22375. Those speculating on this outcome may attempt to capitalize on it by opening short positions with strictly defined stop orders.
Sincerely,
Laszlo | Market Analyst
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