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As markets reacted negatively to the RBA statement this month, the AUD may be experiencing temporary weakness. Data on the AIG Manufacturing Index and commodity prices was positive to the AUD earlier this week, whilst there is a lack of data this week on the NZD, which may limit its strength. At this point the pair is supported by 61.8, D L5, W L3 and rising trend line which might spike the price to the upside. The POC zone for long trades is 1.0430-45 and as long as it stays above 1.0375 upside is possible. Targets are 1.0485, 1.0510 and 1.0550.

EUR/GBP - 0.8778

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term up

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

 
Euro’s retreat after rising briefly to 0.8882 last week has retained our view that a temporary top is possibly formed there and few days of consolidation would be seen with mild downside bias, below 0.9755-60 would add credence to this view, bring retracement of recent upmove to 0.8730-35, however, still reckon downside would be limited to 0.8719 support.

In view of this, would be prudent to stand aside for now and look to turn short on recovery as 0.8840-50 should limit upside. Above 0.8882 would revive bullishness and extend recent upmove from 0.8304 low to 0.8900-10, having said that, as broad outlook remains consolidative, reckon current c leg of larger degree wave b should be limited to 0.8950 and price should falter well below 0.9000 psychological level.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.2972

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway for headway to 1.4700

Trend:  Near term down

 
Original strategy       :

Sell at 1.3115, Target: 1.2915, Stop: 1.3175

Position: -

Target:  -

Stop: -

 
New strategy             :

Sell at 1.3115, Target: 1.2915, Stop: 1.3175

Position: -

Target:  -

Stop:-

As the greenback has remained under pressure after last week’s selloff, bearishness remains for recent decline to resume after consolidation, although corrective bounce to 1.3045-50 and possibly 1.3080 is likely, reckon 1.3115-20 would limit upside and bring another decline later, below support at 1.2946 would extend the fall from 1.3794 top (wave c of larger degree wave b top) to 1.2920, however, near term oversold condition should limit downside to 1.2900 and reckon 1.2870 would hold from here, risk from there has increased for a rebound later.

In view of this, would not chase this fall here and would be prudent to sell the pair again on recovery as 1.3115-20 should limit upside. Above 1.3160-70 would defer and suggest low is formed, bring a stronger rebound to 1.3215-20 and possibly towards 1.3260-65 but only break there would abort and signal a temporary low is formed instead, then test of resistance at 1.3308 would follow.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

USD/CHF - 0.9655

Original strategy :

Buy at 0.9590, Target: 0.9690, Stop: 0.9555

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9590, Target: 0.9690, Stop: 0.9555

Position : -

Target :  -

Stop : -

As the greenback staged a strong rebound after finding good support at 0.9552, suggesting a temporary low has been formed there and consolidation with mild upside bias is seen for this move to bring retracement of recent decline, hence gain to 0.9667-76 (61.8% Fibonacci retracement of 0.9738-0.9552 and previous support turned resistance) is likely, however, reckon upside would be limited to 0.9700 and price should falter below resistance at 0.9738.

In view of this, we are looking to turn long on pullback as the lower Kumo (now at 0.9590) should limit downside and bring another rise later. Below 0.9565-70 would abort and signal intra-day top is formed, risk retest of 0.9552 first.

GBP/USD - 1.2930

Original strategy :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : - 

Target :  -

Stop : -

New strategy  :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : -

Target :  -

Stop : -

Cable’s retreat after faltering below last week’s high of 1.3030 suggests consolidation below this level would be seen, hence weakness to 1.2916 support cannot be ruled out, however, reckon downside would be limited to 1.2865-70 and bring another upmove later, above said resistance at 1.3030 would signal recent upmove is still in progress and may extend further gain towards recent high 1.3048 but loss of near term upward momentum should prevent sharp move beyond 1.3075-80 today and reckon 1.3100 would hold on first testing. 

In view of this, would not chase this rise here and we are looking to buy cable again on pullback as 1.2900 should limit downside and bring another rally. Below previous resistance at 1.2861 would suggest a temporary top is formed instead, risk weakness to 1.2830-35 (50% Fibonacci retracement of 1.2640-1.3030) but support at 1.2794 should remain intact.

EUR/USD - 1.1347

Original strategy  :

Buy at 1.1300, Target: 1.1400, Stop: 1.1265

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.1300, Target: 1.1400, Stop: 1.1265

Position : -

Target :  -

Stop : -

As euro’s retreat from last week’s high of 1.1446 has kept the single currency under near term pressure, suggesting initial downside risk remains for retracement of recent upmove to 1.1325-30 (38.2% Fibonacci retracement of 1.1139-1.1446), however, reckon support at 1.1292 (as well as 50% Fibonacci retracement) would hold and bring another rise, above 1.1400-10 would bring retest of said resistance at 1.1446, break there would extend recent rise to 1.1455-60 (61.8% projection of 1.1119-1.1389 measuring from 1.1292), then 1.1480.

