FX Breakout Monitor: Fresh US-China trade tensions feed JPY strength
Head of FX Strategy
Summary: Market volatility has picked up as the US-China trade tensions have escalated, although trading ranges are still muted relative to even marginally normal times. That could quickly change if China’s commitment to the CNY floor weakens.
The speed of the USDCNY’s rise over the last week, and especially today, beg the question of whether the recent escalation of the trade showdown between the US and China could see the latter surrendering to market forces and allowing the CNY to weaken to offset the impact of some of the trade tariffs. Such a move would be seen as an escalation from the US side, but it could also drive considerable further uncertainty across markets, especially currencies. We would assume the most exposed to a move lower in the CNY would be the AUD, NZD and major Asian exporters into China, like SGD, THB, IDR, etc..
Breakout signal tracker
We stand aside here after taking off the two remaining positions on Friday.
Page 1: No surprise to see the heavy JPY crosses, given nervous risk sentiment. Suddenly, the CHF is serving as a safe haven after largely ignoring risk sentiment developments recently and USDCHF and EURCHF are also looking at downside breaks here.
Gold has sprung into action on the latest US-China trade showdown and traders and commentators bandying about the idea that China could look to sell some of its treasuries. The move looks impressive, but works against the recent tendency for gold to weaken together with a weak CNY – can the two head in opposite directions? Stay tuned… still quite a ways from the cycle top near 1,347.
The following is a left-to-right, column by column explanation of the FX Breakout Monitor tables.
Trend: a measure of whether the currency pair is trending up, down or sideways based on an algorithm that looks for persistent directional price action. A currency can register a breakout before it looks like it is trending if markets are choppy.
ATR: Average True Range or the average daily trading range. Our calculation of this indicator uses a 50-day exponential moving average to smooth development. The shading indicates whether, relative to the prior 1,000 trading days, the current ATR is exceptionally high (deep orange), somewhat elevated (lighter orange), normal (no shading), quiet (light blue) or exceptionally quiet (deeper blue).
High Closes / Low Closes: These columns show the highest and lowest prior 19- and 49-day daily closing levels.
Breakouts: The right-most several columns columns indicate whether a breakout to the upside or downside has unfolded today (coloured “X”) or on any of the previous six trading days. This graphic indication offers an easy way to see whether the breakout is the first in a series or is a continuation from a prior break. For the “Today” columns for 19-day and 49-day breakouts, if there is no break, the distance from the current “Quote” to the break level is shown in ATR, and coloured yellow if getting close to registering a breakout.
NOTE: although the Today column may show a breakout in action, the daily close is the key level that is the final arbiter on whether the breakout is registered for subsequent days.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.