oversold conditions

  Gold shorts certainly worked perfectly on Friday with a $19 drop from the high of the day. Longs at strong support at 1938/34 worked perfectly yesterday as we held above 1930. We wrote: ''Gold remains oversold on the daily chart so a good chance of another bounce from this strong support at 1938/34 to target 1945/47, perhaps as far as first resistance at 1952/57. Take profits on any remaining longs here if you do manage to buy at 1938/34.''   An easy profit of up to 15 points on our longs. However shorts here were stopped above 1960. Note the bullish engulfing candle after we bounced from the 100 day moving average in severely oversold conditions.   Strong resistance at 1963/66 today. Shorts need stops above 1971. A break higher see 1966/63 act as strong support so try to reverse & buy in to a long with stop below 1960, targeting 1975, perhaps as far as strong resistance at 1984/88 for profit taking. Try shorts with stop above 1992.   Silver longs at my buying opportunity at the 38.2% Fibonacci, 100 week & 500 day moving average support at 2280/65 worked perfectly on Friday, after I gave the signal on Thursday, so there was no excuse for missing this trade!   Targets for our longs of 2315 & 2330 were both hit to add to our profits for the week.   I expect strong resistance at 2340/50 again today. Shorts need stops above 2365.   We can try longs again this week at 2280/65 with stops below 2250. However a break below 2250 would be an important longer term sell signal. First target would be 2200/2190.

FX Daily: Quiet G10 markets despite Chinese turmoil Beijing continues to fight the recent turmoil on multiple fronts: real estate, financial, and the FX market. Overnight, the PBoC set the CNY fixing with the largest gap to estimates in order to curb bearish speculation. Despite all the turmoil in China, G10 volatility has remained capped, and this is probably why Japanese authorities are not intervening.   USD: Chinese authorities go all in to defend the yuan Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment, especially after the Fed minutes proved to have limited implications for central bank expectations and developed market calendars are quite light. Overnight, Chinese authorities turned their focus on the FX market, deploying what is now regarded as the biggest defence of the yuan via fixing guidance on record. The People's Bank of China (PBoC) fixed USD/CNY at 7.2006, significantly below the average estimate of 7.305, which marks the largest gap compared to the estimate since the poll started in 2018. Today’s PBoC move follows yesterday’s reports that state-owned banks were asked by Chinese authorities to step up yuan interventions to reduce FX volatility. We could also see a cut in FX reserve requirements, often considered as a tool to avert sharp CNY depreciation. So far, the spillover into G10 currencies has been limited. The highly exposed AUD is down 1.4% this week, a relatively contained slump considering the amount of bad news that has piled up in the past few days. This is probably a signal of how AUD was already embedding a good deal of negatives related to China and how markets are expecting government intervention to avert black swan scenarios. This morning, the emergency yuan fixing has left FX markets quite untouched, with the exception of USD/JPY trading on the soft side, likely due to Japan’s service inflation hitting 2% for the first time in 30 years overnight. Incidentally, the pair is well into FX intervention territory but is probably missing enough volatility to worry Japanese officials. Still, the oversold conditions of JPY and the threat of interventions are likely going to exacerbate any USD/JPY downside corrections. The US calendar is empty today and the focus will likely be on bond market dynamics after back-end yields touched fresh multi-year highs yesterday. The combined effect of high yields and growing risks in China suggests the balance of risks is moderately tilted to the upside for the dollar. A return to 104.00 in DXY remains a tangible possibility in the coming days.

