FX & Futures Analysis by Earn2Trade September 28, 2018

All About Iran

The United Nations summit continued yesterday, this time the center of attention was Israeli Prime Minister Netanyahu’s speech. The subject of course was Iran. Netanyahu claims that according to Israeli secret intelligence Iran is covertly continuing its effort to develop nuclear weapons. In his speech he called Iran a state sponsor of terror and made it clear that he will fight them on all fronts. Meanwhile the US responded to Europe’s proposed alternative to the SWIFT financial institution network. This new system would enable the processing of payments to countries under US sanctions. Secretary of State Mike Pompeo harshly criticized this new system, leaving no doubt that the United States will place sanctions the European Union should they go against US interests on this matter.

Rising Interest

Bank Indonesia raised the country’s base interest rate by 0.25% due to the Indonesian rupiah’s notable weakening against the US dollar. The measure is meant to prevent, or at least slow down, the rupiah’s further decline to keep the country’s trade balance within a predictable range. Analysts suggest this rate hike may not be enough to meet their economic policy objectives as the USD’s growth cannot be fully attributed to its rising interest rate. That said, the overall outlook in Asia was still positive. Every major Asian index, with the exception of South Korea, closed the last trading day of September with positive results. Most notably Nikkei and the Shanghai Composite both increased by over 1%. Gold on the other hand dropped below 1200 and is now hovering around 1186 dollars. Meanwhile oil prices are seeing a noticeable slowdown, with Brent just below $82 and WTI above $72, although without the momentum it had earlier this week.

Nikkei

Nikkei reached a new high at the start of the Asian trading session, although it later corrected itself and finally closed with a 1.25% positive at the end of the day. The initial increase reached price levels not seen since November 1991. This sudden interest in Japanese stocks was due to the results of Japanese economy published earlier today. According to these figures unemployment declined by 0.1% from July to 2.4% in August. Retail sales also increased by 2.7% which vastly exceeded the 1% prior estimate.

Investors were overjoyed by Japan’s impressive macroeconomic data. Despite the price correction at the top, the index’s overall outlook is still overwhelmingly positive. The Bank of Japan (BoJ) has spoken extensively on the key risk factor to the Japanese economy’s continued growth, which at the moment is US trade policy. The central bank’s continued purchase of Japanese stocks is a well known fact, raising the question of how much of Nikkei’s growth can be attributed to the BoJ. Whatever the case, the Japanese economy’s strong performance may continue to push Japanese stocks even higher.

EURAUD

The euro and Australian dollar may not be the most popular pair, however, it’s still worth keeping a close eye on to observe how the two currencies react to the markets when not compared to the US dollar. The recently announced SWIFT system replacement did not bode well for the euro either, although the main factor to affect this currency’s evaluation this time around was Italy. The Italian government’s budget for 2019 expects a 2.4% deficit instead of the 2% required by the European Union. Despite being a founding member of the EU, they are the most indebted country in Europe, which flies in the face of Brussels expectations. The country’s prominently right wing government sets a very poor example for other eurozone countries and could even lead them to follow suit and loosen their own respective budgets.

Both the yields of Italian government bonds and the value of the euro were heavily affected by the news. The euro’s upwards trend since August 20 tapered off at 1.6340 due to the events in Italy, then turned around and began weakening against the Australian dollar. Looking at the chart we can see a downwards trend channel has formed from September 11 and onward, which could help determine price targets. Price is currently still above the 200-period moving average, although the distance between them has shrunk to a mere 70 pips. The simple moving average and the 38.2% Fibonacci retracement level will likely meet price at the same point, forming what’s likely to be a powerful line of support. The Fibonacci retracement level has reversed price on two prior occasions so with the help of the moving average it will likely be able to do so again. Meanwhile the downwards trend channel remains a powerful force backed by the negative fundamentals behind the euro. One relatively likely scenario is price bouncing back from 1.6055, however, stopping short of 1.6152, then making a second attempt at breaking through the moving average and succeeding.

Sincerely,
Laszlo | Market Analyst

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