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Forex Today - EM currencies are back in crisis and as the trade war hots up what's next for the USD

Market Analysis /
Greg McKenna / 31 Aug 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

And, for a deeper dive into more currencies and the charts please see my daily markets video.

QUICK SUMMARY

The picture today accompanying this note of a cargo ship in a storm was chosen to convey the real risks that traders and investors may have to face if President Trump does indeed wack $200 billion of tariffs on China and go after the EU in the manner Bloomberg suggests he might. 

Throw in the reality that risk appetite took a hit across global markets as emerging currencies came under pressure once more. And it's a back drop where the USD's recent rally stall may end.

Overnight the South African rand has lost 2.6% as local policy uncertainty combines with the overall weakness that’s remerged in EM. The litany of losers of more than 1% against the USD overnight includes the MXN, BRL, COP, CLP, and of course the Turkish Lira which lost 3.2% to 6.63 after the deputy governor of the central bank resigned. Argentina was also in the news with its peso down 12% against the USD overnight.   

On forex markets the corollary of the weakness in EM has been a little strength in the Yen with USDJPY falling 0.6%  to 110.97. The Aussie too has reacted – to the overnight moves and yesterday’s big miss in CapEx – and is down 0.6% at 0.7265. The Kiwi too has troubles of its own after “recessionary” level business confidence yesterday – NZDUSD is down about 1.1% at 0.6645. And the Canadian dollar has also lost ground with USDCAD up 0.5% to 1.2971 amid the turmoil and after a slightly weaker than expected 2.9% Q2 GDP print.

The Euro and Pound a stable by comparison at 1.1670 and 1.3015 against the USD respectively for losses of just 0.1% and 0.3%.

BIGGER PICTURE

If a full blown trade war kicks off the US dollar is likely to gain.

I say that because in this environment the US economy has the most sustainable momentum of the major economies and thus, with the Fed still raising rates as well, the Greenback is likely to find the most support. It’s all very volatile at the moment and it’s worth noting that the volatility in currency markets is mostly in emerging markets.

Major currencies on the other hand are simply reacting to from recent range lows, a long USD market, but crucially have respected recent range tops. Take the Euro at 1.1730/50 or the Aussie at 0.7340/60/80. These are levels that have been resistance and remain so recently. It means the hopes of a bigger USD retracement are on hold for the moment.

So we are in a broad range for the moment waiting for the next shoe to drop. 1.1600/20 looks like an important level for the Euro and one that if it holds could ignite the next leg higher but one which if broken could usher a big dip back down toward the middle or bottom of this range. It’s walking through the daily uptrend from the lows now – so we’ll see.

Click on me, I'll expand
Click on me, I'll expand

EURGBP has held inside the current uptrend line which I highlighted yesterday  and which I said I was going to respect in my Video. It did take out the 61.8% retracement level however before stabilising. That makes the region around this trend line – 0.8940/50 – critical.

Click on me, I'll expand
Click on me, I'll expand

I'll discuss all the majors I follow in my video which will be out a little later this morning.

DATA:

On the day Kiwi traders will be watching consumer confidence in New Zealand. We also get South Korean construction, industrial production, and retail sales data. Japan has production, unemployment, and Tokyo prices, while here in Australia we have the RBA financial aggregates data (debt) out.

Chinese official PMI’s are to be released as well and tonight it’s German retail sales French and Euro Area inflation, Indian GDP, Canadian PPI and the Chicago PMI in the US – along with Michigan consumer confidence.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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