The month of August saw an increase in volatility and some reasonably strong movies in a large group of currency pairs. Central banks and trade talk continued to dominate the markets and there remain many loose ends still to be attended to in trade between the United States and China.
During the month of August, the EURUSD has dropped sharply to a 12-month low at 1.13 before rallying strongly to back above the key 1.15 level in the last week. The 1.15 level has done a solid job of supporting the currency pair in the last few months, so it is equally significant that it has been able to rally higher and move back above this level for the time being. Likewise, the 1.17 level has provided significant resistance in the last few months and is likely to play a role again, as the EURUSD has returned to the well-established trading range in between 1.15 and 1.17.
The European Central Bank (ECB) has set the stage for a gradual policy normalization, planning to end bond purchases in December and then possibly raising interest rates late next year. The ECB’s goal is to maintain inflation at just under 2% over the medium term without monetary support. Jens Weidmann sits on the ECB’s Governing Council and is considered a frontrunner to become president when Mario Draghi’s term ends in October 2019. At a conference in Frankfurt Mr Weidmann said that policy makers must be willing to act if needed to prevent financial imbalances. “Should monetary policy remain completely passive if financial imbalances were to build up? In my view, this would be a mistake. As we have witnessed, financial crises have a considerable impact on macroeconomic outcomes and, ultimately, central banks’ ability to guarantee price stability.”
Like the EURUSD, the GBPUSD has eased lower to new lows before rallying higher to finish out the month. In the last week or so to close out August the GBPUSD rallied strongly higher to regain some lost ground however it is still a long way from recovering all of declines in the last few months. In the first couple of weeks in August the GBPUSD fell strongly to its lowest levels in 12 months to below 1.27, although just prior to the fall, it was content to trade in a very small range right around the 1.31 level. It was also feeling some selling pressure from the resistance level at 1.32.
As widely tipped, the Bank of England (BOE) raised interest rates to a decade high 0.75%. In doing so the BOE cited its belief that the UK economy is operating almost at its “speed limit”, raising the prospect of more home-grown inflation pressure ahead. Unfortunately for the BOE, the uncertainty surrounding Brexit is deepening. Some would argue that the negativity surrounding Brexit is excessive, however the deterioration in sentiment has been sudden and considerable. It is also fair to say that it isn’t justified by a significant change in UK economic fundamentals. Although, Britain has gone from the fastest-growing G7 economy to one of the slowest and was the only one to experience a slowdown in growth last year. One suspects the last thing the BOE wants is an ongoing decline in the value of the pound, however they may need to be prepared for that, if the Brexit fears continue. The BOE governor Mark Carney hinted that it was a reasonable assumption that the markets price in only further rate rise in the next 12 months and two over the next 24 months.
The AUDUSD has been a little more erratic than the larger currency pairs as it has moved back and forth a little more whilst drifting lower. Generally, throughout August it has moved lower despite multiple attempt to regain lost ground. In mid-August the AUDUSD dropped sharply from its consolidation range around 0.74 down to an 18-month low at 0.72. This was a significant move as throughout June and July, the AUDUSD was quite content to trade within a 100 pip range right around the 0.74 level. It made a few attempts to break through the resistance at 0.75 however all of these were thwarted.
The Reserve Bank of Australia (RBA) expects interest rates to remain steady for some time yet however they are expecting strong economic growth for Australia in 2018 and 2019. In its recent quarterly statement on monetary policy, the RBA spent some time on inflation and lowered its expectations, expecting underlying inflation to slow to 1.75% by the end of this year. This reflects a reduction from its earlier prediction of 2%. For several years now inflation has been under the RBA’s target and is the main reason why the RBA cut interest rates to the record low 1.5% in mid 2016. RBA governor Philip Lowe said, "The Reserve Bank Board has for some time been of the view that holding the cash rate steady at 1.50 per cent would support the gradual progress being made on unemployment and inflation, with steady monetary policy promoting stability and confidence." The central bank expects the unemployment rate to hover around the current levels of 5.5% this year before easing a little to 5.25% by mid next year.
During the month of August, the USDJPY has generally drifted lower before finishing the month rallying higher regaining some lost ground. The first half of the month saw it drift lower from near 112 down to a six-week low below 110 a week ago. In drifting lower the USDJPY returned to the current key level of 111 and then continued to fall to a two-month low just below 110. The key 111 level has provided significant resistance to the currency pair in the last few months and provided support in recent times. This level is expected to continue to play a role.
At its meeting held July 30-31, the Bank of Japan (BOJ) kept its policy steady as widely expected, voting 7-2 to maintain the target level for the yield on the benchmark 10-year government bond at around zero percent, while allowing the yield to "move upward and downward to some extent." However, since that meeting the market has still been struggling to gauge a seemingly divided central bank that has promised broader fluctuations in yields while also trying to keep them ultralow. In a statement, it explained that the yields may move up or down "to some extent mainly depending on developments in economic activity and prices." A board member was quoted as saying, "Controlling the long-term yields in a flexible manner is likely to contribute to maintaining and improving market functioning."
US equities had a solid ride higher during the month of August. The US30 index has enjoyed a strong rally over the last couple of weeks enjoying some solid support from the key level of 25000 which has rejected the index on several occasions throughout this year and more recently supported it. The 25000 level has been significant for the last few months as it has offered resistance during that time and so it should have come as no surprise that it supported the index so well last week.
As the markets are aware, the United States and China have been locked in trade wars with both countries placing tariffs on several of their imports. These ongoing trade issues have left markets and investors nervous that any escalation could result in a global economic slowdown. The Federal Reserve’s most recent meeting minutes suggested the U.S. central bank is on course for further interest rate rises. A prolonged trade war could change expectations for monetary tightening.
Gold hasn’t enjoyed the last month which has seen it continue to drop sharply and fall to a new 18 month low below $1175. It started the month of August consolidating a little around $1210 and taking a breather however it resumed its strong decline pushing lower through $1200. Gold remains firmly entrenched in a medium term down trend. The key level of $1240 had been a steady rock of support in the last 12 months for gold so it is reasonably significant that it has now broken down through it and then some.
Recent declines in the Turkish Lira have sent shockwaves around the world as concerns grow about market contagion. Accordingly, the US dollar has continued to strengthen pushing the price of gold lower again. The main factor behind gold’s decline has been the US dollar strength combined with emerging market weakness. There is little doubt that is demand for risk aversion presently which has normally assisted gold however currently the dollar is gaining all of the attention in light of its strength against emerging market and major currencies. Also, in the search for safe havens, investors have been choosing U.S. Treasuries, which places even more demand on the US dollar. Moreover is the recent report by the World Gold Council showing that global demand fell 6% in the first half of the year to the lowest level for the period since 2009.
The last month has seen oil move quite sharply at times being sent from multi-week highs down to four-month lows below $71. Towards the middle of the month oil dropped very sharply down through any support level at $71 down to the four-month low below $71, before rallying strongly and moving back strongly to the key $75 level where it has run into a wall of resistance for a couple of days. Despite its volatility oil has been content to remain within its current trading range between $71 and $75 for most of the month. It has been able to push higher to finish out the month to a six-week high above $76.
Oil prices have steadied a little as an escalating trade dispute between the United States and China gathers momentum. The U.S. government recently reported a bigger-than-anticipated drop in crude stockpiles. The drop in U.S. oil stocks received the boost however the optimism is fading as concerns over the U.S.-China trade talks return to the spotlight. There are wide spread fears an escalating trade war will ultimately hurt global oil demand. The United States and China implemented punitive 25% tariffs on $16 billion worth of each other’s goods, even as mid-level officials from both sides resumed talks in Washington.
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