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USD broadly lower, JPY falls ahead of stimulus, Is safe-haven demand sustainable?

Swissquote Bank

- G10 currencies likely to further extend gains as risk appetite improves

- USDJPY still has a solid upside potential with 110 level as the first target

- Surprisingly good news from UK political field may send GBPUSD closest to 1,31 resistance area

- EURUSD may trade within downward channel with closest resistance at 1.0913

- Strong bullish potential for gold and silver in coming months as mistrust in central banks becomes new driver of these precious metals

Most G10 currencies extended gains against the greenback on improving risk sentiment, with the exception of the Japanese yen, which fell for a second straight day after Shinzo Abe promised another round of stimulus. After surging more than 2% on Monday, USD/JPY gained another 0.50%, reaching 103.30 in Tokyo. USD/JPY still has a solid upward potential, especially given the substantial appreciation of the JPY since the beginning of the year, with the 110 level as the first target.

The pound sterling surged for a third straight day as political uncertainty eased further. The news that Theresa May will replace David Cameron, as head of government is surprisingly good news insofar as the market was not expecting such a rapid development. At this point, anything that decreases the level of uncertainty and helps move Brexit developments forward is positive. As a result, GBP/USD was up 0.68% in Asia and was close to testing the 1.31 resistance area. The pound sterling should continue to appreciate but at a moderate pace given the continued Brexit-induced uncertainty.

Most commodity currencies started the day off on firmer footing as investors shifted back to riskier assets. The Australian dollar gained more 0.70% during the Asian session as safe haven assets took a hit: JPY was down 0.50%, gold was treading water at around 1,355 and the Swiss franc was left unchanged against the USD but lost ground against the EUR. EUR/CHF tested 1.09 in Tokyo.

EUR/USD was also trading higher amid improving risk sentiment. The currency pair hit 1.1091 in Tokyo before stabilising slightly lower at around 1.1080. On the medium-term, the single currency is still trading within its downward channel with the closest resistance lying at 1.0913. Further south, the next one can be found at 1.0822.

In the equity market, the S&P500 printed a new all-time high yesterday in Wall Street as it reached 2,143 points. Overnight, Asian equities were trading in positive territory across the board with Japanese shares leading the charge. The Nikkei was up 2.46%, while the broader Topix index surged 2.38% on the prospect of another round of fresh stimulus. On mainland China, the Shanghai and Shenzhen Composites were up 1.40% and 0.66% respectively. Finally, in Europe, equity futures are struggling to follow the positive lead from both Tokyo and New York and are pointing toward a lower open.

Yann Quelenn, market analyst: “Is safe-haven demand sustainable?: The Brexit referendum has highlighted the major role of safe havens during periods of uncertainty. Bullish pressures on the Swiss franc and the yen have significantly increased. It is clear that it is not the economic fundamentals that are important but rather the political stability of these countries. Japan, like Switzerland is in the middle of a lasting deflation period. The yen is decorrelated from the Japanese economy while risk on this currency is far from low. In fact, we believe that interest rates may go deeper into negative territory. As a result it is not surprising to see precious metals go up as they constitute interest rate free insurance against a (albeit unlikely) collapse of fiduciary currencies.

The result of the Brexit vote has indeed revealed much. For the first time since the creation of the European Union, the risk of its dislocation has never been so high. To add salt to the wound, in Finland a referendum is also on the table as a petition is already close to having half of the required signatures. Investors are fully aware of these problematics and the demand for gold and silver has massively increased with these precious metals now being traded at levels unseen in three years.

There is nevertheless a paradox in this sharp increase in gold and silver. Banks, European banks in particular, are caught in the eye of the storm as the issuers of paper ounce. The supply increase, is keeping precious metals at lower levels and helping to maintain confidence in fiduciary currencies. It is worth noting that the supply of physical gold and silver has never been so high. There is a significant counterparty risk that could further weigh on precious metals prices, which could trigger a split between paper and physical precious metal markets. Let’s remember that the size of the gold paper market is two hundred times the size of the physical gold market.

Will gold and silver increase in the next few months? There is a real bullish potential. Despite the Fed promising over the last four years that US interest rates would go up sustainably, financial markets have started pricing a likely rate cut before the end of 2017. Mistrust towards central banks is now the new driver for gold and silver. Negative interest rates are completely nonsensical to the extent that the one that lends needs to pay the interest. Moreover, we cannot see how the ECB or the Bank of England could obtain better results that the Fed or the BoJ. The road is wide open for gold and silver!” ---

Today traders will be watching CPI from Germany, Sweden and Brazil; manufacturing production from South Africa; retail sales from Brazil; trade balance from Russia; wholesale inventories from the US.

Source: https://en.swissquote.com/fx/news
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