Yen and Swiss Franc ended as the weakest ones last week as global stock markets ended higher. There were some jitters in risk sentiments after US announced to move on with tariffs on additional USD 200B in China imports, which come effective as soon as in September. But investors were quickly relieved after China’s refrained response. While China still pledged to retaliate, there is no far no detail on the plan, not even leaked. On the other hand, while Dollar ended as the strongest one, the lack of further escalation in trade war limited its strength. Indeed, the late pull-back of the greenback on Friday argues that it’s not ready to resume recent up trend yet. Australian Dollar ended as the second strongest as particularly lifted by rebound in Asian markets. Sterling survived resignation of two ministers and Trump’s blasting of the softer Brexit plan, ended as the third strongest. Canadian Dollar was just mixed as the lift by hawkish BoC rate hike was offset by the sharp fall in oil price.
Going through all the noises, the main development last week was the weakness in Yen and Franc. That was primarily built on strength in global equities. In particular, NASDAQ hit record highs as it resumed the larger up trend. Near term strength in equities is anticipated. There could be some more positive news as European Commission President Jean-Claude Juncker visits China and Japan on Monday and Tuesday. China is known to look into EU to expand partnership on trade and investment, and on other issues like climate change. Juncker will also sign an Economic Partnership Agreement with Japan during the visit.
However, it should be noted that the risks of trade war is just temporarily taking a back seat and a lot of development is happening. The section 232 investigation in auto tariffs is undergoing and could be completed in weeks. That will be a huge blow to European and North American car industry. And China could be ready to step up with its rhetoric again once stocks rebounded to a level that’s comfortable for investors to see another selloff. So, for now, we don’t anticipate risk appetite to stay long.
DOW rebounded as medium term consolidation extends
Technically, DOW’s strong rebound last week suggested that fall from 25402.83 has completed at 23997.21 already. That temporarily removed the risk of further decline through 23344.52 support. Instead, favors are now on further rebound back to 25402.83, and possibly above to 25800.35. But after all, recent price actions are corrective looking. And even the rebound from 23997.21 is not impulsive looking. Hence, we’d hold on to the view that consolidation pattern from 26616.71 is not completed yet and there will be another fall through 23344.52 before up trend resumption.
NASDAQ hit record high with convincing momentum
On the other hand, the near term upside momentum in NASDAQ is much more convincing. And that’s how an up trend resumption should look like. Further rise should be seen to 61.8% projection of 6991.14 to 7806.60 from 7419.56 at 7923.51. Nonetheless, considering bearish divergence in daily MACD, we’ll pay attention to loss of momentum above 7923.51 and at it approaches 8000 handle.
DAX rebound capped by auto tariff risks
German DAX closed the week just up 0.36% and it struggled to break through 55 day MACD so far. Near term outlook is neutral as the index is bounded in converging range since 13596.89. While a break of last week’s high at 12837.79 could extend the rebound from 12104.41. Strong resistance will likely be seen below trend line resistance (now at 12583.79). On the downside, a break below last week’s low at 12398.47 would likely resume the fall from 13204.31 through 12104.41 support. The development will very much depends on how the US auto tariffs play out.
Nikkei showed promsing momentum
In Asia, the technical development in Nikkei is very promising. The strong break of 55 day EMA suggests that pull back from 23050.39 has completed with three waves down to 21462.94 already. The rebound from 20347.49 looks set to resume. A test on 23050.39 resistance would likely be seen this week. Break will then pave the way to 100% projection of 20347.49 to 23050.39 from 21462.94 at 24165.84, which is close to 24129.34, later in the month on in August. For now, we’re not anticipate a strong break of this resistance level yet. And, remember that Japan got no exemptions from US steel tariffs. The upcoming auto tariffs will also have negative impacts on Japanese car makers. So, the momentum above 23050.39 will be closely watched.
China SSE survived tariff threats
The China Shanghai SSE survived Trump’s tariff threat on tariffs. After initial set back it rebounded strongly to close at 2831.18. The development reinforced our view that the support zone between 2016 low at 2638.3 and 2700 psychological level is a very strong one that was defended. For now, further rise is in favor through 2848.37 resistance. In the case, we’d likely see SSE have a go at 55 day EMA (now at 2979.01). But there is no prospect of regaining 3000 handle. Indeed, the Chinese government could start to feel comfortable to harden its trade rhetoric again above 2900. The index should revisit 2638/2700 again before turning around.
DXY failed to break 95.24 but development affirmed underlying bullishness
Dollar index drew support above 55 day EMA and rebounded to as high as 95.24. But upside was limited below 95.53 resistance so far. The late Friday sell-off suggests that it’s not ready to resume recent rally from 88.25. Nonetheless, recent development affirms the view that price actions from 95.53 are merely corrective and rise from 88.25 isn’t over yet. On the upside, break of 95.53 will target 61.8% retracement of 103.82 to 88.25 at 97.87. Though, break of 93.19 will dampen our bullish view and bring deeper pull back.
TNX staying in consoliation with near term upside prospect
Haven’t talk about 10 year yield so a while and it’s rightly so. Using BoE Cunliffe’s word, there have been some “stodginess” in TNX since May as consolidation continues. So far, the development affirm our view that price actions from 3.115 are corrective in nature. For the near term, considering diminishing downside momentum, there is prospect of a rebound. But there is little sign of upside range breakout yet. And we’d reiterate that 3.0-3.2 represents multi-decade trend defining resistance zone. So it’s not that easy to get through. Though, even in case of deeper pull back, we’d expect strong support from 38.2% retracement of 2.033 to 3.115 at 2.701 to contain downside and bring rebound.
Position trading strategy
Overall, we’d expect risk appetite to continue in near term even though it may not last too long. Comparing the near term outlook of Asian and European stocks, we’d prefer to sell Yen over Swiss Franc. Dollar is preferred to European and others as it’s staying in near term up trend. However, as last week’s rally attempt “sort of” failed, we’d choose to buy on a pull-back rather than chase the current rally. We’ll try to buy USD/JPY at 38.2% retracement of 110.34 to 112.79 at 111.85, with stop at 111.20, below 61.8% retracement and 4 hour 55 EMA. 114.00 will be the initial target, above 61.8% projection of 104.62 to 111.39 from 109.36 at 113.54 but below 114.73 resistance. We’ll monitor the momentum to see whether it can take our 114.73 resistance decisively.
USD/JPY Weekly Outlook
USD/JPY surged to as high as 112.79 last week and formed a temporary top there with subsequent retreat. Initial bias is neutral this week for consolidation first. Downside should be contained well above 111.13 resistance turned support to bring rally resumption. Current development affirms the case of medium term reversal. Above 112.79 will target 61.8% projection of 104.62 to 111.39 from 109.36 at 113.54 first. Break will put focus on 114.73 key resistance for confirming our bullish view.
In the bigger picture, current development, with the solid break of medium term channel resistance from 118.65 (2016 high), affirm our view that corrective fall from there has completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will now be the preferred case as long as 119.36 support holds.
In the long term picture, the rise from 75.56 (2011 low) long term bottom to 125.85 top is viewed as an impulsive move, no change in this view. Price actions from 125.85 are seen as a corrective move which could still extend. In case of deeper fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77. Up trend from 75.56 is expected to resume at a later stage for above 135.20/147.68 resistance zone.