Financial market research and analysis

The risk appetite is back in force after Janet Yellen hinted that the cost of borrowing could increase slower than previously thought at the first day of her semiannual testimony in front of the Congress.

The Dow Jones traded at a fresh historical high of $12’580.79 in New York yesterday; the S&P500 advanced to $2’445.25 on fading hawkish Fed expectations.

Asian stocks took over a gainful market and joined the rally. Hang Seng (+1.04%), Shanghai’s Composite (+0.64%) and ASX 200 (+1.11%) traded higher, as Chinese trade terms reinforced the positive sentiment across the markets.

Chinese exports rose by 11.3% year-on-year in June from 8.7% printed a month earlier. China’s trade surplus improved to $42.80 billion from $40.81 billion.

Industrial metals gained in Shanghai. The UK’s mining stocks (+0.55%) lead gains in London, yet the miners’ gains were insufficient to cover for the hefty sell-off in health care stocks (-1.84%).

Cable is in no man’s land since the Bank of England (BoE) Deputy Governor Broadbent talked down the expectations of an imminent interest rate hike. The BoE hawks retreated further as, in addition, the UK labour data showed that the wages growth slowed from 2.1% to 1.8% (3m/y) in May in line with expectations.

Traders are in a wait-and-see mode before next week’s inflation figure and the BoE’s inflation hearings.

From a dovish standpoint, entering a fresh bearish position seems risky, given that GBP-negative positions may suddenly get trapped in a bullish reversal if the UK’s inflation exceeds 3% in June. The May figure was 2.9% year-on-year.


Euro gains on hawkish ECB expectations

The EURUSD extended gains to 1.1456 in Frankfurt, as German inflation remained unchanged at 0.2% month-on-month in June.

The single currency is back on track to challenge the 1.15 mark against the greenback on the back of convergence between the Fed and the European Central Bank (ECB) policy outlook.

The European Central Bank (ECB) meets next week and is expected to clarify its position regarding the future of the Quantitative Easing (QE) program. The recent rally in the Eurozone yields factors in the equivalent of two ECB rate hikes next year. This pricing takes into account an eventual QE tapering, yet may still require a correction in EZ sovereign yield levels and the euro sooner later than later.

Trend and momentum indicators remain positive for the moment, yet put options are waiting to be exercised at 1.1425/1.1400 at today’s expiry. There are no option barriers at 1.15, stops are eyed above. A break through the 1.15 hurdle should bring in the top seekers. The key resistance is eyed at 1.1616 (2016 high).


Yellen sends the US dollar, yields lower

The Federal Reserve (Fed) Chair Janet Yellen squeezed the US dollar at the first day of her semiannual testimony in front of the Congress. Yellen mentioned worries regarding the slower-than-anticipated recovery in inflation as the wage growth ‘seems somewhat low given the Fed’s 2% inflation objective’.

The probability of an additional rate hike fell to 43% even though she said that the Fed will continue rising rates gradually and the Fed’s balance sheet will return to ‘normal levels by 2022’.

The Fed held less than 1 billion dollar worth of assets in its balance sheet in 2008, before the beginning of the massive Quantitative Easing. In 2015, the Fed’s balance sheet surpassed 4.5 billion dollar. Today, the Fed holds 4.47 billion dollar worth of assets. The 50-month average stands at 4.34 billion, the 100 and 200-month averages stand at 3.47bn and 2.16bn dollar respectively. Therefore, the balance sheet normalisation to ‘normal’ levels is very much open to speculation.

In the dirt of further detail regarding the size and the timing of the balance sheet normalisation and in the light of rising concerns regarding the stagnant inflation, the Fed doves have the market in their hands.

The US 10-year yield eased to 2.30%. The US dollar was offered against all G10 majors. The antipodeans (AUD, NZD) were the biggest gainers in Asia, as carry traders returned to high yielding currencies to take advantage of the rate differential.

Janet Yellen will deliver the second part of her testimony today. The tone being mostly set during the first part of her testimony, we do not expect a U-turn in sentiment. Trend traders will likely stand out throughout the US session.

The Dow is set for a positive open in New York.


JPY-bears insensitive to BoJ’s fight against higher yields

Japan’s 5-year yields came off the 18-month highs as the Bank of Japan accelerated the 3-5 year maturity JGB purchases to fight back the rising yields. Still, the Japanese 10-year yields firmed by 9 basis points.

The yen-bears remained insensitive to the BoJ’s extra bond purchases. As a result, the yen gained against all G10 majors, except the Kiwi.

The US dollar (-0.22%) lead losses against the yen. The Australian dollar (-0.05%) and the euro (-0.02%) remained on the back foot despite the rate differential.

Stronger yen prevented Nikkei (+0.01) and Topix (-0.01%) from benefiting from the rise in the global equity demand.


Loonie at year high against the greenback

The Canadian dollar rallied to a year high amid the Bank of Canada (BoC) raised the interest rate by 25 basis points to 0.75%. Although Governor Poloz urged caution, speculations of another rate hike rose significantly. The market is currently pricing in more than 70% probability for a second rate hike in 2017.

To us, the BoC will likely collect data first, and then decide whether a second rate hike would be appropriate within such a short period of time. The USDCAD traded at 1.2681 for first time since June 2016.

The daily relative strength index (23% < 30%) stepped in the overbought territory, suggesting that a correction could be healthy at the current levels. Trend and momentum indicators remain comfortably negative. Any positive correction in USDCAD could meet fresh sellers. The next Fibonacci resistance stands at a distant 1.2942 (minor 23.56% retracement on May – July decline).