Daily Report: Market watches Hong Kong as Hang Seng slips to 3-month low

Despite key economic data being released from the EU and UK moments ago, Hong Kong remains in the spotlight on Tuesday with the Hang Seng stock index now slipping to a three-month low. Tuesday represents the last day of trading before the National Day and Golden Week in China, therefore Hong Kong will remain under the spotlight with investors perhaps being tempted to exit their positions before the markets close tonight.

We have not yet observed Asian investors seeking the safe-haven Japanese yen (JPY) but there was an emergence of increased demand for “riskier pairs” such as the Aussie and Kiwi overnight. However at the time of writing, both pairs are erasing their gains. It’s no secret that both the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) desire weaker currencies and with the US economy performing with consistency, the chances for a reversal are low.

Meanwhile, the EURUSD has now slipped to its lowest valuation since September 2012, with the pair currently trading at the low 1.26s. This drop followed an announcement this morning that French PPI unexpected contracted and EU inflation being confirmed at 0.3% just moments ago. EU inflation levels are now at dangerously low levels and although it was hoped a weaker EURUSD exchange rate would help economic releases, we have failed to see this in both the recent EU PMI and CPI releases. Investors are likely to continue pricing in future action from the ECB and, as long as this afternoon’s US Chicago Purchasing Manager and Consumer Confidence continues to suggest the US economy is improving, we can expect this pair to reach 1.25 by this afternoon.

I previously wasn’t expecting the EURUSD to reach 1.25 until the Fed concludes QE but the EU sentiment has worsened substantially in the past week, following consistently weak economic performances. It remains unclear whether the ECB will unexpectedly act this Thursday for the second consecutive month, but I am expecting Draghi to talk down the EU economy and send the Eurodollar lower. All US economic indicators are currently suggesting the US economy is progressing nicely, while the divergence between the ECB and Federal Reserve is growing each day the Fed become closer to ending QE in a few weeks.

The disappointing EU inflation data has provided the USDCHF with the necessary momentum to surpass the 0.9518 resistance level, with the pair currently trading at a level not visited since July 2013 (0.9571). With the Eurodollar looking like it is going to continue moving to the downside, we can expect the USDCHF to continue progressing. The Swiss National Bank (SNB) threatened announcing negative rates last month to prevent the EURCHF from moving any lower than 1.20 and I am expecting further dovish comments to come from the SNB. As long as the Eurodollar continues its decline and US economy performs, the pair will enter 0.96 by the end of the week.

Although the UK GDP data was revised upwards and resulted in the GBPUSD trading as high 1.6286, the pair is now pulling back and looking to find support around 1.6190.

There has still been no progress reported in Westminster regarding what extra political powers Scotland will receive, with today’s Cable decline suggesting investors are losing patience with Westminster. The UK’s fundamentals continue to consistently impress with a UK interest rate rise is moving closer to reality, but until the situation with Scotland is clarified, the GBPUSD upside rally remains on pause.