Brexit against the US

The Chinese stock market bubble is ready to burst at any time

The market has become more active and recalled the discount rates as the main speculative instrument. Japan is cautious, England warns, the US seek out opinions. Nobody is ready to make decisions, therefore we are waiting for speculation and volatility.

The forthcoming referendum remains a key topic for the English market. Carney has been straightforward, having stated that it is the Bank of England that has to explain the risks connected with an exit from the EU, including possible recession. The eurosceptics can accuse Carney of violation of a taboo of the Central Banks and forcing of fears, however his honest and emotional comments reflect wider concern about an anemic condition of the world economy - it is for the FRS to be considered fully.

The regulator believes that about a half of 9per cent of GBP/USD drop since November 2015 has been caused by the uncertainty around the results of the UK’s EU referendum. The Bank of England already points out the delay in the economic growth of the country, deterioration in labor productivity and growth of consumer expenses. It significantly reduces the forecast for GDP and predicts a number of the negative forecasts if the UK leaves the EU, including growth of inflation and unemployment, falling of cost of the basic British assets along with the decrease of the rate of the national currency. The first increase of a key rate is expected not earlier than in 2018.

Last week the US dollar has reached the further minimum. It is possible to consider that the long period of the recession has ended. However, the American regulators are interested in preservation of the relative weakness of the currency and if the active growth is resumed, then deterioration of a situation in the raw materials market and in the oil sector will adversely affect the large business again.

The dollar has gradually recovered after the depressing results of the weekly report on requests for a dole and becomes stronger on all range of the market (except for USD/JPY). Yellen’s statement in the letter to the member of the House of Representatives Brad Sherman about the possibility of use of the negative interest rates for acceleration of the growth of the economy has caused an active discussion without the threat of undertaking of any real steps. But there is a significant point to note: on June 23 the UK’s referendum on Brexit will be held, and before its results (at least preliminary!) FRS certainly won't decide to change rates. However, if the UK votes for an exit from the EU, the US will have an opportunity to become a rescuer of the world economy and to postpone the increase of the rate or even announce its decrease.

It once again proves that there are two main driving forces in the market today: the FRS and the European Central Bank. Primarily the Federal Reserve was stated to be incapable to raise the rates and consequently the euro had been pushed out of the most powerful threshold of offers. As it follows from the current eurostatistics, the GDP growth for the first quarter (by the first assessment) is an important factor so that in general Europe can benefit from the best economic environment over the past few years. However, someone has been trying to convince the market that June is a real date for increase and the euro has been moving down.

There is no strong grounds for rumors about the change of a rate, but, having considered the statements of the interested persons, there is a slow, but the right shift of emphases to the fast increase of the rate within the FRS. Most analysts do not expect the powerful growth of economy, agree that it makes sense to raise rates, even though the economy will move former rates without obvious delays.

The current growth of the euro is the usual tool of a manipulation, perhaps, in the anticipation of the summer banks just carry out the diversification of the currency reserves, and therefore enter the market with large volumes. Actually, decline of the euro has been reasonably expected since long time ago. It was still possible to try to buy above 1.14 euro/dollar, while there was an unpleasant feeling of a trap below that level. Nevertheless, we consider the downward direction as more probable one.

Other news:

  1. Kuroda's comments (even if it was an attempt to warn about the forthcoming intervention) haven't impressed the markets. The ‘bulls’ on yen has taken into account the fact that the Bank of Japan before taking new measures, is going to wait for results of negotiations on the transpacific partnership (TPP) and the summit of G7 this month, that is simply to stay idle up to a July meeting on monetary policy.
  2. Restoration of the oil production in Iran obviously does not stimulate the country to join the negotiations of OPEC partners on reduction of deliveries. The Iranian export has increased in April by 600 thousand barrels a day. However, the quotations of oil have been kept close to the maximum level, since November, as interruptions in production in Nigeria, Libya and Venezuela have compensated the influence of the Iranian oil. It reduces the tension around the forthcoming negotiations on oil on June 2, as well as probability of making serious decisions because of the negotiations.
  3. The Chinese market is overflowed by short-term speculators, and the stock market bubble is ready to burst at any time. The cost of the Chinese assets just reads off scale and reminds the classical Ponzi scheme - management companies more often use means of the new clients for repayment of the debts to old ones. At the main Chinese exchanges more than 40% of a volume of the futures were traded at night session. According to Bloomberg data, the average period of possession of raw materials future contracts, including contracts on reinforcing steel and iron ore, has lasted less than 3 hours in April. That is transactions are used only by speculators or retail investors who create volatility, raise the prices of assets and are going to earn on the forthcoming falling.

Finally, there is a basis for the Greek optimism for euro: as the Prime Minister Tsipras has stated, although the income from tourism is likely to be significantly below than was expected, the following tranche from the EU will allow the government to repay the most part of the debts.

USD/JPY: during the Asian trading session on Monday, after rising at the opening of the day the pair went down again, as producer prices were lower than expected. At this point, we have a basic resistance of 110.19 / 109.90 / 109.50 / 109.00, key support 108.21 / 107.70 / 107.21 / 106.92 / 106.25. Now the market is not ready to leave below 106.00, where the likelihood of BOJ intervention increases. Nevertheless, the downward trend seems stronger.

EUR/USD: on Friday 13, the market is trying to frighten the small customers falling to the level of 1.1300. However, a strong medium-term support held by major Offer to 1.1313-1.1344. A key marker of the week: 1.1373. Intraday Resistance: 1.1360 / 1.1377 / 1.1417 / 1.14381 / 1.1482. The yield on the level of 1.1500 this week is unlikely. Intraday Support: 1.1294 / 1.221 / 1.1150. Protection of the breakdown risk is assessed a range of 1.1155-1.1111. Break will dig a long drop to the levels of 1.1090 / 1.1000, followed by semi-annual dynamics must be completely rebuilt.

Author: Lachlan Patel,
ForexChief Currency strategist