North Korea Disarms, Iran Remains a Threat
Recent satellite images showed North Korea dismantling their missile testing and development facilities. Meanwhile, Iran threatened to blockade key oil delivery routes over Mike Pompeo announcing that the US will launch a 24/7 Farsi-language satellite broadcast TV channel to “support the long-ignored voices of the Iranian people”. Political analysts suggest that Trump’s endgame is to resolve the Iranian situation the same way he handled North Korea; at the negotiating table. The key difference is that Iran has broader international influence and support than North Korea. A drop in Iranian oil production combined with a potential naval conflict on the world’s most crucial oil route could send crude oil prices soaring. On the other hand, current oil prices indicate that global production is rising to fill the void left by Iran. It’s also entirely possible that China and the EU will cut a deal with Iran, which could even lead to a surplus in the oil market.
Report Season
Yesterday, Alphabet released their second quarter 2018 earnings report and it showed record heights, setting a baseline optimism towards the tech sector. It showed that it’s still possible to perform well and make a profit, even in a global economy ridden with trade conflicts. It also restored some investor confidence in stocks. Chinese companies seemed especially appealing, since their stocks were undervalued compared to other markets. The Shanghai and Hang Seng indices both increased by 1.5% each as did the Nikkei and the KOSPI, but the latter two only by 0.5%.
GBPUSD
The British pound seems to have lost a lot of steam, despite many noteworthy developments in UK politics over the past few weeks. The Brexit White Paper proposed by Prime Minister Theresa May met significant pushback in Parliament due to keeping most of the UK’s obligations towards the EU intact, resulting in only a partial Brexit. Trump’s London visit seems to have caused a significant rift among the Tories, to the point where the UK’s Conservative Party could split into two.
Jeremy Hunt, Boris Johnson’s replacement as Secretary of State, immediately took off to Berlin to solidify his relationship with his German counterpart. So far it seems Prime Minister May’s cabinet is attempting to find the middle ground between Brexit supporters and the EU, but neither party appears willing to compromise. The British economy is under severe pressure from the growing uncertainty and high probability of a so-called Hard Brexit. According to the latest news, the historically bustling London real estate market has now slowed to a crawl as foreign investors have become increasingly cautious.
Unfortunately, the charts don’t look much better either. Though the Cable seems to have moved away from the steep red downwards trendline, it formed a declining trend channel instead of entering a basing period. The trend channel’s upper limit and the 200-period moving average are almost completely parallel, acting as a confirmation of the pair’s direction. It also suggests the trend channel and moving average will be more accurate predictors of support and resistance levels than static support and resistance lines.
USDJPY
While most other currency pairs seem stuck in ranging sideways patterns, the USDJPY is showing a healthy textbook trending movement. This also comes as a breath of fresh air for the Bank of Japan (BoJ), who no longer have to worry about the yen strengthening too much against the dollar. Many analysts suggest that investors are escaping to Asia’s safe haven currency in large numbers, however, the USDJPY chart doesn’t show any traces of this supposed increase in buying power. This could be the result of the BoJ’s interventionist policy of selling yen and using the accumulating dollars to buy US treasuries.
The pair is trending upwards in a wide, 300 pip channel. Other than the two trendlines at the upper and lower boundaries, there is an additional trendline in the center of the channel. This line has served as both support and resistance on several occasions so far. Due to last week’s correction, price is now hovering near the bottom of the channel, close to the 200-period moving average. This may open up good entry points for long positions, should the trend persist. In that case it would be considered a carry trade, since the BoJ doesn’t seem to be planning any rate hikes, unlike the Fed. The increasing interest rate difference also supports the assessment that the USDJPY will continue to rise, even if this undermines the USA’s attempt to reign in trade deficit.
Sincerely,
Laszlo | Market Analyst
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