Monday saw a pullback from Friday’s sharp sell-off in US equities, as President Trump suggested the Chinese were willing to get back to the negotiating table for a trade deal. 

Despite the Chinese denying they’d ever said this, markets were will to grab on to some faint hopes of optimism as both equities and the USD benefitted.

Tuesday would start quietly, Asian shares taking their cue from Wall Street. European shares would also edge slowly higher.

On the FX front, USDJPY would dip to 105.60 and AUDUSD down to 0.6747. GBPUSD would go the other way en route to 1.2288 amidst renewed Brexit optimism. Crypto started the day edging slowly lower. BTC clung on to $10,000 while ETH dipped to $185.

The US day would start with a marginally higher open for equities. No further headlines about trade or the ongoing protests in HK have given the markets an air of calm to start the day. But that would not last for too long.

The DJ, having been up 100 points at one stage, is down 130 by the midpoint of the US session. US yields are hit hard with the 10Y year yield down to 1.49% and the yield curve once again becoming inverted.

EURUSD drops to 1.1086 while XAU rallies to 1544. GBPUSD rallies to a high of 1.2308 on the back of some comments from the Irish FM that alternatives to the Brexit ‘backstop’ are being discussed. Could the UK leave with a deal yet? As the day comes to an end, it’s all eyes on the US bond market as interest rates continue to slip.

By the US close, the 10Y yield has slipped to 1.47%. Equities close on their lows with the DJ down 120 points. EURUSD is at 1.1090 and USDJPY at 105.75. The rollercoaster continues.

With almost all markets (bonds aside) chopping around, the technical picture becomes clouded, so it is best to focus on the bigger picture levels than get caught up on the short term. With that, I return to AUDUSD.

Yes, we have had a volatile couple of days. But as you can see we dead the sharp break down out of the wedge formation I highlighted last week and even though there was a sharp retracement, we never broke back above the line that was originally the bottom of the wedge.

And lurking higher we still have strong resistance at 0.6832. ‘Aussie’ is susceptible to all headlines, good and bad, when it comes to trade wars, as well as sharp moves in equity markets.

So sticking to the major levels becomes even more important as of course does a strong dose of sound risk management.

David Hannigan
Author

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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