A waiting game for markets this week with traders expecting details on both the timing and the level at which tariffs on U.S. $200 bn of goods from China will be implemented. The expectation is for tariffs to be imposed at or near to 25% and in return China would then follow through on its threat to impose tariffs on U.S. $60bn in US exports.
An interesting view from a prominent investment bank is that short-term effects of tariffs on U.S. growth are not as negative as commonly believed. This is because tariffs are designed to boost the demand for U.S. made goods at the expense of foreign made goods, the effect of which is amplified when retaliatory moves are less than equal. Furthermore, the boost that tariffs provide the U.S. will mostly offset the negative effects which includes lowering business confidence, disrupting supply chains and higher inflation.
Overnight, U.S. equity markets appear to have taken heed of this view with the S&P 500 continuing to rally from the middle of the 2875/55 support zone highlighted in our article from August 31 https://www.cityindex.com.au/market-analysis/sp500-spring-loaded/. Also enjoying a rally last night was EURCHF which at one point was trading at 1.1345 after trading as low as 1.1183 earlier this week.
EURCHF is generally viewed as a currency pair that reflects the dominant risk sentiment prevalent in markets at the time. That means when global equity markets such as the S&P500 and the DAX are rallying, then EURCHF will rally as well, a relationship clearly on display last year.
However, after reaching a high of 1.2000 in May of this year, EURCHF dropped over eight big figures, mainly due to the outcome of the Italian election which delivered a government that promised to increase spending, despite a huge budget deficit and threats of downgrades from rating agencies.
Recent comments from Italian Government Official’s indicative of more restrained spending plans for 2019, have calmed the nerves of jittery Italian bond holders and yields have retreated from highs. As can be seen on the chart above EURCHF has fallen in response to rising yields on Italian bonds.
As a result, EURCHF recently reached an area of strong technical support. In fact, the 61.8% Fibonacci retracement of the rally from 1.0676 to the high of 1.2005 was 1.1184 – very close to the low of the past two weekly bars. Additionally, after a clear 5 wave rally, the move to 1.1184 has a distinct 3 wave corrective look about it and there is bullish divergence evident on the daily charts via the RSI indicator.
I favour cautiously building long positions in EURCHF at the current price of 1.1285 leaving room to add on a dip to 1.1250. The stop loss should be placed at 1.1175 with a view to trailing the stop loss higher should the market rally as expected. The profit target is a retest of 1.1714, with a move above 1.1370 providing more support for the idea that EURCHF has put in place a medium-term low at 1.1184 and that the rally can extend.
Source Tradingview. The figures stated are as of the 8th of August 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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