Stocks Break Support, More Losses Ahead for FX?

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Stocks Break Support, More Losses Ahead for FX?

Daily FX Market Roundup May 29, 2019

US equities sold off sharply today, breaking through some important support levels and this sell-off drove all of the major currencies lower. The Dow Jones Industrial Average hit a fresh 3-month low after breaking below the 100 and 200-day simple moving averages. The S&P500 slipped underneath 2800. The New Zealand dollar, one of the most sensitive high beta currencies led the decline despite stronger business confidence and ANZ activity index. With the world’s two largest economies engaged in an intensifying trade war, investors are worried that the global economy will be hit hard by a simultaneous slowdown in the US and China. After walking away from trade talks, China’s biggest state owned newspaper issued a hostile warning to the US that said “We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!” Investors are worried that China will restrict or worse, cut its export of rare earth materials which are crucial components in almost all high tech manufacturing. If China plays the rare earth’s card we could minimally see another 2% to 3% drop in equities that will translate into big losses for currencies. AUD and NZD will be hit the hardest but USD/JPY could sink towards 1.08 and EUR/USD could drop to 1.10.

Many countries are already feeling the pain of the trade war. This morning, Germany reported the largest one month increase in unemployment in 10 years. While nearly 75% of the increase was due to reclassification of some people, this was also the first rise in nearly 2 years. The unemployment rate rose from 4.9% to 5%. This deterioration is consistent with the slowdown in job growth reported in the manufacturing and service sector PMIs. According to the Federal Labor Agency, “we are seeing the first signs of a weakening economy on unemployment.” Further weakness is likely which means that when the European Central Bank meets next month their concerns will grow. Keep an eye on 1.10 as that could be the next target for EUR/USD.

USD/CAD traded above 1.35 even before the Bank of Canada’s monetary policy announcement. It was no surprise that the BoC left interest rates unchanged and while they had some positive things to say, investors were not convinced that Canada can continue to grow at its current pace. According to the BoC, data reinforces their view that the slowdown in Q4 and Q1 was temporary and there’s more evidence of a pickup in Q2. They felt that overall growth in business investment firmed, the removal of tariffs and the prospects of the US Mexico Canada Agreement are positive. The oil sector is also beginning to recover as production and prices increase. But there are risks. The BoC saw the escalating trade war as a problem for global growth and warned that China restrictions have a direct impact on Canada’s exports. The uptrend in USD/CAD remains intact with tomorrow’s current account balance likely to be weak given the deterioration in trade activity in the first quarter.

Last but not least, GBP/USD is at the cusp of hitting 4 month lows and we’re getting asked if the pair is nearing a bottom. There are no major UK economic reports scheduled for release this week so it is all about flows. UK politics are still a mess. The economy is at risk of the same strains as the rest of the world and sterling is a high beta currency. In downtrends when investors are bailing out of risky positions, currencies can oftentimes move lower than most would anticipate. The key support level of GBP/USD is closer to 1.25 but the January flash crash low of 1.2442 could be tested as well.

Kathy Lien
Managing Director

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