By Lukman Otunuga, Research Analyst, FXTM
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A sense of normality seems to be returning to the FX markets, however the events of Monday continue to linger in the air. When most pairs had dished out levels of volatility which resembled the situation with the Swedish National Bank (SNB) in January. The domino effect that started by a 7.6% plunge on the Shanghai Index rippled across the board and pushed many other major markets lower. Billions of dollars were lost on Monday and currency pairs which had an economic reliance with China illustrated surreal levels of weakness on the charts.
One can understand the situation of China, but it feels like the PBoC does what it wants, when it wants. A few weeks back, the central bank devalued the Yuan on three consecutive occasions which caused uproar in the markets, but when the effects of that soon wore off, Monday’s events showcased that any attempts to stabilise the Shanghai Index had been largely unsuccessful so far. The central bank has since cut interest rates as a method to quickly induce stability of the injured economy, but the markets in China are still suffering losses and it looks like everything the PBoC has done to keep things above water have failed.
In all honesty, it seems like the bubble in China has burst and the PBoC will need to do everything in its power to stop matters sinking even deeper. Interest rates will most likely be cut further on many more occasions in the future as an attempt to promote economic stability, but it might already be too late. Most market players now hold a bearish stance to China and a risk-on environment has already been enabled, which in turn has empowered safe haven assets such as the JPY, and through a paradigm shift also the EUR. Post Monday’s events, the EURUSD attained a fundamentally bullish stance and is currently in a potential correction phase.
Speaking of corrections, this is the theme most pairs are experiencing in a technical sense. The USDJPY spiked to the lows below the 116.50 before correcting back to the 120.50, whilst the GBPJPY also experienced a heavy move to 183.50 before a correction move back towards 188.0. It may be likely that this week which started with a storm, will finish up with most currency pairs positioning themselves to continue in the initial direction from which the events of Monday sent them flying.
Wednesday’s economic calendar is relatively quiet with some releases from the US shared in the afternoon. The USD has taken a beating as of late with the once illustrious bullish sentiment which powered the Dollar index to all-time highs chipped away. Disappointing economic figures from the States combined with the delay of the rate hike has done very little to help the USD bears. Positive Core durable goods, in addition to a hawkish FOMC Dudley, will act as attributes which may help USD regain its lost momentum. The focus still remains on China and most market participants will be on alert if any more surprises are dished out from the PBoC.
EURUSD
The EURUSD spiked to frightening highs of 1.1714 before declining to the 1.450 area. The pair is in a current correctional phase with first targets of the 50.0% Fibonacci looking like a potential point for a bounce. Leading and lagging indicators do suggest that the EURUSD is heavily bullish, but there may be a case where conditions look overbought. A correction is technically healthy because trends do not move in a straight line. The trend defining level which is the lower high holds around 1.100 before the hefty rise, but there may be a situation where previous resistance at 1.1450 acts as a new support. Today's daily close will be quite relevant. A slide below 1.1450 may open a further path to 50% fib level discussed earlier. A move back below the 61.8% Fibonacci point does suggest bullish weakness, but as of now the lagging indicator known as the MACD trades to the upside.
GBPUSD
Fundamentally, the GBP gained some traction against the USD simply because the events of China have mitigated the impact on Sterling. The range within the GBPUSD was breached to the upside with levels as high as 1.5819 reached. A continuation seemed likely, but Wednesday’s full bearish engulfment on the GBPUSD suggests that we may be trading back within the range with first support based at 1.5500. The MACD is about to cross to the downside and prices are marginally above the daily 20 SMA. Things currently look bearish for the GBPUSD, but a range may be in motion again once a daily close is confirmed back below 1.5650.
AUDUSD
The AUDUSD remains fundamentally and technically bearish. Monday’s events caused AUD weakness as the Shanghai composite indexed declined 7.6%. Prices dropped to the lows of 0.7040 before making a technical correction back to the upside. With the candlesticks currently trading below the 20 SMA and monthly pivot, it may be best to observe a breakdown below the 0.7100 regions or a secondary correction back above 0.7200. The trend defining level for us to keep bearish on the AUDUSD will be the previous lower high of 0.7400. The current decline on Gold may act as an attribute which may ripple back to the AUDUSD in aiding the breakdown below 0.7100.
USDJPY
USDJPY turned from bearish to heavy bearish in 24 hours due to Monday’s events. Safe haven purchasing mixed with USD weakness has caused the USDJPY to trade to the lows of 116.190. Prices are in a correctional phase but as long the bears can keep below the previous support of 120.50 which may act as resistance, then more declines can be expected on USDJPY.
GOLD
Fundamentally, Gold has been bearish for an extended period of time with the previous strength of the USD hitting the precious metal hard. Things have changed and the USD is experiencing some weakness, but Gold is still in decline. Even the events of China which triggered a risk on scenario had very little impact on the Gold bulls. Prices of this precious metal hit highs of 1170.0 before declining below the 1147.0 previous support level which became resistance. Lagging indicators still suggest that Gold has some bullish momentum left because candlesticks reside above the 20 SMA and the MACD still trades to the upside. A breakdown below 1130.0 may suggest further bullish weakness and bring us closer to confirming a further move down back to 1120.0.
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