In view of this, would not chase this rise here and would be prudent to buy euro on pullback as 1.1292 (previous support as well as 50% Fibonacci retracement of 1.1139-1.1446) should limit downside, bring rebound. Below 1.1270 would abort and signal a temporary top is formed, bring correction to 1.1250-55 first.

USD/JPY - 113.19

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Although the greenback retreated after rising to 113.47 and consolidation below this level would be seen, reckon downside would be limited to the upper Kumo (now at 112.60) and 112.40 should hold, bring another rise later, above said resistance at 113.47 would signal recent upmove is still in progress for headway to 113.75-80 but loss of momentum should prevent sharp move beyond 114.00, bring retreat later.

In view of this, would not chase this rise here and would be prudent to stand aside for now. Below the lower Kumo (now at 112.40) would suggest top is possibly formed but break of 111.90-95 is needed to add credence to this view, bring test of 111.73 support first.

• North Korea overnight carried out its most advanced missile test so far with the launch of what was probably an intercontinental ballistic missile (ICBM). It was the 11th round of missile tests this year, but the first test of the long-ranging ICMB that is needed to reach the US.
• The test underlines that North Korea is not backing down from its nuclear ambitions but instead continues to make progress in its goal to reach the US with a nuclear warhead. It is one of the most difficult military challenges the US has faced since the Cold War. Below, we give a quick summary of the crisis and why it is important.
• For further background analysis and market implications please see Research: The rising risk from North Korea - and what it means for markets, 27 April 2017.

What happened overnight?

On US Independence Day, 4 July, North Korea carried out its most advanced missile test so far with the apparently successful launch of an ICBM. According to North Korean state media the rocket reached an altitude of 2.802km, reached the target 933km away and flew for 39 minutes. If true, it is the first time North Korea has tested an ICBM. It has previously tested rockets with similar technology but not an ICBM that can carry a warhead.

According to the state media it was fired at its highest angle. This makes the distance it travels shorter. But at a lower angle it is estimated by some Western experts that it may be able to reach a range of roughly 6700km, see for example this blog (www.allthingsnuclear.org). US, Japanese and South Korean military officials have not yet been able to confirm it indeed was an ICBM. The missile landed in Japan's Exclusive Economic Zone, according to US, Japanese and South Korean officials.

Why is it important?

The launch is another testimony that North Korea continues to move on with its nuclear ambitions - and that it has made a lot of progress over the past year in its stated aim of becoming able to strike the US with a nuclear warhead. For this, it needs two things: an ICBM that can reach the US and a nuclear weapon that can be miniaturized enough to fit in the cone of a missile. North Korea has escalated missile tests over the past two years and in a New Year speech, North Korean President Kim Jong-Un said North Korea had 'reached the final stage in preparations to test-launch an intercontinental ballistic rocket'. This may have turned out to be true with today's test. On the nuclear side of things, North Korea has carried out five tests in total, with the two most recent last year (the single most recent in September).

It is uncertain how close North Korea is to its stated goal. Experts believe that North Korea may only be a couple of years away from this. At the same time the US has been very clear that it will not allow North Korea to develop the capability of hitting the US with nuclear weapons. It seems clear that a solution will have to be found under the reign of US President Donald Trump and his advisors.

While the Trump administration has highlighted that all options are on the table - including the military option - it is also clear that a military intervention against North. Korea comes with a huge risk as North Korea would probably be able to cause severe casualties in South Korea and possibly Japan before being stopped.

The key thing to watch is still whether North Korea pursues completion of another nuclear test. The US has made clear that this would have consequences - and would need to respond in some way in order not to lose face. North Korea has been ready to do a test for some time according to military intelligence but has refrained from this.

How can North Korea be stopped? What are the scenarios?

This is the million dollar question to which there is no obvious answer. For Kim Jong-Un development of the nuclear deterrence is necessary for the survival of his regime - and possibly himself. Other nations that stopped nuclear weapons programmes were overthrown. Following a nuclear test in January 2016 a commentary in North Korea's state media said 'The Saddam Hussein regime in Iraq and the Gaddafi regime in Libya could not escape the fate of destruction after being deprived of their foundations for nuclear development and giving up nuclear programmes of their own accord.' There are thus no signs that any sanctions or threats are likely to stop the North Korean regime.

In theory a military alliance with China guaranteeing North Korea's safety - as the US is guaranteeing to defend South Korea - could work. But it requires a degree of trust between China and North Korea that does not exist. Another option is that the US eventually allows the development of North Korea's ability to reach the US with a nuclear weapon, simply because the cost of stopping North Korea with military force is deemed too high. This would be a major loss of US credibility, however, and would weaken any US show of force in future conflicts. Finally, using the military option and accepting the potential casualties could be the result if all other options are ruled out. The lack of any obvious solutions is what makes the situation so difficult - and the biggest US military challenge since the end of the cold war.

