The Dow Jones Industrial Average moves to an all-time high, the Federal Reserve hikes rates again, and the US dollar finishes the month stronger on the back of the Federal Reserve's outlook for another rate hike in December, three more next year, and one increase in 2020. Central banks and trade talk continued to dominate the markets and there remain many loose ends as United States and China continue their ‘tit for tat’ antics in trade talks, and more recently with Canada and the North American Free Trade Agreement (NAFTA).
During the month of September, the EURUSD tended to trade around the 1.17 level, falling towards support at 1.15 before rallying higher again. For the last five months the 1.17 level has become key as the EURUSD has often responded to it and in most cases, it has pushed the currency pair lower. To close out the month it has fallen back below the key 1.17 level and for the moment, it seems to be destined to remain within the 1.15 – 1.17 range for a little while yet.
On the trade wars, the European Central Bank (ECB) released a study they conducted showing the possible effects on ongoing trade wars. The simulation released by the ECB simulated a 10% tariff on all imports and an equivalent retaliation from other countries. The report suggested that the United States would have most to lose if it started a trade war with other countries, while China would be better off after retaliating. Specifically, a global tariff exchange could boost China’s $12 trillion economy and hurt the U.S. expansion. Further it suggested the United States would bear the brunt of diminished trade and of damage to consumer and investor confidence. The study said, “Estimation results suggest that the United States’ net export position would deteriorate substantially. In this model, U.S. firms also invest less and hire fewer workers, which amplifies the negative effect.
Throughout September the GBPUSD generally moved strongly and reached a two-month high just shy of 1.33 before falling even further the next day back down to the key 1.3050 level. At the start of the month the GBPSUSD rallied strongly however it ran into a wall of resistance at 1.3050 which repelled the sterling on several occasions. To close out the month it has fallen back below the key 1.32 level but found some support again at 1.3050 and for the moment, it seems to be likely to remain below the 1.32 level for a little while.
Only a month after raising the official interest rate for only the second time in more than ten years, the Bank of England (BOE) kept interest rates on hold. In doing so, they highlighted greater financial market concerns surrounding Brexit. The Monetary Policy Committee (MPC) voted unanimously to hold rates at 0.75%, in line with economists' expectations in a Reuters poll. The BOE said there had been limited domestic developments since its August 2 meeting, other than on Brexit. The central bank said, "Since the Committee's previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the (European Union) withdrawal process." It is expected that the BOE won’t want to unsettle the UK economic recovery with an unexpected rate rise.
The AUDUSD has been a little more erratic than the larger currency pairs as it has moved back and forth but remained above the current key level of 0.7150. Throughout September it has both dropped sharply to a two year low as well as rally strongly higher to back above 0.73 before easing a little to finish the month. A couple of weeks ago the AUDUSD settled a little resting on support at the 0.7150 level and it is quite likely this level will continue to support should the AUDUSD drift lower. Interestingly when the AUDUSD did fall to its two-year lows below 0.7150 it was well supported with buyers jumping in at those low levels. The last time the AUDUSD was this low, it bounced off the 0.7150 level very strongly and moved over 500 pips in a couple of weeks.
The Reserve Bank of Australia (RBA) earlier in the month left the nation's official cash rate at the record-low level of 1.5% for an incredible 25th straight meeting. The interest rate has been at the current level since August 2016. On a related note, Australia's impressive run of jobs growth has continued into August. Employment increased by 44,000 over the month, well ahead of market expectations, with most of the growth in full-time positions with 33,700 jobs created, while part-time work increased by 10,200. The unemployment rate remained at 5.3% as the number of people looking for work edged up. Unemployment rates in New South Wales and Victoria are now below 5% but much higher elsewhere, particularly Western Australia and Queensland, which are sitting on 6.4%.
During the month of September, the USDJPY has only headed in one direction. The USDJPY has moved well in the last few weeks surging higher from the key 111 level up to a 2018 high and through the resistance level of 113. It is significant that it has moved through the 113 level compared to what happened only a few months ago when the USDJPY was strongly rejected at this level and sent back to 111 very quickly. The 111 is also significant as throughout August the USDJPY was content to trade right around there, keeping a reasonably tight range for that time. This level is expected to continue to play a role should the USDJPY decline however for the moment, it will be interesting to see whether it can maintain the break above 113.
