Asian Open: The dollar catches a bid on China’s 'rare earth' move

The US dollar caught a bid overnight on reports that China plans to curb its rare earth exports to the US.

Charts (1)

The move would restrict vital parts for US weaponry and F-35 fighter jets, and plans have been drawn to limit up to 17 rare earth materials. China currently controls around 80% of global supply, so this is likely to be an interesting twist in US-Sino saga as we head into a new round of the trade war.

The US dollar index (DXY) printed a bullish engulfing and bullish outside day, regaining as much as 0.6% by its intraday high although closed below the 20 and 50-day eMA’s. USD/JPY broke to a 4-mont high and stopped just shy of 106 during its most bullish session in 6-weeks. USD/CNH, which will likely be closely watched around trade war developments, also produced a bullish outside candle and closed back above 6.4120 support

Commodity FX majors (AUD, CAD and NZD) lost ground to the dollar and produced bearish reversal patterns on the daily chart. Although the dollar made notable ground against the Mexican peso (USD/MXN) and the South African rand (USD/ZAR) which produced a large engulfing candle during its most bullish session in one month.

Asian indices continued to outperform over the near-term

Whilst Wall Street set new record highs on an intraday basis, major cash market indices such as the S&P 500 and Nassq-100 closed beneath their opening prices. A strong rise in yields likely weighed on US indices with the 10-year yield breaking above 1.3%. Softer industrial production data weighed on European bourses, sending the DAX -0.3% lower, although volatility was contained overall.

Asian indices continued to outperform over the near-term with the ASX 200 closing at a 12-month high. RBA’s minutes ruled out any tapering of QE any time soon, saying an end to bond buying would put “significant” upside pressure on the Australian dollar.

The Hang Seng rallied to a 30-month high during its first day’s trade after the Chinese Lunar New Year. The Nikkei 225 closed to its highest level since August 1990 after the BOJ (Bank of Japan) brushed aside any concerns over an asset bubble due to their QE programme.

USD/JPY: Momentum favours a break above 106

USD/JPY broke to a new cycle high in a ‘bid’ to hit 106 and closed firmly above its 200-day eMA. A strong trend is beginning to build on the daily chart with higher highs and lows, and it has taken just 30 sessions to rally from the January low to February high compared with over 62 days to decline from 106 to the January low.

Switching to the four-hour chart shows rising volume heading into resistance and an elongated bullish engulfing candle ahead of the breakout which was followed by a firm close above resistance. 106 – 106.10 makes a likely interim target but, given strength of underlying momentum, we favour an eventual break above it.

  • Bulls can seek dips above 105.75 support to target 106 – 106.10.
  • Alternatively, enter upon a period of consolidation below 106 with a view to trade above it.
  • Next major resistance is around 106.55.
  • A break back below the 105.67 – 75 support zone invalidates the near-term bullish bias.

Up Next (Time in Sydney GMT +11)

  • Today’s machinery orders and trade data provide a sneak-peak view of the likelihood for Japan’s economic recovery to maintain momentum in Q1. That said, expectations are for a decline of -6.2% in December for factory orders, so we won’t hold our breath. JPY pairs and Nikkei 225 are in focus for news traders.
  • The Federal reserve release their minutes of February’s FOMC meeting at 06:00 tomorrow morning.
  • UK and Canada’s CPI prints also warrant a close look for any large deviations away from expectations.  

Watchlist update:

AUD/USD: Stepping aside. Momentum reversed around 0.7800 and stopped just shy of our second bullish target.

GBP/CHF: Prices continue to march higher in line with the dominant trend. The bias remains bullish above the recent swing low of 1.2350 on the four-hour chart.

EUR/USD:  Removed from watchlist. A bearish engulfing candle formed on the four-hour chart before prices reached the initial target around 1.2190.

USD/CHF: Removed from watchlist. Momentum quickly reversed after a false break below 0.8883 support.

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