China’s state news agency, Xinhua, reported on Saturday that both the US and Chinese trade teams had “constructive” discussions in Washington, as cited by Reuters.

Xinhua added that the US and China agreed to keep communicating on related issues, and discussed the details of the next round of trade talks in October. However, no details of the discussions were provided by the Chinese news outlet.

This comes despite the overnight reports that China’s agriculture delegation canceled the US farm visit to Montana and they returned to China sooner than expected.

The above headlines sent the risk sentiment tumbling in the US last session, knocking-off the stocks in tandem with the Treasury yields. USD/JPY lost nearly 40-pips to close the week near four-day lows of 107.53.

  • US Pres. Trump: Agricultural purchases will not be enough, we want a complete deal
  • EUR/USD ends the week in the lower part of its range but struggle to generate any meaningful breakdown.
  • The level to beat for bears is the 1.1000 handle.

EUR/USD daily chart

The common currency, on the daily chart, is trading in a bear trend below its main daily simple moving averages (DSMAs). The Euro ends the week stuck in a two-week trading range as investors are waiting for the next catalysts. There will be a plethora of news announcements next week, including the Gross Domestic Product in the United States. Therefore, there is potential for volatility and the current range may get broken.

EUR/USD four-hour chart

EUR/USD is trading below its primary SMAs, suggesting a bearish bias in the medium term. The Euro has been ranging for most of the week. However, bears will probably try to break the 1.1000 handle to potentially reach 1.0965 and 1.0930 support level near the 2019 low, according to the Technical Confluences Indicator.

EUR/USD 30-minute chart

Bears will try to keep the market contained below 1.1023 resistance. However, if the bulls push through it, 1.1045 can come into play, but this is likely a weak resistance which will be easily be overcome opening the way to 1.1074 resistance, according to the Technical Confluences Indicator.

Additional key levels

  • West Texas Intermediate prices were trading -0.22% lower in the Wall Street close.
  • West Texas Intermediate crude for October delivery lost by 4 cents, or 0.07%, to finish at $58.09.
  • Can Saudi production be restored?

West Texas Intermediate prices were trading -0.22% lower in the Wall Street close having edged lower from a high of $59.23 to a low of $59.97 while futures registered a sharp gain for the week, 6% higher and considerably higher on the attacks on Saudi Arabian production facilities last weekend which put into question how much spare capacity there will be left in the oil market leading to the biggest weekly gain in 3 months.

As for futures, West Texas Intermediate crude for October delivery lost by 4 cents, or 0.07%, to finish at $58.09 a barrel on the New York Mercantile Exchange. The contract logged a 5.9% weekly advance, which was the biggest for the U.S. benchmark since the week ended June 21.

Saudis revealed the extent of damages

Oil eased back from the opening highs for the week through the 63 handle on the sentiment that Saudi production would be back to full capacity by the end of this month, according to official announcements made very early on after the first report of the weekend attacks. However, Saudis then revealed the extent of damages and the market now questions how quickly production can, indeed, be restored which will make for a volatile time ahead.

"In that context, energy market participants are anxiously awaiting an announcement from the Saudis on the geographic location of the cruise missiles launches which targeted the nerve center of the Kingdom's energy complex, along with any details about Pompeo's coalition response, which they hope will be peaceful,"

analysts at TD Securities explained:

"That being said, we think crude oil is not ripe for unconditional love, and suspect that WTI prices ranging in the $58-60/bbl region seem appropriate for now. On the CTA front, trend followers are set to ramp up selling below $59.30/bbl, while in contrast, CTAs could cover shorts above $64.14/bbl."

WTI levels

The price dropped back from the 127.20% Fibonacci extension of the July swing highs to Aug swing lows and remains on the 58 handle, for the most part, rejected on attempts beyond the 59 handle. A break to the downside will open prospects for the 61.8% Fibo and Aug resistance just below the 57 handle. On a re-escalation of fundamentals, the April highs at 66.58 will be a key target.

  • The Nasdaq Composite Index lost 65.20 points to reach 8,117.67, a decline of 0.8%.
  • The Dow Jones Industrial Average lost 160.60 points, or 0.59%, at 26,934.19.
  • The S&P 500 index dropped 14.89 points, or 0.5%, to 2,991.90.

The technology sector dragged US stocks lower on Friday following the news that the Chinese delegation, visiting the US negotiators this week, cancelled plans to visit farms in Montana as a part of its negotiations with the U.S. delegation – President Trump declared he would not accept a partial trade deal.

