India’s Rate Hike
Asia’s third largest economy is currently facing a significant inflation problem due to the rupee’s continued weakening. At the start of the year the Indian rupee (INR) was at a rate of 63 for one US dollar. Since then it has lost 14% of its value, rising to 73 per USD. Seeing the currency’s rapid depreciation, analysts expect an initial base interest rate increase of at least 25-50 in the near future. India’s economy boasts an impressive 7% annual growth rate, however, rising oil prices have increased domestic demand for US dollars. Official inflation figures suggest a 4-5% price increase, which is still lower than the Reserve Bank of India’s 6.5% base interest rate. Even so the central bank still has to tackle the possibility of inflation accelerating in order to avoid the same crisis as Argentina and Turkey. India is one of the main buyers of Iranian oil so it is certain that the issue of providing an alternative source of oil for the country was a major topic in yesterday’s trade negotiations between Trump and President Ram Nath Kovind of India.
Closed for the Holidays
China celebrated yesterday. Not because of rising stock markets or easing trade tensions, instead it was the start of the country’s longest public holiday. China’s National Day and subsequent Golden Week lasts October 1-7, meaning Chinese exchanges will only open up on October 8. South Korean exchanges were also closed, leaving the Asian trading session with only a small number of participants and an overall low volume of trade. The remaining markets were largely bearish, with Nikkei dropping by 0.66% primarily due to a decline in auto industry stocks. The Hang Seng declined as well, although only by a marginal 0.13%. The commodities market on the other hand saw a revival, especially in the case of precious metals. Copper futures are now above 2.82.while gold futures exceed 1200 USD. Oil and natural gas continue to rise and even agricultural products saw an increase due to the recently restored NAFTA agreement.
USDJPY
Japanese corporations are hoping their government can strike a deal with Trump much like Canada did. The Japanese auto industry exports 40 billion dollars worth of cars to the United States that are now exposed to a 25% tariff. Analysts in Tokyo worry about Japan being in a poor position to negotiate. Japan’s imports from the US are so low compared to their exports that it leaves the Japanese government with very little leverage against the US. Toyota, Nissan and Honda have attempted to pressure Prime Minister Shinzo Abe into being more accommodating on matters of trade in his talks with Washington.
The US dollar strengthening against the yen in the past few days has not come as a surprise. The trend started on September 6 and has been rising in a steady series of waves since then. The upwards movement only accelerated on one occasion at the 113.17 resistance line, which required price to gather a great deal of momentum before it could be broken. Following the break of the 113.17 line, price continued to increase without any major obstacles until stopping at 114. The pair is now at heights not seen since December 2017. Price was still at 104 back in March 2018, however, since then Japan’s currency declined by approximately 8% over the course of the year. From a technical analysis perspective, the yen’s continued weakening seems the most likely scenario at the moment.
WTI
Although there have been efforts to replace oil various sources of alternative or renewable energy, it remains one of the driving forces of the global economy and the uncertainties surrounding Iran have certainly pushed the price of oil futures upwards. President Trump has continued to pressure oil producing countries, especially OPEC, to increase production, however, at this point they appear either unwilling or unable to do so. Trump has made his stance that Iranian oil will disappear from the market clear, however, OPEC countries are not entirely convinced and worry that overproduction could push prices down. Oil producers are quite content with prices being at a 4 year high and have little incentive to lower prices by increasing production. There is only one month left until the sanctions go into effect.
The uncertainty drove the price of WTI above $75, even exceeding this year’s $75.30 high. Resistance lines are too far apart within the price’s current range of movement, making their validity questionable. It may be necessary to use the Fibonacci retracement tool to find future lines of resistance. Applying the usual 0-100% Fibonacci levels between the August 16 low and July 4 high could prove insufficient so we’ll add an additional levels at 125% and 138.2%. Using this method the next resistance line would be 77.99 with another potential line at 79.41. This means oil prices could rise to $78 relatively unobstructed.
Sincerely,
Laszlo | Market Analyst
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