What does the escalation mean for US-China relations?

The continued escalation is gradually increasing tensions between the US and China again. The relationship got off to a much better start than feared with the successful visit by Chinese President Xi Jinping to Mar-a-Lago in April. Trump acknowledged that China was doing what it could to put pressure on North Korea but that it may not have so much power over North Korea. During the visit Trump said 'After listening 10 minutes, I realised it's not so easy...I felt pretty strongly that they had a tremendous power [over] North Korea... But it's not what you think'. He also called the relationship with China 'outstanding'.

As late as 20 June Trump tweeted 'While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried!'

However, today after the missile launch Trump tweeted '...Hard to believe that South Korea and Japan will put up with this much longer... Perhaps China will put a heavy move on North Korea and end this nonsense once and for all'. It indicates that Trump believes China has not done all it could. This will most likely anger China, although it may continue to keep a calm face publicly.

It comes on top of a range of other issues upsetting China over the past few weeks: apparent US plans for steel tariffs (see Flash Comment: Trump likely to announce tariffs on steel soon, 23 June 2017), the US finalising a USD1.4bn arms sale to Taiwan (www.cnbc.com), labelling China one of the worst human traffickers (www.foxnews.com) and imposing sanctions on a Chinese bank for doing business with North Korea.

Keep an eye on the G20 meeting

Japan said on Monday that the US, South Korea and Japan will have a trilateral summit on North Korea at the G20 meeting in Hamburg this weekend (7-8 July). On Tuesday Japan's prime minister Shinzo Abe also said he would ask China and Russia to play a more constructive role in efforts to stop North Korea.

As the threat from North Korea rises, Japan may increasingly push to scale up its military power, which would most likely anger China and increase tensions in the Asian region.

Another hot issue at the G20 meeting that could make the environment for the talks difficult is the area of trade and protectionism. Trump may send a signal of coming protection of US steel workers or of other areas which would anger both the EU and China.

EURUSD: The pair closed lower on Monday opening the door for more weakness in the days ahead. Resistance comes in at 1.1400 level with a cut through here opening the door for more upside towards the 1.1450 level. Further up, resistance lies at the 1.1500 level where a break will expose the 1.1550 level. Conversely, support lies at the 1.1300 level where a violation will aim at the 1.1250 level. A break of here will aim at the 1.1200 level. Its daily RSI is bearish and pointing lower supporting this view. All in all, EURUSD faces further downside pressure.

Asian stocks concluded lower on Tuesday while European equities were under pressure as geopolitical tensions stemming from North Korea's missile launch have encouraged investors to develop a more cautious stance. It appears that geopolitical risks are starting to reappear in the headlines, something that has been complemented by reports that President Trump believes China should be doing more to contain the situation.

With the unexpected surprises from last week sparking discussions of volatility making a return, the developments seen today could fuel the speculation further. The re-emergence of geopolitical tensions in Asia, Brexit developments and ongoing political instability in Washington could make for wild trading conditions in the third quarter of 2017.

Yen supported by caution

The Japanese Yen appreciated against its major counterparts during early trading on Tuesday amid risk aversion, with investors adopting a cautious approach following reports of North Korea conducting a long-range missile test. In times of uncertainty and trouble, the Yen remains a trader's best friend and this was illustrated today when the currency gained ground against the US Dollar.

Although the USDJPY eventually clawed back recent losses as of writing, further downside could be expected if uncertainty and geopolitical risk accelerate the flight to safety. From a technical standpoint, the USDJPY has found some resistance at 113.50. A failure of bulls to secure control above this level could open a path lower back towards 111.60.

WTI Crude smashes into $47

WTI bulls crashed into a brick wall in the form of $47 on Tuesday, following reports that OPEC's production in June climbed to its highest levels so far in 2017, as Nigeria and Libya pumped more oil. It's quite remarkable how the seemingly harmless supply cut exemptions for Libya and Nigeria are threatening to sabotage the efforts made by the rest of the group to rebalance the saturated markets.

With rising oil production in the US another painful piece of the equation that continues to compound to the oversupply concerns, WTI Crude is at risk of remaining depressed for a prolonged period of time. Although WTI Crude has staged an impressive rebound from the $42 level, sellers may be enticed to exploit the technical bounce to install renewed rounds of selling, with $45 acting as a level of interest. From a technical standpoint, the $47-48 region should act as a check point for bears to jump back in.

Commodity spotlight - Gold

Gold bulls found support in the form of geopolitical risk during Tuesday's trading session as the metal rebounded from $1220. Although the current market anxiety and flight to safety has the ability to support Gold, the sharp $23 depreciation observed on Monday will be difficult for bulls to claw back. Short term bears remain in control with Gold at risk of depreciating further if the Greenback continues to stabilize. From a technical standpoint, the yellow metal has turned bearish on the daily charts. Weakness below $1220 may open a path towards $1214.