USD/JPY rises to 6-month high
After a rocky Wednesday, financial markets stabilised on Thursday as trade war fears eased. Asian moved back up with the Nikkei rising 1.17%, while Chinese equities rebounded strongly with the Shanghai and Shenzhen Composites rising 2.17% and 2.73% respectively. Similarly, European stocks opened slightly higher with the Eurostoxx 50 up 0.09% and the German DAX rising 0.27%.
In the FX market, the greenback enjoyed a nice recovery as investors fled risky assets. The dollar index surged to 94.78 (its high level since July 3rd) but consolidated gains on Thursday morning. Surprisingly, the Japanese yen, which usually appreciates during period of rising risk aversion, fell substantially over the last 24 hours. USD/JPY rose more 1.30% to 112.42, its highest level since January 10th. The currency pair is currently testing a key resistance level, which corresponds to the top of its multi-month downtrend channel.
It is still why the market has punished the yen against the backdrop of deteriorating risk environment. However, the surge in demand for upside protection in USD/JPY suggests that investors are getting anxious about further yen weakness. Indeed, call prices for all maturity increased with the 1-week 25-delta risk reversal measure climbing to -0.34% from -1.28% two weeks ago.
Today, traders will focus on the publication of the June inflation report in the US. Headline inflation is expected to have risen 2.9%y/y in June, while the core gauge, which excludes the most volatile components such as energy and food prices, should come in at 2.3%y/y. A stronger print in core inflation should provide the last nudge needed for USD/JPY to break the resistance as it would support the case for more rate hike this year.
Brent crude endures its largest drop in 2 years
OPEC meeting in Vienna on 22. June 2018 was a real push for oil prices. Members confirmed their willingness to reduce total production output. Both Brent Crude and West Texas Intermediate (WTI) were trading at $79.44 and $74.15 on 29. June 2018, a 4-year high for the black gold. However, as the diplomatic situation between both largest oil consumers, China and the US, are deadlocked, the tendency on crude oil is reversing.
Indeed, following Wednesday’s OPEC report forecast confirming a decline in world demand for crude due to slowing consumption (OPEC-related demand estimated at 32.18 million bpd, a drop of 760’000 bpd compared to current year) and higher production from rivals, investors’ opinion drastically changed, causing a rapid selloff of the commodity. Crude oil and WTI dropped by -6.92% and -5.03% on Wednesday late afternoon session.
Aside from escalating trade tensions between the two largest nations, EIA US crude oil stockpiles report confirms a lower drop in inventories for last week while communications made by both the US and Libya with regard to further sanctions against Iran for one and reopening of four export terminals for the other provide a rather negative outlook for oil prices in the mid-term. Speculations involving US pressure on Russia for extending its oil production also support the downtrend.
Accordingly, we expect oil prices to benefit from a slight bounce in the short-term, as the worst-case scenario is now priced in. We would therefore recommend to reload at current valuation levels.