UK Mortgage approvals expected to continue to drop No major revisions expected with Q2 GDP report BOE overnight index swaps price in a peak rate of 5.369% at the Feb 1st meeting US Government Shutdown risk remains as Senate negotiators propose stopgap solution The British pound looks like it is heading for a further breakdown as dollar strength appears to be resuming.  Technical traders trying to find a bottom are getting frustrated as oversold conditions deepen and on doubts that a DeMark Buy countdown might yield a meaningful rebound.  The bearish trend has steadily broken below several key technical levels and weekly support from 1.2114 seems to be the next target.         The recent surge with the dollar was also supported by safe-haven flows from rising American government shutdown fears, so a potential stopgap solution could allow for the dollar rally to pause.  After the NY close a tentative proposal between Senate Republicans and Democrats would keep agencies functioning through mid-November. The potential solution fund federal agencies at current levels for another 45 days, with little support given towards Ukraine or disaster relief.  It isn’t clear if they have enough votes to avert an October 1st showdown, but momentum is growing for a band-aid solution. If risk aversion remains the dominant theme of the week, it will be hard for the British pound to find key support.  Unless Treasury yields tumble and disinflation signs grow, short-term dollar strength seems likely.    

Details of the Economic Calendar on September 26 European Central Bank Chief Economist Philip Lane announced a shift in monetary policy towards a more accommodative stance but also presented forecasts indicating the possibility of the first interest rate cut as early as the second quarter of next year. Furthermore, the refinancing rate could be reduced by 150 basis points over the next two years. Based on this information, the euro accelerated its decline, and as a result, the British pound also shifted towards active weakening.   Analysis of Trading Charts from September 26 The EUR/USD currency pair concluded its pullback with a new surge in the volume of short positions. As a result, the local low of the downward cycle was updated, and the technical signal of oversold euro remains in the market. On the other hand, the GBP/USD pair, during its inertial movement, does not respond to technical signals of oversold conditions. As a result, the exchange rate fell below the level of 1.2150, indicating significant speculative interest in short positions. Economic Calendar for September 27 Today, the publication of data on durable goods orders in the United States is expected, with expectations of a decrease of 1.4% in the volume of these orders. This should be considered in light of the previous month when they fell by 5.2%. Thus, this will be the second consecutive month of declining orders for durable goods. Durable goods orders reflect the state of consumer activity, which is a driver of economic growth. If the data confirms a decline in orders, this could put pressure on the dollar in the market.     EUR/USD Trading Plan for September 27 Based on the oversold signal for the euro exchange rate, it can be assumed that the support level at 1.0500 may play as support. In this case, there is a scenario of slowing down the current downward cycle within this level, which could lead to an increase in the volume of long-term positions, potentially resulting in a partial recovery of the euro exchange rate. However, if speculators ignore the technical oversold signal and the exchange rate remains below the level of 1.0500 during the day, this could support the momentum in the euro market for some time.   GBP/USD Trading Plan for September 27 If the inertial movement continues in the market, and traders continue to ignore the technical oversold signal for the British pound, further depreciation of the exchange rate towards the psychological level of 1.1950/1.2050 is possible. What's on the charts The candlestick chart type is white and black graphic rectangles with lines above and below. With a detailed analysis of each individual candle, you can see its characteristics relative to a particular time frame: opening price, closing price, intraday high and low. Horizontal levels are price coordinates, relative to which a price may stop or reverse its trajectory. In the market, these levels are called support and resistance. Circles and rectangles are highlighted examples where the price reversed in history. This color highlighting indicates horizontal lines that may put pressure on the asset's price in the future. The up/down arrows are landmarks of the possible price direction in the future.    

The EURUSD slips into bearish consolidation zone ECB's Isabel Schnabel, who has been one of the most hawkish voices during the bank's latest monetary policy tightening campaign, started to sound dovish this week. Schnabel said that inflation is slowing at a 'remarkable' pace. The 10-year bund yield melted to 2.23% level – last seen back in June.   Yes, but Schnabel also said that officials 'have been surprised many times in both directions'. But traders are now set to sell the euro on dovish ECB expectations until inflation proves the contrary. The EURUSD slipped below 1.08 and to the 100-DMA, where it found some support. Following yesterday's selloff below the major 38.2% Fibonacci retracement, the pair is now in the bearish consolidation zone, with a strengthening bearish momentum that hints that the selloff could continue to 1.07/1.0730. Note that the market could absorb a further selloff at the current levels as the RSI is now at a mid-range: we are far from oversold conditions.   Gold sees support near the $2000 per ounce as falling US yields and fading appetite for equities continue to push capital into the precious metal.  Crude oil remains sold in a lower-highs-lower-lows pattern that paves the way for a further fall to the $70pb target, and China is not happy because Moody's cut its outlook for the Chinese sovereign bonds to negative warning that the country's usage of fiscal stimulus to support local governments and its spiraling property downturn pose risks to its economy. The Chinese CSI 300 fell to the lowest levels in almost 5 years, and nothing helps to undo the damage that government crackdowns and the COVID-zero policy have inflicted on investor confidence. China's stimulus measures brought Moody's to cut its sovereign debt outlook but couldn't bring investors or homebuyers back to the market. 

