Mid-Day Report

Swiss Franc Overtaking Yen as the Strongest as European Stocks Fall on Risk Aversion


Yen and Swiss Franc remain the strongest major currencies today with US-North Korean tensions as the main theme of the markets. Japan Nikkei suffered steep selloff today by losing -1.29% to close at 19738.71. Major European indices follow with FTSE down -0.8%, DAX down -1.5% and CAC down -1.8% at the time of writing. Among the currencies, risk sensitive Aussie and Canadian Dollar are hardest hit, followed by Sterling and Euro. Risk aversion pushes gold to as high as 1282.4 so far today as recent rebound resumes. WTI continues to tread water between 48.5 and 49.0.

Weakness in European equities is giving the Franc an extra push as CHF/JPY is staging a rebound after hitting 112.94, a recent low, earlier today. CHF/JPY is now back pressing 114 handle. It's now likely that a short term bottom is formed at 112.94, ahead of 112.48 key support, on bullish convergence condition in 4 hour MACD. CHF/JPY should be heading back to 114.789 resistance and possibly further to 38.2% retracement of 118.59 to 112.94 at 115.09 and above.

US Tillerson: Trump just used language that Kim can understand?

This episode of US-North Korea started on reports that North Korea is ready to give US a ""severe lesson" as it's examining plans to strike US territory Guam. US President warned that North Korea "best not make any more threats to the United States". And, Trump said that "they will be met with fire, fury and, frankly, power the likes of which this world has never seen before.

US Secretary of State Rex Tillerson tried to talk down the tension and said that there is no "imminent threat" from North Korea and "Americans should sleep well at night". Also he noted that "nothing that I have seen and nothing that I know of would indicate that the situation has dramatically changed in the last 24 hours." He said that Trump's "met with fire and fury like the world has never seen" was for "sending a strong message to North Korea in language that Kim Jong Un can understand". And Tillerson said that because "he doesn't seem to understand diplomatic language". From the context, Tillerson should be talking about Kim as illiterate on so called diplomatic language.

China growth to ease in 2H

China's trade and inflation data surprised to the downside in July, likely drive by the government's targeted tightening monetary policy. GDP growth is expected to slow in second half of the year. Yet, given the strong readings in the first half, with the economy expanding 6.9% in both the first and second quarters, GDP growth should be able to meet government's target of "around 6.5%". We believe the government would continue its tightening monetary policy in order to prevent and resolve systematic risks, and to curb excessive strength in property prices. Meanwhile, as ultra accommodative monetary policies across major central banks are coming to an end, with the Fed and BOC raising interest rates, while ECB will begin discussing reduction of asset purchases, it would be detrimental to the renminbi if the central bank pledges to maintain monetary easing. This would exacerbate capital outflow from China. More in .

Also released earlier today, Japan M2 rose 4.0% yoy in July. Machine tool orders rose 26.3% yoy in July. Australia Westpac consumer confidence dropped -1.2% in August, home loans rose 0.5% in June.

RBA Kent: Aussie strength due to unwinding of Trump trade

RBA Assistant Governor Christopher Kent said that recent appreciation in the Australian exchange is mainly due to unwinding of so-called "Trump Trade". He noted that investors have initially anticipated US President Donald Trump's fiscal stimulus, which could be inflationary. That pushed Dollar and US yields higher after last year's election. But "gradually that's just been unwinding". Also, he noted that there's been a bit weaker inflation in the US. Together "that's a large part of the Australian dollar appreciation story of late."

Regarding the shrinking yield gap between US and Australia, Ken noted that "one might imagine that if the rest of the world is experiencing increasingly better conditions, better inflation, that underpins a pickup in yields, then that yield differential will come back and our estimates suggest that will potentially have some impact on the Australian dollar."

RBNZ to stand pat

RBNZ rate decision will be a major focus in the upcoming Asian session. The central bank is widely expected to keep the OCR unchanged at record low of 1.75%. New Zealand Dollar has been soft this month as markets are cautious that RBNZ governor Graeme Wheeler might turn a bit dovish in his statement. NZD/JPY accelerates lower today as also pressured by risk aversion. Follow up on our analysis earlier in the week, 55 day EMA is firmly taken out. The development confirmed that whole rise from 75.65 has completed at 83.90, after failing to sustain above 83.76 resistance. Deeper fall should now be seen back to 61.8% retracement of 75.65 to 83.90 at 78.80 and below before getting support for rebound. In any case, near term outlook will stay bearish as long as 81.62 resistance holds.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9708; (P) 0.9741; (R1) 0.9772; More...

USD/CHF dropped to as low as 0.9611 so far. It's staying above 0.9594 support and intraday bias remains neutral first. But outlook is turned a bit mixed as the pair is bounded inside medium term falling channel. The pair was also limited below 38.2% retracement of 1.0342 to 0.9437 at 0.9783. Firm break of 0.9594 will dampen our bullish view and turn bias back to the downside for 0.9437. This could also extend the fall through 1.0342 through 0.9437/43 key support level. On the upside, above 0.9772 will revive the bullish case and turn bias back to the upside.

In the bigger picture, current development argues that USD/CHF has successfully defended 0.9443 key support level. And long term range trading in 0.9443/1.0342 is extending with another rise. At this point, there is no sign of an up trend yet. Hence, while further rise is expected in USD/CHF, we'll start to be cautious on loss of momentum above 61.8% retracement of 1.0342 to 0.9437 at 0.9996.

USD/CHF 4 Hours Chart

USD/CHF Daily Chart

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
23:50 JPY Japan Money Stock M2+CD Y/Y Jul 4.00% 3.90% 3.90%
00:30 AUD Westpac Consumer Confidence Aug -1.20% 0.40%
01:30 CNY CPI Y/Y Jul 1.40% 1.50% 1.50%
01:30 CNY PPI Y/Y Jul 5.50% 5.60% 5.50%
01:30 AUD Home Loans Jun 0.50% 1.50% 1.00% 1.10%
06:00 JPY Machine Tool Orders Y/Y Jul P 26.30% 31.10%
12:30 CAD Building Permits M/M Jun 2.50% -1.90% 8.90%
12:30 USD Non-Farm Productivity Q2 P 0.90% 0.80% 0.00%
12:30 USD Unit Labor Costs Q2 P 0.60% 1.10% 2.20%
14:00 USD Wholesale Inventories Jun F 0.60% 0.60%
14:30 USD Crude Oil Inventories -1.5M
21:00 NZD RBNZ Rate Decision 1.75% 1.75%