Daily Market Outlook, August 27, 2020
Asian equity market is mixed this morning but notably Chinese indices are higher. This is despite an escalation in Sino-US political tensions after China launched four missiles into the South China Sea. In response, the US has ordered sanctions against China’s state controlled Communications Construction Company.
Ahead of the start of today’s important US central bank conference, a Federal Reserve policymaker warned that the course and timing of the recovery is still highly uncertain, while another highlighted that the service sector remains depressed. In Australia, investment spending was reported as having fallen by a less-than-expected 5.9% in Q2.
The Kansas City Fed’s annual economics symposium will begin today and run through tomorrow. Often called Jackson Hole after its usual location this week it will be entirely online. It is an opportunity for prominent economists and central bankers to exchange policy ideas. In the past, it has featured keynote speeches, particularly from Fed Chairs, that have had significant market impact. Today’s remarks from Fed Chair Powell will be followed particularly closely.
The title of this year’s symposium is “Navigating the Decade the near-term outlook. Powell is expected to update on the Fed’s ongoing review of its policy framework. There has been speculation that this may include a recommendation for a more flexible approach to inflation targeting, potentially allowing for overshoots to balance out previous undershoots. Powell may say something about this and about future policy options still open to the Fed, including changes to its forward guidance. If he touches on negative policy rates, he is likely to reiterate that the Fed remains unenthusiastic about the merits.
Today’s data calendar is very light in Europe aside from July Eurozone money supply numbers, which may provide further evidence on the effectiveness of ECB monetary policy. In the US, the second reading for Q2 GDP is likely to be seen as old news with focus in markets on the pace and sustainability of the recovery post-lockdown. Of more interest will be weekly US jobless claims, which will provide evidence on whether unemployment continues to move down after the previous outturn posted a disappointing rise.
Early Friday morning, the August Lloyds Business Barometer will provide a timely update on the UK economy. August PMI data suggested that the overall situation is improving but that employment remained a concern as many businesses indicated that they could lay-off staff. The Barometer should provide further information on these trends and also the sector and regional picture. In July, it showed business confidence rising for the second consecutive month but firms remained generally cautious about the outlook. Moreover, while the employment measure edged up slightly it remained very low.
CITI: Month-End FX Hedge Rebalancing: August 2020 Preliminary Estimate
The preliminary estimate of month-end FX hedge rebalancing flows points to a net USD selling need on Monday, 31 August. Good performance of Japanese assets means that the sell USDJPY signal is amongst the weakest this month. The signal to buy GBPUSD is strongest at 0.96 historic std. dev, although below the 1 std. dev threshold that we consider significant.The FX impact suggests USD selling against EUR and GBP at month end.
Today’s Options Expiries for 10AM New York Cut (notable size in bold)
- EURUSD: 1.1700-10 (500M), 1.1735-40 (700M), 1.1750-60 (1.6BLN), 1.1765-70 (450M), 1.1800 (580M), 1.1825-30 (620M), 1.1875-85 (800M), 1.1900 (1BLN), 1.1950-55 (1BLN)
- USDJPY: 104.90-105.00 (2BLN), 105.50-60 (1.2BLN), 105.70-75 (1BLN), 105.90-106.00 (600M), 106.50-60 (1BLN), 107.00-05 (550M), 107.15 (350M)
- AUDUSD: 0.7120 (935M), 0.7170 (200M), 0.7190 (586M)
Technical & Trade Views
EURUSD Bias: Bullish above 1.17 targeting 1.20
EURUSD From a technical and trading perspective, the breach of trendline support and suggests that we may be entering an extended consolidation phase, as 1.1860/80 contains upside attempts look for a retest of 1.17 base before another attempt to test the psychological 1.20 UPDATE continued rotation around 1.18 ahead of Fed Chairs speech on Thursday, likely to be the catalyst for the next leg
GBPUSD Bias: Bullish above 1.32 Bearish below targeting 1.30
GBPUSD From a technical and trading perspective, erratic price action into the end of last week, printing three daily reversal patterns, Friday’s bearish reversal on the Daily time frame flipped the daily chart bearish again, as 1.32 now acts as resistance look for a test of range support to 1.30
USDJPY Bias: Bullish above 105.50 Bearish below
USDJPY From a technical and trading perspective, as 106.50 acts as resistance look for another test of support at 105.50 failure to find sufficient bids here will expose 104.18 again. Note DTCC shows a massive USD 7-billion 105.00 strike option expiries this week. Biggest collection Wednesday – USD 3.2-billion, and Thursday – 1.6-billion. Several billion Wed-Thurs from 105.75 to 105.40 too, but little above 106.00
AUDUSD Bias: Bullish above .7200 Bearish below
AUDUSD From a technical and trading perspective, reversal from the test of offers above .7250 finds support at .7150 as this contains the downside look for another run at .7300 before a more meaningful reversal UPDATE a closing breach of .7140 would delay the upside objectives suggesting a test of base support back to .7080
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