The day has come.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was finally the day that most FX traders have been waiting for since at least a year: the day where the Bank of Japan (BoJ) gave a hint that it will finally exit its negative interest rate policy. Precisely, the BoJ Governor said, after his meeting with the Japanese PM - that handling of monetary policy would get tougher from the end of the year. Indeed, the BoJ is buying a spectacular quantity of JGBs to keep the YCC intact at absurdly low levels compared with where the rest of the developed markets yields are following an almost 2-year long of aggressive monetary policy tightening campaign. At its highest this year – after the BoJ relaxed the rules on its YCC policy – the 10-year JGB flirted with the 1% mark, whereas the 10-year yield German bund yield hit 3%, the 10-year British gilt yield advanced to 4.70% and the US 10-year yield hit 5%. Certainly, inflation in Japan lagged significantly behind inflation in Western peers, yet inflation in the US is now exactly where inflation in Japan is: near 3%.   The BoJ's negative rate is the last souvenir of the zero/negative rate era and any small hint that things will get moving over there could move oceans. And this is what happened yesterday. The speculation that the BoJ will hike rates as soon as this month spiked to 45% soon after Mr. Kuroda's words reached investors ears. The 10-year JGB yield spiked to 0.80% from around 0.62% reached earlier this week in parallel with the falling DM yields. The USDJPY fell from 147 to 141 in a single move, and the pair is consolidating gains a touch below 144 this morning, as traders argue whether a December normalization is too soon or not. Fundamentally it is not: in all cases, the BoJ will start normalizing policy two years after the Bank of England (BoE) hiked its rate for the first time after a long period. And the BoJ will be normalizing its rates when all major central banks plateaued their tightening policy and when investors are out guessing when the normalization – toward the other direction – will begin. So no, fundamentally, it is not too early for the BoJ to start hiking its policy rate. But it would be a sudden move – that's for sure!   In any case, it is more likely than not that the fortunes of the Japanese yen turned for good this week. In the short run, consolidation is the immediate answer to yesterday's kneejerk rally – which took the USDJPY immediately into the oversold market conditions as the move was also amplified with many traders covering their short positions. But from here, yen traders will be looking to sell the tops rather than to buy to dips. A sustainable move below 142.60 – the major 38.2% Fibonacci retracement on this year's bullish trend – will confirm a return to the bearish consolidation zone, then the pair will likely take out the next major technical supports: the 200-DMA near 142.30, the next psychological support at 140 and should gently head back to – at least around 127 – where it started the year. But these forecasts will hold only, and if only, the BoJ doesn't make a sudden U-turn on its normalization plans. Remember, the BoJ didn't say it would normalize. It just said that it will be hard to handle the actual policy for longer. If one were to imagine, Governor Kuroda maybe spent last night looking at the ceiling and wondering 'what have I said!'. Funny thing is, the BoJ's rate normalization speculation comes a few hours before the country revealed a 2% fall in its GDP; obviously, the global policy tightening has been hard on the world economy, and Japan can't avoid the global slowdown winds. If it turns out, Japan might normalize its monetary policy when its economy begins to slow down.    