The benchmarks closed in the red for the first weekly decline in a month and the Dow Jones Industrial Average lost 160.60 points, or 0.59%, at 26,934.19, while the S&P 500 index dropped 14.89 points, or 0.5%, to 2,991.90. The Nasdaq Composite Index lost 65.20 points to reach 8,117.67, a decline of 0.8%.

US data will also be key

Looking ahead to next week, US data will be a keen focus following the Federal reserve's announcements earlier in the week.

"The Markit PMI will offer a preliminary first look at countrywide manufacturing activity for September, with the market looking for an unchanged print at 50.3. This stands in contrast with the ISM manufacturing reading, which dipped below 50 in August. Conversely, the preliminary Markit services PMI is projected to have advanced to 51.5, up from 50.7 in August,"

analysts at TD Securities explained.

DJIA levels

The bearish dojis have weighed on the index and the DJIA had dropped back below the 4-hour 21 moving average casting a bearish outlook for next week's open. Bears can then target the 21-day moving average, the 50 and then the 200-day MA (25756). Further below lies the May and June lows on the wide in the 24700s as a double-bottom target.

  • Spot Gold was around 1% higher, travelling from a low of $1498.09 to a high of $1516.38.
  • The Gold and Silver ratio added to the mid-week bullish correction.
  • Silver prices inched higher to short term trendline resistance.

Precious metals gained on Friday following the news that Chinese and US trade talks were cut short while troubles in the Middle East continue to concern investors, and US benchmarks closed in the red, fueling a flight to safety. Spot Gold was around 1% higher, travelling from a low of $1498.09 to a high of $1516.38 while Silver prices inched higher to short term trendline resistance, walking into the Wall Street close around 0.90% higher having travelled from a low of $17.75 to a high of $17.98. The Gold and Silver ratio added to the mid-week bullish correction, moving up from a low of 83.84 to a high of 84.71, around 0.30% higher on the day.

As for futures, Gold for December delivery on Comex added $8.90, or 0.6%, to settle at $1,515.10 an ounce, after retreating 0.6% on Thursday. December Silver lost a marginal 3.5 cents, or 0.2%, lower to $17.869 an ounce. Gold futures gained 1% for the week, after 3 straight weekly declines while Silver made a weekly gain of 1.6%.

Fundamentals playing into the bull's hands again

On the fundamental front, the Federal Reserve has played their hand for now, with speculation that the rate cut was a one and done until at least 2020, depending on the economic performance of the US and how well trade talks go. However, while there had been some belief that the US and China were on the verge of a breakthrough with talks starting up again, it would appear that we are still as far away as we ever in finding a solution to the dispute.

"I do not need a US-China trade deal before the 2020 election," Trump said in a joint press conference with Australian Prime Minister Morrison. "I have an amazing relationship with China's Xi but we are having a little spat." There was also news that the Chinese cut metings short this week, and thus we are back to square one again. "Political determination from decision-making circle of the two countries is needed in order to reach a deal," Hu Xijin, the Editor in Chief for the Global Times argued.

Meanwhile, analysts at TD Securities explained that with the latest Fed cut digested by the market, "gold continues to straddle the $1,500/oz level, and now awaits the next catalyst which is likely to come in the form of economic data in the US as Fed expectations become more data-dependent going forward."

"We expect that further weakness on the economic data front will catalyze additional gains in precious metals, and we expect the Fed to cut interest rates another 25bps at the end of October. As market pricing for a cut in October remains below the 50% mark, gold and precious metals could still have some room to the upside should those probabilities converge to a cut as we expect. That being said, we expect little flow from CTAs in the complex for the time being."

Gold levels:

Bulls finally broke through the recent resistance with a higher high in the 1,500s and closing above the 4-hour 200 moving average at 1,510 which was guarding prospects to the 1,550 level which guards territories towards 1,590 as the 127.2% Fibo target area. On the flip-side, a 50% mean reversion of the late June swing lows to recent highs around 1470 guards the 19 July swing highs at 1,452.93.

Silver levels:

Technically, Silver is testing the upside resistance and breakout point converging around 18 the figure, supported by the 4-hour 200 moving average. Bulls were closing just above the 21-daily moving average and daily pivot point and will look towards the September highs of 19.64, while on the downside, bears can look to the 16.50s.

  • The Greenback rose this Friday but remains trapped within its weekly range.
  • The level to beat for bulls is the 98.55/98.68 resistance zone.
  • DXY ends the week about 45 cents higher.

DXY daily chart

DXY (US Dollar Index) is trading in a bull trend above its main daily simple moving averages (DSMAs). In the last two weeks, the Greenback has been in a trading range around the 98.40 level as investors are waiting for a catalyst.

