Wednesday had a quiet feel about it with both equity and FX markets struggling to find direction. The main topic of conversation was the signing of the Phase 1 trade agreement between the US and China.

Originally scheduled for the now-cancelled APAC meeting in Chile, it seems these two superpowers are struggling to agree on a new venue. Surely that couldn’t be too much of a barrier to overcome, with both Sweden and Switzerland being touted as potential solutions. However, it got the markets a little concerned that maybe something more sinister was lurking behind the failure to agree.

A brief but sharp sell-off in US equities was overcome. But how would Asia react as the new day began?

The answer to that would be nervous. USDJPY was sold down from 109 to 108.65. EURJPY dropped from 120.55, through major support at 120.35 down to a low of 120.14.

The market was acting scared on nothing but a rumour. Then a headline the market was not expecting – China agrees with the US to lift existing trade tariffs between the two nations in phases.

DJ futures immediately jump 150 points and European stocks hit 4-year highs. USDJPY rips higher to 109.19 and EURJPY back to 121.11. EURUSD bounces off an earlier low of 1.1055 to 1.1090.

XAU dropped from $1,492 to $1,482. One must always be careful when trading rumours, especially when the exact opposite might be true! The US day would begin with a different focus; the Bank of England Interest Rate decision and MPC meeting minutes.

As expected, rates are unchanged. However, this was not a unanimous decision with two MPC members opting for a rate cut. GBPUSD drops from 1.2855 to 1.2806 in short order.

The press conference from Governor Carney just underlines the usual irritants to the UK economy with cable stabilising around 1.2820. Next up, we had the US equity market open and the DJ immediately jumps 250 points to a record high.

FX and commodities take their lead from equities and the USD rallies across the board. USDJPY touches 109.48 and EURUSD falls to 1.1037.

GBPUSD remains stable at 1.2820 but XAU drops like a rock down to $1,461. Higher yields, higher stocks, higher USD, leave the yellow metal with few friends today. But an hour from the US equity market close comes the headline traders didn’t want – The rollback of China tariffs faces internal opposition.

The DJ is immediately lower by 80 points and USDJPY drops to 109.25. XAU heads back up to $1,470. And so equities close well off their best levels, but the DJ is up 182 points to close at a record high.

EURUSD ends the day at 1.1050, GBPUSD at 1.2815 and USDJPY at 109.25. All eyes on the news wires for more trade headlines.

Its was a choppy 24 hours with the markets reacting to rumours and headlines. Still, the USD has benefitted overall.

US yields have risen as investors dump bonds and buy equities on renewed hopes of a full trade agreement between the US and China.

All-time highs for the DJ and S&P drag the USD higher and XAU lower.

Today’s chart is an hourly USDJPY chart with the S&P overlaid in orange. Even on an hourly chart, the correlation is obvious. Today’s equity rally took us through strong resistance at 109.30 but that late day headline took stocks off their highs and USDJPY back lower. While I did suggest in a commentary last week there had been some divergence in this relationship, it seems well and truly back on course this week.

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David Hannigan

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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