The day has come By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was finally the day that most FX traders have been waiting for since at least a year: the day where the Bank of Japan (BoJ) gave a hint that it will finally exit its negative interest rate policy. Precisely, the BoJ Governor said, after his meeting with the Japanese PM - that handling of monetary policy would get tougher from the end of the year. Indeed, the BoJ is buying a spectacular quantity of JGBs to keep the YCC intact at absurdly low levels compared with where the rest of the developed markets yields are following an almost 2-year long of aggressive monetary policy tightening campaign. At its highest this year – after the BoJ relaxed the rules on its YCC policy – the 10-year JGB flirted with the 1% mark, whereas the 10-year yield German bund yield hit 3%, the 10-year British gilt yield advanced to 4.70% and the US 10-year yield hit 5%. Certainly, inflation in Japan lagged significantly behind inflation in Western peers, yet inflation in the US is now exactly where inflation in Japan is: near 3%.   The BoJ's negative rate is the last souvenir of the zero/negative rate era and any small hint that things will get moving over there could move oceans. And this is what happened yesterday. The speculation that the BoJ will hike rates as soon as this month spiked to 45% soon after Mr. Ueda's words reached investors ears. The 10-year JGB yield spiked to 0.80% from around 0.62% reached earlier this week in parallel with the falling DM yields. The USDJPY fell from 147 to 141 in a single move, and the pair is consolidating gains a touch below 144 this morning, as traders argue whether a December normalization is too soon or not. Fundamentally it is not: in all cases, the BoJ will start normalizing policy two years after the Bank of England (BoE) hiked its rate for the first time after a long period. And the BoJ will be normalizing its rates when all major central banks plateau their tightening policy and when investors are out guessing when the normalization – toward the other direction – will begin. So no, fundamentally, it is not too early for the BoJ to start hiking its policy rate. But it would be a sudden move – that's for sure!   The Day of Anticipation: BoJ's Hint at Exiting Negative Rates Sparks Market Reaction"In any case, it is more likely than not that the fortunes of the Japanese yen turned for good this week. In the short run, consolidation is the immediate answer to yesterday's kneejerk rally – which took the USDJPY immediately into the oversold market conditions as the move was also amplified with many traders covering their short positions. But from here, yen traders will be looking to sell the tops rather than to buy to dips. A sustainable move below 142.60 – the major 38.2% Fibonacci retracement on this year's bullish trend – will confirm a return to the bearish consolidation zone, then the pair will likely take out the next major technical supports: the 200-DMA near 142.30, the next psychological support at 140 and should gently head back to – at least around 127 – where it started the year. But these forecasts will hold only, and if only, the BoJ doesn't make a sudden U-turn on its normalization plans. Remember, the BoJ didn't say it would normalize. It just said that it will be hard to handle the actual policy for longer. If one were to imagine, Governor Ueda maybe spent last night looking at the ceiling and wondering 'what have I said!'. Funny thing is, the BoJ's rate normalization speculation comes a few hours before the country revealed a 2% fall in its GDP; obviously, the global policy tightening has been hard on the world economy, and Japan can't avoid the global slowdown winds. If it turns out, Japan might normalize its monetary policy when its economy begins to slow down.    

What's cooking in Japan?  The Bank of Japan (BoJ) will announce this year's final policy verdict on Tuesday. The BoJ Governor Ueda's comments that the BoJ's policy would be hard to maintain from the year end, had triggered expectations that the BoJ will finally say goodbye to negative rates. There is nothing more than a slim probability for the BoJ to exit negative rates this week, but investors are eager to hear further details about how and when the BoJ will leave the negative rate territory. Concrete details regarding the BoJ's policy plans and/or changes in BoJ's inflation outlook could cause swift moves in yen markets, which became very volatile since Ueda hinted that something is cooking in its kitchen. The USDJPY fell from above 150 to nearly 140 in just two weeks. As such, the pair slipped - a bit too fast – into the bearish consolidation zone, below the major 38.2% Fibonacci retracement on this year's rally.   The market's position regarding the yen couldn't be clearer. Presently, long Japanese yen is the most obvious trade in the currency markets. It is almost too easy. A hawkish signal from the BoJ has the potential to push the USDJPY below the 140 level, even with prevailing oversold conditions. Conversely, should the BoJ disappoint the market once more, any price rallies could draw the attention of top sellers.   

