Markets are confused - where to go?

Published date: 06/12/2018

Risk sentiment has taken another sharp hit today, with news overnight that the daughter of the founder of Huawei has been arrested (in Canada) and extradited to the US for violation sanctions (with Iran).  This naturally puts the current truce with China at risk, and the market has reacted accordingly, again looking to the USD for refuge though there are signs that the JPY may start to gain some advantage under the circumstances.  

However, USD support is coming through against the traditional risk related currencies led by the AUD and CAD, with the latter having suffered a fresh round of losses in the aftermath of the BoC statement which was taken to be dovish as the central bank will consider fresh tightening against the backdrop of certain downside risks.  

This morning, comments from the RBA's deputy governor Debelle have underlined the fact that an Australian rate rise is still seen as up, though remains some way off as concerns over housing and consumption persist.  The US-China relationship is also key for AUD as any weakness in the Chinese economy will detract from demand for raw materials of which Australia is a key producer.  AUD is now testing lower and looks set to challenge initial support at 0.7200.  USD/CAD is now through 1.3400 and the next level to watch for is the psychological 1.3500 level.  

Against the EUR and GBP, USD gains are pretty self-explanatory, though we see a resilience in the EUR at the moment, with notable support seen at 1.1310.  Hopes that the EU and Italy can resolve their differences on the budget plans would give the single currency some much-needed relief, though we also need to see some significant improvement in Eurozone data to gain traction on the upside. 

GBP's fate is all down to the Brexit vote next week, which may be delayed.  Traders anticipating a rejection of PM May's deal are expecting another test on the downside, and if 1.2660 gives way, then Cable will then challenge the 1.2500-1.2600 zone which carries heavy demand.  As we saw this week, the move to the lows was well absorbed - for now - though Brexit fears can be explosive for GBP in the current climate.


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