A couple of weeks ago the Bank of Japan (BOJ) kept monetary policy steady and maintained its optimistic outlook on the economy. The central bank reiterated that it would keep interest rates extremely low “for an extended period,” holding to forward guidance it first introduced in July. The decision to maintain its interest rate targets was made by a 7-2 vote with board members Goushi Kataoka and Yutaka Harada differing. "Japan's economy is expanding moderately," the BOJ said in a statement announcing the policy decision. In an interview published a few weeks ago, Governor Haruhiko Kuroda said the Bank of Japan is unlikely to raise interest rates for “quite some time” and recent steps to make policy more flexible are not preparation for policy normalization.
US equities have enjoyed another solid ride higher during the month of September. The US30 index has enjoyed a strong last couple of weeks pushing through the previous resistance level at 26200 and reaching a new all-time high before easing in the last few days. The 26200 level will now likely provide some support should the index continue to decline. For several weeks the US30 index had been content to trade within a narrow range near 2018 highs under 26200. It was only towards the end of August that the US index surged higher to a then six month high before the recent consolidation.
The U.S. Federal Reserve's have raised rates by 25 basis points, its third rate rise of the year, bringing its target range for its benchmark overnight lending rate to between 2 - 2.25%. In doing so it removed the long-standing word "accommodative" from its policy statement. The Federal Reserve Chairman Jerome Powell also had a new message for the markets: stop watching the central bank’s words or forecasts, rather focus on the data on jobs, wages and inflation for signals on monetary policy. Powell said in a press conference on Wednesday that the removal of the “accommodative” wording was not a policy signal at all, as he noted that the U.S. economy is having a “particularly bright moment” with unemployment expected to remain low, inflation stable, and no recession in sight. Powell said, “The question we are answering is, how do we provide the economy just the right amount of support - not too much, not too little - to sustain the recovery and achieve our statutory goals” of full employment and 2 percent inflation. We don’t want to suggest either that we have this precise understanding of where accommodative stops or suggest that’s a really important point in our thinking. What we’re going to be doing ... is carefully monitoring incoming data.”
Gold hasn’t enjoyed the last month which has seen it fall a little lower despite consolidating in a narrow range for most of the month. The $1200 level has provided both support and resistance during the last month and up until a few days ago, gold didn’t appear to be in any rush to move too far away. To close out the month gold fell further to a one month low near $1180 so it will be interesting to see whether it can maintain touch with the key $1200 level and rally back shortly.
The US dollar has continued to strengthen pushing the price of gold lower again. There is little doubt that is demand for risk aversion presently which has normally assisted gold however currently the dollar is gaining all the attention considering its strength against emerging market and major currencies. Often purchased as a hedge against geopolitical risk, gold is highly sensitive to rising yields, because it pays no yield, yet costs to insure and store. Gold has been hurt again with the U.S. Federal Reserve raising interest rates and saying it has planned four more increases by the end of 2019 and another in 2020. U.S. rate rises tend to boost the dollar and hurt gold prices. They also push U.S. bond yields higher, reducing the attraction of non-yielding bullion.
Generally, oil has moved very well throughout the month of September. Only a week ago it ran into a wall of resistance at the $80 level, however it has since surged strongly through that level and potentially setup a new trading range for oil. Oil has moved quite sharply at times being sent from multi-week highs down to lows near the support level at $75 before rallying back and challenging the resistance at $80. It is quite likely the $80 level will provide some support to oil should it retrace soon.
Oil prices have enjoyed a steady climb for the last month or so due to the escalating trade dispute between the United States and China gathering momentum. They have also been well supported by strong domestic gasoline demand amid ongoing global supply concerns over U.S. sanctions on Iran that come into force in November, and five straight weeks of crude inventory drawdown. On 5th September Reuters reported that Saudi Arabia wanted oil to stay between $70 and $80 to keep a balance between maximising revenue and keeping a lid on prices until U.S. congressional elections.
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