FX Commentary – Risk-On – Anticipating Trump’s Response On China’s Sanctions

Market Talk

  • The dollar edged higher on Wednesday after U.S. President Donald Trump said late on Tuesday the US will announce before the end of the week its response to China’s planned security bill for the former British colony of Hong Kong, supporting safe-haven demand for the greenback.
  • Financial markets have been caught in a tug-of-war between optimism and pessimism about the global outlook. Some investors are betting on a resumption of normal economic activity following the crippling coronavirus pandemic, but others worry the threat of U.S. sanctions against China for its treatment of Hong Kong could easily worsen risk sentiment yet again.
  • The pound had its biggest one-day surge against the dollar in more than a month on Tuesday, but is still likely to cap off the month in the red and likely faces a bumpy road ahead. Amid little progress on Brexit talks so far, safe-haven demand for the dollar and expectations for the Bank of England to adopt negative rates are likely to weigh on the pound.
  • The common currency held gains against the dollar but faces a severe test when the European Commission is expected to release details of a financial rescue fund for the bloc later on Wednesday. The Euro had rallied on France-German proposal to create a relief fund for coronavirus affected countries in the bloc.
  • Gold tumbled on Tuesday as a broad risk-on move in global markets as institutional investors scramble to react to signs that the worst of the coronavirus has passed in the U.S. and Europe from coronavirus-induced lockdowns. Renewed US-China tension could move safe haven demand back into gold.

Chart Focus AUD/USD
Key Points

  1. Sell AUD/USD recommendation
  2. Sell AUD/USD at 0.6650. Stop at 0.6685 and target at 0.6570
  3. US-China tension and risk aversion are both likely to weigh on the Aussie dollar
  4. A Shooting Star candlestick pattern and Stochastic are both hinting of a price high and a possible reversal in trend.

Fundamental Comments

  1. US-China tension is likely to move demand into safe haven US dollar.
  2. Risk aversion is likely to weigh on the Aussie dollar which is a proxy for risk

Technical Comments

  1. A Shooting Star candlestick pattern is hinting of a possible price high and a potential reversal in trend.
  2. Stochastic is in the overbought extreme and has a bearish crossover, hinting of a possible price decline ahead.

Key Levels

Support 0.66300.65950.6550
Resistance 0.66750.67150.6755

Technical Overview

USD/JPY – From yesterday’s high of 107.92, price declined following an increase in US-China tensions to a low of 107.36 this morning. We are expecting price to break the support at 107.30 for a further decline to 106.80 in the next couple of days. Stochastic is still on the decline with no signs yet of a reversal. MACD is bearish and is also on the decline. Both indicators support further price declines. 20EMA is also turning down and capping price at 107.65 at the moment.

Support 107.30106.80106.50
Resistance 107.65107.90108.35

EUR/USD – While our view was correct yesterday, price did not move lower for our buy call to be filled. Price rallied to a high of 1.0993 but has declined lower this morning to 1.0951. 20EMA on the 4-hourly chart should provide support at 1.0935 and if price can hold above this support, we could see another attempt to break above 1.1000. Stochastic is near to the overbought extreme but MACD is still bullish and rising.

Support 1.09451.09001.0875
Resistance 1.09851.10201.1055

GBP/USD – Against our expectation, price rallied to a high of 1.2362 yesterday, which was also the Fibonacci 127% of the rally from 1.2072 to the high at 1.2295 on 19 May. Stochastic is into the overbought zone and had a bearish crossover. MACD is still bullish at the moment. 20EMA is rising and its gradient is steep, hinting of a strong bullish trend. If price is supported above 1.2260, we could see another attempt to test the high of 1.2362 again in the next couple of days ahead.

Support 1.23051.22601.2220
Resistance 1.23651.24001.2440

XAU/USD – We had shifted our stop higher to $1721 yesterday and this was filled. We are out with a $1 loss. Price has declined down to $1704.75 this morning. There could be more decline but we feel that price is likely to be supported above $1700. Stochastic is near to the oversold zone and MACD is still bearish but the faster line is rising, hinting we may be close to a low. However 20EMA is hinting of a strong bearish trend at the moment. Wait for reversal signal to buy.

Support 1700.951691.301681.20
Resistance 1712.801722.801730.40

USD/CNH – Price broke above the resistance at 7.1650 this morning and looks likely to continue towards 7.20 in the next few days. Stochastic is rising and is not near to the overbought zone as yet. There are still lots of room for Stochastic to move higher, bringing price higher with it. MACD is bullish and rising as well. 20EMA is rising with a steep slope, hinting of a strong bullish trend. A decline below 7.12 would negate our bullish view.

Support 7.16507.15007.1370
Resistance 7.17907.18857.2000

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