Synergy FX Forex Market News | Monday 4th July, 2016
There’s no question that the UK vote to leave the European Union has thrown a new element of uncertainty into global financial markets and the world economy. There was an acute market reaction for a couple of days, but, in hindsight, the disruption to the financial system was not extreme and it’s reasonable to say that market participants and some political officials predicted much worse.
However, as we move into the third quarter of 2016, there are several other market themes outside of the “Brexit” result which could influence price flows across the foreign exchange spectrum.
Additional market risks outside the fallout from the UK referendum include a simmering European banking crisis, a forecasted rebound in US employment and manufacturing activity and the political uncertainty from this weekend’s Australian elections.
Europe has been in a slow-burning financial crisis since 2012. Throughout the EU, there has been waning confidence in both the banking system and the ECB’s ability to manage financial stress within the system. Many European banks have extremely high levels of non-performing loans (NPLs), soaring credit default spreads and share prices at multi-year lows.
Just last week, the US branch of Deutsche Bank failed the Federal Reserve’s stress test for the second consecutive year, which pushed their share price below the 2009 lows. Separately, Italian banks are holding about €400 billion in NPLs which makes up about 25% of their national GDP. We feel this unfolding banking drama will continue to weigh on investor sentiment and influence capital flows to the EU. As such, we suggest medium-term traders look to sell EUR/USD into the 1.1150/70 area for an initial target of 1.0970 with a 1.1260 stop.
The result of this weekend’s Australian Federal election is still not finalized. However, it’s widely accepted that the incumbent LNP has failed to win a majority mandate and that passing any meaningful legislation through Parliament over the next several years will be difficult and require support from the Independents and the Green party.
With an expanding Federal deficit and an economy still in transition from the mining boom, ongoing political gridlock is not a good way to maintain a AAA credit rating. The technical picture in the AUD/USD looks constructive with an immediate upside potential into the .7520/30 area. The RBA will likely keep rates unchanged at Tuesday’s meeting, which could also lift the pair.
However, after advancing for five consecutive weeks, we see further upside momentum limited and suggest short-term traders look to sell the AUD/USD at .7520 for an initial target of .7320 with a .7570 stop.
The USD/JPY traded in a relatively narrow 200 point range last week, but we believe that pressure continues to mount on the Bank of Japan (BoJ). Last week’s inflation data continued to trend lower and retail sales slipped further despite a stable reading on employment. Japanese bond yields traded lower last week pushing the yield curve into negative territory out to 15 years. Not surprisingly, the Ministry of Finance report on weekly portfolio data showed that foreign names sold over $20 billion of Japanese bonds for the week ended June 24th.
Technically, the USD/JPY found sellers at 103.40 but held above 102.40 going into the weekend. The Daily RSI is still below 40 but the slow stochastics are beginning to turn higher. It’s reasonable to suspect that the sharp plunge to 99.00 just after the “Brexit” vote satisfied most downside targets as a new stimulus plan could follow the July 10th upper house elections.
As such, we suggest medium-term traders can look to buy into the upside momentum at 103.15 o/s for an initial target of 104.70 with a 102. 25 stop.
The GBP/USD remains sensitive to ongoing developments between the UK and EU with the expectation of more downside price action in the near term. The technical oversold conditions were alleviated to a small degree during last week which could give scope to sell levels above the 1.34 handle. Our trade suggestion from Friday’s report to sell GBP/USD at 1.3565 came nowhere close to getting filled but we still prefer the short side of the pair.
Bank of England Governor, Mark Carney is holding a press conference on Tuesday morning LDN time. We believe there’s scope for the Sterling to trade higher over the next 24 hours and suggest selling GBP/USD at 1.3470 for an initial target of 1.3160 with a 1.3570 stop.