DXY four-hour chart

DXY is trading above the 50/200 SMAs, suggesting bullish momentum. The Greenback gained some relative strength this Friday as it broke above the triangle pattern. The market is retracing down and buyers will need to defend the 98.42 and 98.20 support if they intend to lift the market towards 99.10 and 99.38 resistances. The market would need a daily close beyond 98.68 to pull away from the trading range.

DXY 30-minute chart

DXY is trading above the main SMAs, suggesting bullish momentum in the near term. Support is seen at the 98.42 and 98.20 price levels. A break below 98.20 would be seen as bearish.

Additional key levels

  • Kaplan: Have pencilled in no further rate cuts this year, one rate cut next year.
  • Rate cuts this year make it more likely 10-year yield will rise.

Dallas Federal Reserve's President Robert Kaplan on Friday has been crossing the wires throughout the afternoon, earlier arguing that economies need a broader menu of other policy tools than just monetary policy, expecting the economy to expand by 2% in 2019 and around 1.7% in the second half of the year.

In more recent trade, Kaplan has made the following remarks:

  • Have pencilled in no further rate cuts this year, one rate cut next year.
  • Agnostic about further rate cuts this year; Not opposed, nor leaning toward it.
  • To be open-minded is watching how trade tensions unfold, does not want to prejudge.
  • Rate cuts this year make it more likely 10-year yield will rise.
  • Should ‘seriously examine’ plans to allow b/sheet increase with growth in demand for reserves.

FX implications:

In a world of central banks easing across all corners of the globe, should the Fed pause in their easing cycle, markets will be attracted to the divergence trade in the Dollar. Today, the Greenback has stabilised in the correction from the session highs of 98.64 and trades +0.15% higher on the day at 98.50 at the time of writing.

Analysts at CIBC expect the NZD/USD pair to trade at 0.64 during the fourth quarter and to rise later to 0.66 by the second quarter of 2020. They see that improving fundamentals could help Kiwi.

Key Quotes:

“Since the OCR cut in early August, NZD/USD has fallen to multi-year lows of 0.6269, pushed down by expectations of further rate cuts down the road. Business investment in the region remains lackluster, with the confidence index dropping to the lowest level since April, reflecting global trade tensions. Retail sales have also underperformed due to lower fuel sales. Consumer confidence improved in August to 118.2, but remains below the 120 historical average as declining house prices weigh on sentiment. We do not see these themes changing over the coming months, and as such, there’s less scope for an extension higher in NZD driven by improving fundamentals.”

“The 50bps cut in August was far more aggressive than the market expected and was done to ward off the need for additional aggressiveness down the road. We do not see the RBNZ making further moves this year and near term moves in the NZD will be driven by macro gyrations.”

Analysts at Rabobank see the EUR/CHF pair moving toward 1.0800 on a 3-month view amid risk aversion.

Key Quotes:

“Compared with the commentaries produced by its peers, the outlook painted by the SNB’s policy statement on September 19 was one of the gloomiest. Weaker growth and inflation prospects abroad combined with the stronger CHF contributed to a low forecast for domestic price pressures. Growth forecasts were also revised down. Despite this the SNB provided no indication that it was ready to push rates further into negative territory. Like the BoJ and the ECB, it is concerned about the negative impact of negative rates on the banking sector and announced a revision in how the exemption threshold for banks is calculated.”

“The CHF popped higher on speculation that the SNB may be lacking the tools to take fresh policy decisions to offset economic headwinds and safe haven demand for the CHF. We see risk of EUR/CHF edging towards 1.08 on a 3 month view largely on anticipation of another round of safe haven buying.”

Analysts at Danske Bank explained that after two weeks of central bank action, focus will likely turn to the real economy, starting with the PMI and the Ifo. They point out it will be interesting to see if the service sector can continue to support growth despite the weakness in manufacturing.

Key Quotes:

“In the euro area, the most important data release next week is the PMI figures for the euro area and Germany on Monday. Last month, the manufacturing PMIs ticked up in both the euro area and Germany. However, both remain two-speed economies, with the service sectors shielding growth from the weak manufacturing sectors. With new orders improving slightly in August, we expect the manufacturing PMI to remain broadly stable at 47.0 in September. However, we see downside potential for the service print after the drop in business expectations last month and expect it to decline to 53.0.”

On Tuesday, we get German Ifo prints for September. Both the expectations and current situation component have been on a falling trend for the last year, but we expect to see some stabilization this month in line with the uptick we got in the ZEW expectations last week.”