GBP/USD exhibited quite chaotic movements during the last trading day of the previous week, month, and year. The price constantly changed direction, but at the end of the day, it stayed above the trendline that has suggested an uptrend for the past couple of months. Therefore, the pair could resume its upward movement as early as Tuesday.   However, at the same time, the euro has settled below the trendline, indicating a good chance for a downward move. Take note that the euro and the pound often (almost always) trade in the same direction. Therefore, it wouldn't be surprising if the pound also settles below the trendline today. This would open up possibilities for the pound to fall towards the Senkou Span B line. Of course, any downward movement can easily come to an end near this line since the dollar is still weak, and market participants are not eager to buy it. However, this week will bring plenty of important information from the U.S., and if it turns out to be positive, the dollar could significantly strengthen its positions, especially amid a three-month decline and oversold conditions. Therefore, we believe that the pair could potentially start a downward movement as early as tomorrow, which we could work with. The main condition is for the pair to breach the trendline. Speaking of trading signals, there were quite a few on Friday, but volatility was weak, and the movements were chaotic. On the last day of the year, hardly anyone wanted to enter the market, especially since last week's movements were absolutely unpredictable. Therefore, we believe that the year has ended and it's best to leave it in the past.  

FX Daily: Asia in the driver's seat The dollar is softer and pro-cyclical currencies are following the yuan higher after news that China is preparing a CNY 2tn rescue package for the stock market. The BoJ revised inflation expectations lower but signalled further progress towards the target, keeping anticipation for a hike in June alive. We expect New Zealand CPI to be soft tonight.   USD: China and Japan in focus The dollar has been mostly moved by developments from outside of the US since the start of the week. China remains the centre of attention before key central bank meetings in the developed world. Risk sentiment was boosted overnight as the Chinese government is reportedly considering a large CNY 2tn package to support the struggling stock markets. The rescue plan should be mostly targeted to the Hang Seng stock exchange, which has sharply underperformed global equities of late. This is a strong message that conveys Beijing’s intention to artificially support Chinese markets in spite of the deteriorating economic outlook in the region, and it is reported that other measures are under consideration. It does appear a temporary solution, though. Ultimately, stronger conviction on a Chinese economic rebound is likely necessary to drive a sustainable recovery in Chinese-linked stocks. For now, the FX impact has been positive; USD/CNY has dropped to 7.16/7.17 and we are seeing gains being spread across pro-cyclical currencies as safe-haven flows to the dollar are waning. Doubts about the impact of Beijing rescue package’s effects beyond the short-term automatically extend to the FX impact. It does seem premature to call for an outperformance of China-linked currencies (like AUD and NZD) and softening in the dollar on the back of this morning’s headlines. Another important development in Asian markets overnight was the Bank of Japan policy announcement. In line with our expectations and market consensus, there were no changes to the yield curve control, and forward guidance remained unchanged. Inflation projections were revised lower from 2.8% to 2.4% for the fiscal year starting in April. The revision was mostly a consequence of declining oil prices, and the inflation path continues to show an overshoot of the target for some time. All this was largely expected, and markets are focusing on Governor Kazuo Ueda’s claim that Japan has continued to inch closer to the inflation goals, keeping expectations for an eventual end to the ultra-dovish policy stance some time this year. The yen is experiencing a rebound which is likely boosted its oversold conditions. Money markets currently price in a 10bp rate hike in June. Extra help from a declining USD this morning might push USD/JPY a bit lower (below 147) today, but we suspect that markets may favour defensive USD positions as the Fed meeting approaches. Domestically, the only release to watch today in the US is the Richmond Fed Manufacturing index, which will give some flavour about the state of the sector ahead of tomorrow’s S&P Global PMIs. DXY may stabilise slightly below 103.00 once the China-led risk rally has settled.