Fatal Levels of Recession

The dollar fell to new lows against the euro, sterling, the Australian dollar, and the Swedish krona last week. However, it was a head fake and the greenback quickly returned to its previous ranges. The combination of the July FOMC minutes that dampened expectations for new initiatives, such as yield curve control or an increase in asset purchases and disappointing preliminary August PMI readings tempered investor enthusiasm for risk.

Since the lower end of the dollar’s range was tested, the rule of alternation warns of the risk that the upper-end will be probed. Just like the downside was frayed, so can the upside. The resilience of the US PMI and the continued outperformance of US stocks compared with Europe undermine some of the arguments of the dollar bears..

Below are thumbnail sketches of the events and data that shape the macro picture.

Country

US DOLLAR INDEX HOLDS STEADY

• The DXY was seen consolidating in a range above the 93.00 level on Monday.
• Dovish Fed expectations held the USD bulls from placing aggressive bets.
• The upbeat market mood further undermined the USD’s safe-haven status.
• The US Dollar Index (DXY), which tracks the greenback against a basket of currencies, was seen oscillating in a range above the 93.00 mark through the Asian session on Monday.
• The index last week found decent support ahead of the 92.00 level following the release of less dovish FOMC meeting minutes on Wednesday. However, the impasse over the next round of the US fiscal stimulus measures held the USD bulls from placing any aggressive bets.
• Meanwhile, the incoming US economic data did little to ease concerns about the US economic recovery, instead has been fueling speculations that additional monetary easing by the Fed. This, in turn, further collaborated towards capping the upside for the buck.

EUROZONE

• The euro recorded a two-year high a little above $1.1965 early last week preceding to shed two cents in the second-half of the week and ended an eight-week advance. The roughly 0.5% net loss on the week leaves it virtually unchanged for the month.
• Contrasting preliminary PMI reads, with Europe disappointing and the US surprising to the upside saw the euro post an outside down session ahead of the weekend. This leaves it vulnerable at the start of next week.

BRITISH POUND GROANS AS BREXIT TALKS FAIL

• The British Pound may face heightened liquidation pressure following another unsuccessful round of EU-UK Brexit negotiations. On Friday, European chief negotiator Michel Barnier said that at this stage, an agreement with London appears unlikely. His counterpart David Frost reinforced this message, adding that “little progress” had been made with their European partners.
• The geopolitical complication could jeopardize early signs of economic stabilization in the UK. On Friday, markets were caught off-guard after preliminary manufacturing and services PMI data for August printed better-than-expected figures. However, doubt about a Brexit resolution and increased likelihood of a messy divorce could darken the outlook and later be reflected in weaker economic indicators.

CHINA MEETS ASEAN DIPLOMATS

• The South China Morning Post has reported that China is meeting with Asean diplomats to propose resuming South China Sea talks.
• Beijing conveys its concerns about the rising risk of conflict over the contested waters.
• Discussion follows US Secretary of State Mike Pompeo’s announcement of a harder line concerning China’s ‘unlawful’ claims.

NEW ZEALAND HAS EXTENDED ITS LOCKDOWN

• New Zealand’s Prime Minister Jacinda Ardern has extended the coronavirus lockdown till Aug. 30.
• While the city of Auckland is under alert level 3 restrictions, the rest of New Zealand remains at level 2, Ardern said, while adding that Auckland will move to level 2 after Aug. 30.
• New Zealand registered nine new cases on Monday – eight confirmed cases and one probable cas – taking the total tally of confirmed cases to 1,332.

JAPAN PM ABE GETTING TREATED FOR CHRONIC ILLNESS

• Japan PM Shinzo Abe is now being reported to be getting treatment for chronic illness, not a check-up, cited by Nippon TV, citing multiple government and ruling party sources –

according to Reuters.

• The Japanese media have speculated about Abe’s health this month, including detailed reports on Abe’s walking speed.
• Abe is the country’s longest-serving prime minister. He was set to surpass a half-century-old record set by his great-uncle Eisaku Sato for the longest consecutive tenure as prime minister on Monday.

Market

OIL UP OVER IRAQ PRODUCTION LOWERS

• Bulls tried repeatedly to push October crude oil above its 200-day moving average (~$43.40) in vain and appeared to give up ahead of the weekend. It settled near at two-week low (~$41.55) and below its 20-day moving average (~$42.00) for the first time this month. The four-week drawdown of US inventories was the longest in a year.
• Industry reports that 19 tankers carrying 37 mln barrels of oil are on their way from the US to China. Offsetting these supportive factors was the rising concern about demand as the recovery in the major economies may be stalling.

GOLD

• The powerful momentum that lifted gold for nine consecutive weeks through the first part of August to a record high of $2075.50 has been broken. Although gold rallied in the first part of last week and surpassed the (61.8%) retracement objective (~$1994) to poke a little through $2015, corrective/consolidative forces remain in control.
• The MACD is trending lower, but the Slow Stochastic has moved sideways after pulling back the previous week.

Here’s a look at all the important market-moving factors for the week:

Week Ahead

All times listed are EDT

Tuesday

4:00: Germany – Ifo Business Climate Index: expected to rise to 92.0 from 90.5.

10:00: US – CB Consumer Confidence: seen to edge higher to 93.0 from 92.6.

10:00: US – New Home Sales: likely increased to 786K from 776K.

Wednesday

8:30: US – Core Durable Goods Orders: predicted to plunge to 2.1% from 3.6%.

10:30: US – Crude Oil Inventories: came in last week at -1.632M.

Thursday

8:30: US – GDP: expected to crawl up to -32.6% from -32.9% QoQ.

8:30: US – Initial Jobless Claims: to fall to 925K from 1,106K.

9:10: US – Fed Chair Powell Speaks

10:00: US – Pending Home Sales: forecast to plunge to 4.5% from 16.6%.

 Friday

9:05: UK – BoE Gov Bailey Speaks

Based on the above factors and the events lined up for the week, the analyst at RvR Ventures suggests you to Trade responsibly; invest only as much as you can lose. All the profits and losses due to the above data are your own personal responsibility. Kindly practice money management & risk mitigation while trading.

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